Internal Revenue Bulletin 2026-37 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 2026–37
September 8, 2026
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
REG-101355-26, page 247.
These proposed regulations provide guidance on employer con-
tributions to Trump accounts under section 128 of the Internal
Revenue Code. They also provide guidance on nondiscrimi-
nation requirements for purposes of both section 128 Trump
account contribution programs and section 129 dependent
care assistance programs.
REG-103844-26, page 272.
The Notice of Proposed Rulemaking provides an election
under which controlled foreign corporations (CFCs) would not
compute or recognize foreign currency gain or loss under sec-
tion 987(3), except in connection with certain inbound trans-
actions. The proposed regulations would provide that a CFC
generally does not compute or recognize section 987 gain or
loss for taxable years in which the CFC exemption election is
in effect. However, a CFC would be required to recognize sec-
tion 987 gain or loss arising before the election is made, and
would be required to recognize section 987 gain in connection
with certain inbound transactions.
REG-115145-25, page 298.
These proposed regulations provide for the allocation of for-
eign taxes of foreign corporations affected by the repeal of
the one-month deferral election. These proposed regulations
also provide for the disallowance of foreign tax credits on
certain distributions of previously taxed earnings and profits.
Rev. Rul. 2026-17, page 247.
Federal rates; adjusted federal rates; adjusted federal long-
term rate, and the long-term tax exempt rate. For purposes
of sections 382, 1274, 1288, 7872 and other sections of
the Code, tables set forth the rates for September 2026.
Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and
enforce the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
September 8, 2026 Bulletin No. 2026–37

Part I
Section 1274.—
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7702, 7872.)
Rev. Rul. 2026-17
This revenue ruling provides vari-
ous prescribed rates for federal income
tax purposes for September 2026 (the
current month). Table 1 contains the
short-term, mid-term, and long-term
applicable federal rates (AFR) for the
current month for purposes of section
1274(d) of the Internal Revenue Code.
Table 2 contains the short-term, mid-
term, and long-term adjusted applica-
ble federal rates (adjusted AFR) for the
current month for purposes of section
1288(b). Table 3 sets forth the adjusted
federal long-term rate and the long-
term tax-exempt rate described in sec-
tion 382(f). Table 4 contains the appro-
priate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. How-
ever, under section 42(b)(2), the appli-
cable percentage for non-federally sub-
sidized new buildings placed in service
after July 30, 2008, shall not be less
than 9%. Finally, Table 5 contains the
federal rate for determining the present
value of an annuity, an interest for life
or for a term of years, or a remainder or
a reversionary interest for purposes of
section 7520.
REV. RUL. 2026-17 TABLE 1
Applicable Federal Rates (AFR) for September 2026
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR4.18%4.14%4.12%4.10%
110% AFR4.60%4.55%4.52%4.51%
120% AFR5.03%4.97%4.94%4.92%
130% AFR5.45%5.38%5.34%5.32%
Mid-term
AFR4.49%4.44%4.42%4.40%
110% AFR 4.94%4.88%4.85%4.83%
120% AFR5.40%5.33%5.29%5.27%
130% AFR5.85%5.77%5.73%5.70%
150% AFR6.77%6.66%6.61%6.57%
175% AFR7.92%7.77%7.70%7.65%
Long-term
AFR5.12%5.06%5.03%5.01%
110% AFR5.65%5.57%5.53%5.51%
120% AFR6.16%6.07%6.02%5.99%
130% AFR6.69%6.58%6.53%6.49%
REV. RUL. 2026-17 TABLE 2
Adjusted AFR for September 2026
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted AFR3.16%3.14%3.13%3.12%
Mid-term adjusted AFR3.40%3.37%3.36%3.35%
Long-term adjusted AFR3.88%3.84%3.82%3.81%
Bulletin No. 2026–37 247 September 8, 2026

REV. RUL. 2026-17 TABLE 3
Rates Under Section 382 for September 2026
Adjusted federal long-term rate for the current month3.88%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal
long-term rates for the current month and the prior two months.)
3.88%
REV. RUL. 2026-17 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for September 2026
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit8.12%
Appropriate percentage for the 30% present value low-income housing credit 3.48%
REV. RUL. 2026-17 TABLE 5
Rate Under Section 7520 for September 2026
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest
5.40%
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2026. See Rev. Rul. 2026-17, page 247.
Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2026. See Rev. Rul. 2026-17, page 247.
Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of September 2026. See
Rev. Rul. 2026-17, page 247.
Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2026. See Rev. Rul. 2026-17, page 247.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term rates are set
forth for the month of September 2026. See Rev.
Rul. 2026-17, page 247.
Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2026. See Rev. Rul. 2026-17, page 247.
Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2026. See Rev. Rul. 2026-17, page 247.
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2026. See Rev. Rul. 2026-17, page 247.
Section 7520.—Valuation
Tables
The applicable federal mid-term rates are set
forth for the month of September 2026. See Rev.
Rul. 2026-17, page 247.
Section 7872.—Treatment
of Loans With Below-
Market Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2026. See Rev. Rul. 2026-17, page 247.

September 8, 2026 248 Bulletin No. 2026–37

Bulletin No. 2026–37 249 September 8, 2026
Part IV
Notice of Proposed
Rulemaking
Employer Contributions
to Trump Accounts and
Nondiscrimination Rules for
Dependent Care Assistance
Programs
REG-101355-26
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations that would provide
guidance with respect to employer con-
tributions to Trump accounts, including
applicable nondiscrimination rules, and
the nondiscrimination rules for dependent
care assistance programs. This document
also provides a notice of a public hearing
on the proposed regulations. The proposed
regulations would affect employers main-
taining a Trump account contribution pro-
gram or a dependent care assistance pro-
gram and employees participating in those
programs.
DATES: Comments: Electronic or written
comments must be received by September
25, 2026. Public Hearing: The public hear-
ing is scheduled to be held on October 15,
2026 at 10 a.m. ET. Requests to speak and
outlines of topics to be discussed at the
public hearing must be received by Sep-
tember 25, 2026. If no requests to speak
or outlines are received by September 25,
2026, the public hearing will be cancelled.
Requests to attend the public hearing must
be received by 5 p.m. ET on October 13,
2026.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submis-
sions via the Federal eRulemaking Portal
at www.regulations.gov (indicate IRS and
REG-101355-26) by following the online
instructions for submitting comments.
Requests for the public hearing must be
submitted as prescribed in Comments and
Public Hearing in Part V of this preamble.
Once submitted to the Federal eRulemak-
ing Portal, comments cannot be edited or
withdrawn. The Department of the Trea-
sury (Treasury Department) and the IRS
will publish for public availability any com-
ments submitted to the IRS’s public docket.
Send paper submissions to: CC:PA:01:PR
(REG-101355-26), room 5503, Internal
Revenue Service, P.O. Box 7604, Ben
Franklin Station, Washington, DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Jennifer Friedman at (202)
317-5500; concerning submissions of
comments and the public hearing, the
Publications and Regulations Section at
(202) 317-6901 (not toll-free numbers) or
by email at publichearings@irs.gov (pre-
ferred).
SUPPLEMENTARY INFORMATION:
I. Authority
This document contains proposed addi-
tions to the Income Tax Regulations (26
CFR part 1) to implement sections 128
and 129 of the Internal Revenue Code
(Code).
These proposed regulations are pro-
mulgated under section 7805(a) of the
Code, which provides that “the Secretary
1

shall prescribe all needful rules and regu-
lations for the enforcement of [the Code],
including all rules and regulations as may
be necessary by reason of any alteration of
law in relation to internal revenue.”
II. Background
A. In General
1. Section 128 Contributions to Trump
Accounts
Section 70204 of Public Law 119-21,
139 Stat. 72 (July 4, 2025), commonly
known as the One, Big, Beautiful Bill Act
(OBBBA), added section 530A regard-
ing Trump accounts to the Code. Sec-
tion 70204 of the OBBBA also added
section 128 to the Code providing an
exclusion from gross income for employer
contributions to the Trump account of
an employee or of any dependent of an
employee pursuant to a Trump account
contribution program. The provisions
apply to taxable years beginning after
December 31, 2025.
A Trump account is a type of traditional
individual retirement account (IRA) that is
established for the exclusive benefit of an
eligible individual and that is designated
at its establishment as a Trump account.
When a Trump account is opened, the eli-
gible individual is the owner of the Trump
account and is referred to as the account
beneficiary.
A Trump account is subject to certain
special rules inapplicable to other indi-
vidual retirement arrangements under
section 408.
2
The special rules apply only
during the period that begins when the
account beneficiary’s initial Trump account
is established and ends on December 31
of the calendar year in which the account
beneficiary attains age 17 (growth period).
The special rules that apply only during the
growth period include rules regarding con-
tributions, investments, distributions, and
reporting. After the growth period, most of
these special rules cease to apply and the
rules under section 408(a) governing tradi-
tional IRAs generally apply.
Section 128(a) provides that an amount
paid by an employer as a contribution to
1
Section 7701(a)(11)(B) provides that the term “Secretary” means the Secretary of the Treasury or his delegate. Section 7701(a)(12)(A)(i) defines delegate to include any agency of the
Treasury Department, which includes the IRS.
2
Individual retirement arrangements are individual retirement accounts under section 408(a) or individual retirement annuities under section 408(b). The term “individual retirement arrange-
ments” refers to both individual retirement accounts and individual retirement annuities, while the term “IRAs” refers only to individual retirement accounts under section 408(a).

September 8, 2026 250 Bulletin No. 2026–37
the Trump account of an employee or of
any dependent of an employee pursuant
to a Trump account contribution program
is excludable from gross income of the
employee.
Section 128(b) provides that the
amount excludable under section 128(a)
with respect to any employee shall not
exceed $2,500 (subject to inflation adjust-
ments after 2027).
Section 128(c) provides that the term
“Trump account contribution program”
means a separate written plan of an
employer for the exclusive benefit of its
employees to provide contributions to the
Trump accounts of such employees or
dependents of such employees that meets
requirements similar to the requirements
of section 129(d)(2), (3), (6), (7), and (8).
2. Section 129 Dependent Care
Assistance Programs
Section 129
3
provides that amounts
paid or incurred by an employer for
dependent care assistance provided to
an employee are excludable from the
employee’s gross income if the amounts
are furnished pursuant to a dependent
care assistance program. A dependent
care assistance program is a separate writ-
ten plan of an employer for the exclusive
benefit of its employees that provides
dependent care assistance and meets cer-
tain other requirements under the Code,
including requirements relating to nondis-
criminatory benefits, limits on principal
shareholders’ benefits, and information to
be provided to eligible employees.
Dependent care assistance means the
payment or provision of services that
would be considered employment-related
expenses under section 21(b)(2) (relating
to expenses for household and depen-
dent care services necessary for gainful
employment) if paid for by the employee.
Such employment-related expenses
include expenses for the care of a quali-
fying individual. The term “qualifying
individual” is defined as (i) a dependent
of the taxpayer who has not attained age
13 or (ii) a dependent or spouse of the tax-
payer who is physically or mentally inca-
pable of caring for himself or herself and
who has the same principal place of abode
as the taxpayer for more than one-half of
the taxable year. The amount that may
be excluded annually from an employ-
ee’s gross income under a dependent care
assistance program is limited to $7,500
($3,750 in the case of a married individual
filing a separate return).
A dependent care assistance program
must satisfy four nondiscrimination rules:
(1) the contributions and benefits rule in
section 129(d)(2), (2) the eligibility rule
in section 129(d)(3), (3) the owner con-
centration rule in section 129(d)(4), and
(4) the average benefits rule in section
129(d)(8). The contributions and bene-
fits rule is satisfied if the contributions
and benefits provided under the plan do
not discriminate in favor of highly com-
pensated employees (HCEs) within the
meaning of section 414(q). The eligibil-
ity rule is satisfied if a plan must benefit
employees who qualify under a classifi-
cation set up by the employer and found
by the Secretary not to be discriminatory
in favor of HCEs or their dependents. The
owner concentration rule is satisfied if no
more than 25 percent of the amounts paid
or incurred by the employer for dependent
care assistance during the year are pro-
vided for the class of individuals who are
shareholders or owners (or their spouses
or dependents), each of whom (on any day
of the year) owns more than 5 percent of
the stock or of the capital or profits inter-
est in the employer. The requirements of
the average benefits rule are satisfied if the
average benefits provided to employees
who are not HCEs under all plans of the
employer is at least 55 percent of the aver-
age benefits provided to the HCEs under
all plans of the employer. A special rule
applies with respect to benefits provided
through a salary reduction agreement that
allows the plan to disregard employees
whose compensation is less than $25,000.
In applying the eligibility test and
the average benefits test, employees are
excluded if they have not attained age 21
and completed one year of service; or if
they were not included in a dependent care
assistance program and were included in a
unit of employees covered by a collective
bargaining agreement under which depen-
dent care benefits were the subject of good
faith bargaining.
If a dependent care assistance pro-
gram fails the nondiscrimination rules, the
benefits are not excludable from income
by HCEs, but the benefits are excludable
from income by employees who are not
HCEs.
B. Published Guidance
Notice 2025-68, 2025-52 IRB 856,
informed taxpayers that the Treasury
Department and the IRS intend to pro-
pose regulations providing guidance
with respect to Trump accounts. The
notice described guidance expected to be
included in the proposed regulations in
the form of answers to specific questions,
including questions about employer con-
tributions under a Trump account contri-
bution program.
Notice 2025-68, Q&A I-1 states
that section 128 permits an employee
to exclude up to $2,500 per calendar
year, indexed for inflation after 2027,
for employer contributions made under
a Trump account contribution program.
This limit is applied per employee rather
than per dependent, so an employee with
multiple children still has only one aggre-
gate $2,500 exclusion. Q&A I-2 of Notice
2025-68 states that when an employer
makes a section 128 contribution to a
Trump account, it must affirmatively
identify the payment to the trustee of the
Trump account as a section 128 contribu-
tion that is excludable from the employ-
ee’s income, and the trustee may rely
on that employer-provided information
unless it has contrary knowledge.
1
Finally,
Q&A I-3 of Notice 2025-68 states that a
Trump account contribution program may
be offered through salary reduction under
a section 125 cafeteria plan only when the
contribution is made to the Trump account
of the employee’s dependent, not to the
employee’s own Trump account.
Notice 2025-68 included a request for
comments. These proposed regulations
under sections 128 and 129 are informed
3
Section 129 was originally added to the Code by the Economic Recovery Tax Act of 1981 (Pub. L. 97-34) and has been amended several times.
4
Note that section 408(h) provides, “For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be
treated as the trustee thereof.”

Bulletin No. 2026–37 251 September 8, 2026
by the comments received in response to
the notice. The issues raised in the com-
ments are discussed in the Explanation of
Provisions in Part III of this preamble.
III. Explanation of Provisions
A. Section 128 Contributions to Trump
Accounts
Proposed § 1.128-1(h) would define
a section 128 contribution as an amount
paid by an employer to a Trump account
under a Trump account contribution pro-
gram.

1. Trump account contribution program
Proposed § 1.128-1(j) would define the
term Trump account contribution program
to mean a program governed by a separate
written plan of an employer for the exclu-
sive benefit of its employees to provide
contributions to the Trump accounts of the
employees or their dependents that meets
the requirements of proposed § 1.128-2(b)
through (h), including following the terms
of the written plan, satisfying the nondis-
crimination requirements (see Part III.B.
of this preamble), and providing various
notices and certifications. For these pur-
poses, the term Trump account has the
meaning set forth in section 530A(b)(1).
Generally, an arrangement that fails to
satisfy a requirement for a Trump account
contribution program would not be a
Trump account contribution program and,
for this reason, contributions to Trump
accounts under such an arrangement
would not be excludable from employee
income under section 128. However, with
respect to the nondiscrimination require-
ments at proposed § 1.128-3, a failure to
satisfy the rules would cause the arrange-
ment to fail to be a Trump account con-
tribution program only with respect to
HCEs.
a. Written plan
Proposed § 1.128-2(b) would pro-
vide that a Trump account contribution
program must be set forth in a separate
written plan. The written plan must spec-
ify—(i) the classes of employees eligible
to participate; (ii) the rules governing
employer contributions, including the
amount of contributions and whether con-
tributions may be made via a section 125
cafeteria plan salary reduction arrange-
ment; (iii) the procedures under which
an employee must designate the Trump
account of the employee or of a dependent
of the employee to receive contributions;
(iv) the certification, notice, and report-
ing procedures required under proposed §
1.128-2(d), (f) and (g); (v) the plan year;
and (vi) the procedures for correcting
administrative failures and for furnishing
notices to employees and trustees when
amounts previously designated as sec-
tion 128 contributions are subsequently
determined not to be excludable from an
employee’s gross income under section
128(a). Proposed § 1.128-2(c) would
provide that an arrangement is a Trump
account contribution program only if the
employer follows the terms of the written
plan.
b. Reasonable notification
Under section 128(c), a Trump account
contribution program must meet require-
ments similar to the requirements of sec-
tion 129(d)(6), which requires reasonable
notification of the availability and terms
of the program to be provided to eligi-
ble employees. Accordingly, proposed
§ 1.128-2(f) would provide that all eligi-
ble employees must be given reasonable
notification of the availability and terms
of the Trump account contribution pro-
gram. This rule is intended to ensure that
employees who are eligible to participate
are adequately informed by the employer
about the existence of the program and
the terms governing participation. Pro-
viding reasonable notification is also rel-
evant to the operation of the eligibility
rules, because employees cannot have a
meaningful opportunity to receive ben-
efits under the program unless they are
informed by the employer that the pro-
gram is available and understand its basic
terms. Proposed § 1.128-2(f) does not pre-
scribe content requirements or a particular
method of furnishing the notice.
c. Written statement
Under section 128(c), a Trump account
contribution program must meet require-
ments similar to the requirements of
section 129(d)(7), which requires a plan
to furnish to an employee, on or before
January 31, a written statement showing
the amounts paid or expenses incurred
by the employer in providing dependent
care assistance to the employee during
the previous calendar year. Accordingly,
proposed § 1.128-2(g) would provide that
a written statement showing the amount
of section 128 contributions made for
an employee during the previous calen-
dar year under the employer’s Trump
account contribution program must be
furnished to that employee. This require-
ment may be satisfied by including the
amount of Trump account contributions
on the employee’s Form W-2, Wage and
Tax Statement, in the manner specified in
the form’s instructions for reporting sec-
tion 128 contributions. The 2026 Gen-
eral Instructions for Forms W-2 and W-3
provide that the employer must report the
amount of section 128 contributions made
to the Trump account of an employee or
dependent of an employee in box 12 of the
Form W-2 with code TA.
d. Certification
Proposed § 1.128-2(d)(1) would pro-
vide that a Trump account contribution
program may make contributions only to
a Trump account whose account benefi-
ciary is in his or her growth period, and is
an employee or an employee’s dependent.
Proposed § 1.128-2(d)(2) would provide
that the aggregate amount contributed
with respect to any employee under a
Trump account contribution program may
not exceed the permitted annual limit
specified in proposed § 1.128-2(d)(5).
Proposed § 1.128-2(d)(3) would provide
that contributions that are not permitted
under proposed § 1.128-2(d)(1) or (d)(2)
are not made pursuant to a Trump account
contribution program and thus are not
excludable from income under proposed
§ 1.128-2(a).
Proposed § 1.128-2(d)(4) would allow,
but not require, an employer to rely on
certain employee certifications. The
employee certification must be in writ-
ing, in paper or electronic form, and must
include the following representations: (i)
the account beneficiary is the employee
or anticipated to be the dependent of the
employee for that employee’s taxable year

September 8, 2026 252 Bulletin No. 2026–37
during which the contribution is made;
(ii) the beneficiary’s date of birth, which
would allow the employer to determine
whether the beneficiary is in his or her
growth period for the calendar year in
which the contribution is made; and (iii)
no facts are known to the employee that
would make the account beneficiary ineli-
gible to receive a contribution to his or her
Trump account for that calendar year. The
employer may rely on this certification
unless the employer has actual knowledge
that the certification is incorrect.
Proposed § 1.128-2(d)(4) would fur-
ther provide that an employer may not
rely solely on an employee certification
to establish that the recipient account is a
valid Trump account. The employer must
use a method reasonably designed to ver-
ify, through information provided by the
trustee, payroll processor, or other service
provider, that the contribution is made to
a valid Trump account. For example, the
method may be that the employee pro-
vides the employer with a unique identi-
fying number that corresponds to a partic-
ular Trump account, which the employer
(or service provider) could then use to ver-
ify that the account to which the contribu-
tion will be transferred is a valid Trump
account. The Treasury Department and
the IRS are exploring ways in which this
information can be validated in a secure,
electronic way.
e. Employer communication
Proposed § 1.128-2(h) would prescribe
rules regarding employer communications
with a Trump account trustee to which the
employer is making contributions. Pro-
posed § 1.128-2(h)(1) would require an
employer at the time it makes a contribu-
tion to a trustee to advise the trustee that
the amount is a section 128 contribution.
If the employer subsequently deter-
mines a section 128 contribution not to
be a section 128 contribution, in whole or
in part, proposed § 1.128-2(h)(4) would
require an employer to so notify the trustee
and provide the trustee with the affected
Trump account information, the calendar
year in which the contribution was made,
and the amount determined not to be a
section 128 contribution. The employer
must provide this notice within a reason-
able period of time following the date the
employer determines that an amount is
not a section 128 contribution. Proposed
§ 1.128-2(h)(4) would deem 21 calendar
days after the determination to be a rea-
sonable period of time as a safe harbor.
The Treasury Department and the IRS
request comments on whether any addi-
tional information is needed for this cor-
rective notice requirement.
Proposed § 1.128-2(h)(2) would
require an employer to adopt procedures
to ensure that section 128 contributions
are properly identified and to notify the
trustee when a contribution is a section
128 contribution and when a contribution
previously identified as a section 128 con-
tribution is not a section 128 contribution.
Proposed § 1.128-2(h)(3) would allow
a Trump account trustee to rely on an
employer’s notice that an amount is a sec-
tion 128 contribution until such time that
the trustee receives a corrective notice or
has contrary knowledge.
The Treasury Department and the IRS
propose this rule to ensure that contribu-
tions intended to qualify as section 128
contributions are specifically identified
as section 128 contributions when made
and are corrected as necessary, so that the
trustee may properly administer the contri-
bution under the applicable rules govern-
ing Trump accounts, including properly
accounting for whether the account bene-
ficiary has basis in such contributions. The
Treasury Department and the IRS recog-
nize that the corrective notice requirement
may be operationally challenging. For this
reason, comments are requested on what
elements in particular will be difficult to
effectuate, and alternative ways to ensure
that basis in Trump accounts may be prop-
erly accounted for where section 128 con-
tributions are recharacterized. For exam-
ple, the Treasury Department and the IRS
ask commenters to consider whether it
would be viable for the employer to fur-
nish a notice to the affected employee that
could be submitted to, and relied upon by,
the trustee of the affected account.
f. Trustee selection
Comments received in response to
Notice 2025-68 requested guidance on
whether an employer may limit the num-
ber of trustees of Trump accounts to whom
they will send contributions under a Trump
account contribution program. Some com-
menters explained that allowing such lim-
itations could minimize employer burden
associated with directing contributions to
multiple trustees as Trump accounts are
established or rolled over.
Proposed § 1.128-2(d)(6) would pro-
vide that an arrangement is not a Trump
account contribution program if an
employer limits contributions to Trump
accounts held by a particular trustee or
trustees. Allowing for a Trump account
contribution program to restrict the trustee
or trustees would frustrate the purposes
of section 128 and section 530A because,
unlike analogous circumstances involving
health savings accounts, only one Trump
account may exist for a particular ben-
eficiary. If the employer were permitted
to select the trustees into which a sec-
tion 128 contribution would be made, an
employee whose dependent has a Trump
account with a different trustee would be
precluded from receiving contributions to
the dependent’s Trump account. In addi-
tion, in the case of parents working for
different employers, each of whom limits
section 128 contributions to particular, but
different trustees, at least one parent would
be precluded from receiving tax-favored
employer contributions to the depen-
dent’s Trump account. Section 530A(b)
(1)(A)(i), which contemplates the Trea-
sury Department’s role in organizing ini-
tial Trump accounts, supports the need
for a rule that addresses systemic account
structure problems that arise because only
one Trump account may exist for a bene-
ficiary. Trump accounts are a distinct stat-
utory arrangement, not merely ordinary
IRAs by another name, and the Treasury
Department’s general rulemaking author-
ity under section 7805 supports issuance
of administrable rules implementing
sections 128 and 530A where the statute
leaves operational gaps. Accordingly, the
proposed regulations would provide that a
Trump account contribution program may
not restrict contributions to a particular
trustee or trustees.
2. Salary reduction
Consistent with Notice 2025-68, pro-
posed § 1.128-2(d)(7) would provide
that a Trump account contribution pro-
gram may allow an employee to make a

Bulletin No. 2026–37 253 September 8, 2026
contribution via salary reduction under a
section 125 cafeteria plan if the contribu-
tion is made to the Trump account of the
employee’s dependent but not if the con-
tribution is made to the Trump account of
the employee. Although a Trump account
contribution program would be a qual-
ified benefit under section 125(f)(1), a
contribution under the Trump account
contribution program to a Trump account
of the employee would provide deferred
compensation that is prohibited under sec-
tion 125(d)(2)(A), because the employee
would have a vested right to compensa-
tion that may be payable to that individual
in a later year. In contrast, in the case of
a contribution to the Trump account of a
dependent, the employee cedes dominion
and control over the contributed amount
after the contribution is made, retaining no
future right to receive or assign later dis-
tributions from the account. In the case of
a contribution to the account of a depen-
dent, the amount is not a deferral of a right
to compensation because there is no such
future right.
Comments received in response to
Notice 2025-68 that addressed salary
reduction through a section 125 cafeteria
plan generally described it as an import-
ant feature because it would let employees
make pre-tax contributions to a depen-
dent’s Trump account, something they
otherwise could not do. Several comment-
ers treated this as a potentially meaning-
ful path to employer adoption. One com-
menter asked for clarification regarding
whether the elections would be required
before the start of the program year or if
employees could change or revoke their
elections mid-year.
Proposed § 1.128-2(d)(7) would pro-
vide that a section 125 cafeteria plan may
permit employees to make prospective
salary reduction elections, or to change or
revoke those elections, at any time during
the plan year, provided the election change
is effective before the salary becomes cur-
rently available. Proposed § 1.128-2(d)
(7) would also require that the section 125
cafeteria plan specifically describe the
Trump account program contribution
benefit and permit participants to pro-
spectively change or revoke elections at
least monthly before salary becomes cur-
rently available. The Treasury Department
and the IRS propose these regulations to
facilitate administration of section 128
contributions through section 125 cafe-
teria plans while ensuring that any elec-
tion to reduce salary remains prospective
in operation. The Treasury Department
and the IRS intend to amend Treas. Reg.
§ 1.125-4 to incorporate these proposed
rules concerning election changes with
respect to salary reduction for section 128
contributions.
3. Annual limitation
Proposed § 1.128-2(d)(5) would pro-
vide that, with respect to any employee,
the total contributions under a Trump
account contribution program for a cal-
endar year may not exceed the lesser of
the amount specified in section 128(b), as
adjusted for inflation under section 128(b)
(2), or the amount specified in the terms of
the program’s written plan.
An individual employee may not
exclude employer contributions under sec-
tion 128 for that individual’s taxable year
to the extent the aggregate amount of such
contributions from all employers exceeds
the annual limitation under section 128(b).
Specifically, proposed § 1.128-2(d)(5)
would provide that the amount which may
be excluded by an individual with respect
to all Trump account contribution pro-
grams for that individual’s taxable year
may not exceed the amount specified in
section 128(b), which is $2,500 for 2026
and 2027 and is adjusted for taxable years
after 2027 as provided in section 128(b)
(2). An employee’s receipt of excess con-
tributions due to participation in Trump
account contribution programs sponsored
by more than one employer will not cause
those programs to fail to be Trump account
contribution programs, provided that each
program prohibits the payment of contri-
butions under that plan with respect to an
employee in excess of the annual limita-
tion.
Several comments received in response
to Notice 2025-68 requested that the Trea-
sury Department and the IRS clarify how
the annual limit for employer contributions
applies in certain scenarios where multiple
employers might make contributions to
the same Trump account or an employee
has multiple children who could receive
contributions to their Trump accounts
under an employer’s Trump account con-
tribution program. In response to these
comments, proposed § 1.128-2(d)(5)(ii)
would clarify that the annual limit applies
with respect to each employee so that if an
employee has more than one employer in
a year, the maximum that an employee can
receive from all employers is the amount
specified in section 128(b). Further, as to
employment for a single employer, the
limit applies to the employee rather than
on a dependent-by-dependent basis. If an
employee has more than one dependent
with a Trump account, a program may per-
mit the contribution to be allocated among
those accounts, provided that the aggre-
gate amount an employer contributes with
respect to the employee for the calendar
year does not exceed the annual limit. The
proposed regulations provide examples
clarifying the application of these rules.
A number of major employers have
announced their intention to match the
government’s $1,000 contributions pur-
suant to the section 6434 Trump accounts
contribution pilot program for eligible
children born in the years 2025 through
2028. Provided that the arrangement oth-
erwise qualifies as a Trump account con-
tribution program under section 128, these
employer contributions would be exclud-
able from employee gross income. Like
other section 128 contributions, the match
contributions would count toward the pro-
gram’s limit under proposed § 1.128-2(d)
(5) and toward the individual employ-
ee’s aggregate limit under section 128(b)
for the taxable year. See Part B.7 of this
Explanation of Provisions for a safe har-
bor for such match contributions under the
otherwise applicable nondiscrimination
rules that would apply under proposed §
1.128-3.
Proposed § 1.128-2(d)(5)(v) would
provide that an employer has no obliga-
tion with respect to compliance with the
section 530A(c)(2) limit. The Treasury
Department and the IRS intend to provide
in a separate notice of proposed rulemak-
ing addressing contributions to a Trump
account that, to the extent that section 128
contributions and other source contribu-
tions (such as from the parent, child, rel-
ative, etc. but not including pilot program
contributions, qualified general contribu-
tions, or qualified rollover contributions)
are made to a Trump account and exceed
the section 530A(c)(2) annual limit,

September 8, 2026 254 Bulletin No. 2026–37
excess contributions will be considered
first to be attributable to the other source
contributions before being attributable to
section 128 contributions. The Treasury
Department and the IRS request com-
ments on specific circumstances in which
the section 128 contributions in addition
to other contributions to a Trump account
may exceed the applicable limit under
section 530A and how such situations can
best be addressed.
The Treasury Department and the IRS
note that an employer may make contri-
butions to a Trump account that are not
section 128 contributions because, for
example, the contribution exceeds the
annual limit for contributions that are
excludable from gross income under a
Trump account contribution program.
Pursuant to section 219(f)(5), amounts
paid by an employer on behalf of an
employee to a Trump account that are not
made under a Trump account contribution
program, including by reason of exceed-
ing the annual limit, are not excludable
from income by virtue of section 128,
and absent some other basis for exclu-
sion, are payments of compensation to
the employee that are includible in his or
her gross income and wages in the taxable
year for which the amounts were contrib-
uted and are subject to applicable employ-
ment tax reporting and withholding. For
example, if an employer contributes an
additional amount outside of the Trump
account contribution program to a Trump
account, it must treat that amount as gross
income and wages to the employee rather
than as a section 128 contribution. Pro-
posed § 1.128-2(d)(5)(vi)(E) (Example 5)
illustrates this rule.
4. Employer and employee
For an amount to be excludable from
gross income under section 128, it must be
contributed by an employer to the Trump
account of an employee or an employ-
ee’s dependent. One comment received in
response to Notice 2025-68 asked Trea-
sury and the IRS to address whether sec-
tion 128 contributions may be made for
an “owner-employee,” specifically in the
case of partners in a partnership and S cor-
poration shareholders.
To address this comment proposed
§ 1.128-1(b) would provide that the
term employee means an individual who
is an employee under the common-law
standard described in § 31.3401(c)-
1. Therefore, the term employee does
not include a self-employed individual
within the meaning of section 401(c)(1),
such as a partner in a partnership, a sole
proprietor, a director solely by reason
of service as a director, or a 2-percent
shareholder of an S corporation within
the meaning of section 1372(b). A
self-employed individual is not disqual-
ified from maintaining a Trump account
contribution program covering employ-
ees of the self-employed individual’s
trade or business, but the self-employed
individual would not be eligible to par-
ticipate in the program.
This definition is narrower than the defi-
nition of employee in section 129 and is
based on differences in the statutory struc-
tures of the two provisions. Section 128
does not define the term “employee.”
Accordingly, in the absence of a contrary
statutory indication, that term is inter-
preted under common-law principles. See
Nationwide Mut. Ins. Co. v. Darden, 503
U.S. 318, 322-24 (1992). Section 129 sim-
ilarly does not provide a general definition
of employee and thus would also rely on
common law principles. In contrast to sec-
tion 128, however, section 129(e)(3) states
the term employee includes “an individual
who is an employee within the meaning
of section 401(c)(1) (relating to self-em-
ployed individuals).” Section 129(e)(3) is
not among the paragraphs of section 129
that are incorporated into section 128.
Moreover, section 128 does incorporate
three of the four nondiscrimination pro-
visions of section 129(d), omitting only
section 129(d)(4), which tests owner con-
centration, a rule that is generally unnec-
essary when self-employed individuals,
including owners in that capacity, are not
eligible for the benefit. Accordingly, the
statutory structure indicates that self-em-
ployed individuals were intentionally
excluded from section 128.
Likewise, consistent with the pro-
posed definition of employee, proposed
§ 1.128-1(c) would define employer by
reference to the common-law standard.
The proposed regulations would further
provide that all persons treated as a single
employer under section 414(b), (c), (m),
or (o) are treated as a single employer for
purposes of section 128. Although these
rules are not referenced expressly in sec-
tion 128, they are implicitly incorporated
into section 128 because the section 129
rules referenced in section 128(c) are sub-
ject to them by virtue of section 414(t). As
a result, in adopting rules similar to the
referenced section 129 rules, as section
128(c) directs, it is appropriate to incorpo-
rate the same aggregation rules. Accord-
ingly, the proposed regulations would
treat related entities that are members of a
controlled group of corporations, trades or
businesses under common control, or an
affiliated service group, or that otherwise
are required to be aggregated under sec-
tion 414(o), as one employer in applying
section 128(c). The rules are intended to
function under section 128 in the same
manner as they would under section 129,
including the application of special rules
for separate lines of business under sec-
tion 414(r).
5. Dependent
Proposed § 1.128-1(a) would define
dependent for purposes of section 128 by
cross-reference to the definition of depen-
dent in section 152.
5
Consequently, in the
case of divorced or separated parents, or
married taxpayers filing separately, a child
cannot qualify as a dependent of both par-
ents and only one of the parents can claim
the child as a dependent. See section
152(c)(4) and (e). In the case of a married
couple filing jointly, a child may qualify
as a dependent of both parents for pur-
poses of the exclusion under section 128.
6. Exclusion from gross income
Proposed § 1.128-2(a) would provide
that gross income of an employee does not
include an amount paid by the employer
as a contribution to the Trump account of
the employee or of any dependent of the
employee pursuant to a Trump account
contribution program. Such a contribu-
tion may be made via salary reduction, as
explained in Part A.2 of this Explanation
5
As provided in section 152(a), the definition of dependent in section 152 applies for purposes of subtitle A of the Code, which includes section 128.

Bulletin No. 2026–37 255 September 8, 2026
of Provisions.
6
Amounts contributed by
an employer in excess of the section 128
exclusion, or otherwise not meeting the
requirements for exclusion under sec-
tion 128, would not be excludable from
the employee’s gross income under sec-
tion 128.
Several comments received in response
to Notice 2025-68 asked for clarification
regarding whether employer contribu-
tions under a Trump account contribution
program are wages subject to the Fed-
eral Insurance Contributions Act (FICA),
Railroad Retirement Tax Act (RRTA), and
Federal Unemployment Tax Act (FUTA),
as well as Federal income tax withhold-
ing requirements. Although section 128
excludes certain employer contributions
from an employee’s gross income for
Federal income tax purposes, that exclu-
sion does not extend to amounts that are
taxed as wages under subtitle C of the
Code. Thus, employer contributions that
are excludable from gross income under
section 128 have no corresponding exclu-
sion from the definitions of wages under
section 3121 (FICA) and section 3306
(FUTA), or compensation under section
3231 (RRTA), and are treated as wages or
compensation for these purposes unless
some other exclusion applies. Although
there is also no express exclusion from the
definition of wages under section 3401 for
section 128 contributions, Federal income
tax withholding generally is intended
to be commensurate with an employ-
ee’s income tax liability. Therefore, sec-
tion 128 contributions that are excludable
from an employee’s income will not be
treated as subject to Federal income tax
withholding. See, e.g., Notice 2001-14,
2001-6 IRB 516.
B. Nondiscrimination Rules
As discussed previously, section 128
provides that Trump account contribution
programs must, among other things, sat-
isfy “requirements similar to the require-
ments” of certain of the nondiscrimina-
tion rules under section 129. In general,
the nondiscrimination rules under pro-
posed §§ 1.128-3 and 1.129-2 are identi-
cal. However, these proposed regulations
would differ with respect to the nondis-
crimination rules in situations in which
modifications would better effectuate the
purposes of section 128.
Proposed § 1.129-1 would provide cer-
tain definitions related to dependent care
assistance programs. Proposed §§ 1.128-3
and 1.129-2 would clarify the application
of the nondiscrimination rules to Trump
account contribution programs and depen-
dent care assistance programs, respec-
tively.
Comments received in response to
Notice 2025-68 expressed support for
comprehensive section 129 guidance that
provides clear and administrable rules.
Some commenters requested that safe har-
bors or other interim relief be provided in
order to ensure that uncertainty does not
discourage employers from implementing
Trump account contribution programs.
Commenters also raised unresolved ques-
tions about the definition of an HCE, what
it means for “benefits or contributions”
not to discriminate in favor of HCEs, and
how the section 129(d)(3) classification
test should work. They also emphasized
that the 55-percent average benefits test
under section 129(d)(8) has been the sub-
ject of confusion for many years and has
been challenging for taxpayers to apply.
Commenters also requested that the Trea-
sury Department and the IRS provide
guidance on opportunities for remediation
and self-correction of contributions that
would otherwise cause a nondiscrimina-
tion failure.
1. Definition of HCEs
For purposes of both sections 128 and
129, HCE is defined by cross-reference
to section 414(q). Proposed §§ 1.128-
1(f) and 1.129-1(a)(7) would define non-
highly compensated employee (NHCE)
to mean an employee who is not an HCE.
These definitions would provide the basic
employee groupings used throughout the
proposed nondiscrimination rules under
both sections 128 and 129. The Treasury
Department and the IRS propose these
regulations to provide an administrable
framework for applying the statutory
requirement that eligibility classifications
not discriminate in favor of HCEs, while
aligning the analysis under sections 128
and 129 with established nondiscrimi-
nation principles used in other employee
benefit contexts.
2. Contributions and benefits
Proposed §§ 1.128-3(a) and 1.129-2(a)
would provide parallel rules requiring
that contributions and benefits provided
under the Trump account contribution
program and dependent care assistance
plan, respectively, must not discriminate
in favor of HCEs or their dependents.
These proposed regulations would imple-
ment section 129(d)(2) (applied to Trump
account contributions via section 128(c))
through qualitative rules governing the
terms on which contributions are made
available under the program. More spe-
cifically, proposed §§ 1.128-3(a) and
1.129-2(a) would provide that a Trump
account contribution program or depen-
dent care assistance program does not
satisfy the nondiscrimination rule for
contributions and benefits if the program
provides more favorable terms for HCEs
than for other employees. These pro-
posed regulations would further provide
that a program satisfies this requirement
if it is designed to provide contributions
and benefits on the same terms for all
employees who are eligible to partici-
pate, even if eligible employees receive
different amounts of contributions and
benefits as a result of differing elections
or differing utilization of the contribu-
tions and benefits.
3. Eligibility
Proposed §§ 1.128-3(b) and 1.129-2(b)
would address the requirement in sec-
tions 128(c) and 129(d)(3), respectively,
that the program benefit employees who
qualify under a classification established
by the employer and found by the Sec-
retary not to be discriminatory in favor
of HCEs or their dependents. Proposed
§§ 1.128-3(b) and 1.129-2(b) would inter-
6
The Treasury Department and the IRS note that employers may not provide section 128 contributions directly to the employee or employee’s dependent; rather, the contributions must be
made to Trump accounts.

September 8, 2026 256 Bulletin No. 2026–37
pret these provisions as requiring both that
the employer’s eligibility classification be
reasonable and that the classification be
nondiscriminatory in operation.
Accordingly, proposed §§ 1.128-3(b)
(2) and 1.129-2(b)(2) would provide
that an eligibility classification must be,
based on all facts and circumstances,
reasonable and established under objec-
tive business criteria that identify the
category of employees who are eligible
under the program. Proposed §§ 1.128-
3(b)(2) and 1.129-2(b)(2) would clarify
that reasonable classifications generally
include specified job categories, nature of
compensation (salaried or hourly), geo-
graphic location, and similar bona fide
business criteria, but that an enumera-
tion of employees by name, or by crite-
ria having substantially the same effect,
is not a reasonable classification. This is
the same standard that is applied under
§ 1.410(b)-4(b).
Proposed §§ 1.128-3(b)(3) and 1.129-
2(b)(3) would further provide rules for
determining whether an employer’s eligi-
bility classification is nondiscriminatory.
Under the proposed regulations, a classi-
fication would be nondiscriminatory for
a plan year only if the group of employ-
ees eligible under the program satisfies
either a facts-and-circumstances test or a
numerical safe harbor, both of which are
similar to the nondiscriminatory classifi-
cation test for qualified plans described in
§ 1.410(b)-4.
Proposed §§ 1.128-3(b)(3)(ii) and
1.129-2(b)(3)(ii) would provide a
facts-and-circumstances test for deter-
mining whether an employer’s eligibility
classification is nondiscriminatory. Under
proposed §§ 1.128-3(b)(3) and 1.129-2(b)
(3), a classification would satisfy the eligi-
bility requirement if and only if, based on
all the relevant facts and circumstances,
the Secretary finds that the classification
is nondiscriminatory. Proposed §§ 1.128-
3(b)(3)(ii) and 1.129-2(b)(3)(ii) would
clarify that no one factor is determinative
and would identify relevant considerations
including the underlying business reason
for the classification, the percentage of
the employer’s employees who are eligi-
ble under the plan, whether the eligible
employees under the plan are representa-
tive of the employer’s workforce across
salary ranges, and the extent to which the
plan’s ratio percentage differs from the
employer’s safe harbor percentage (as
described in the following paragraph). In
general, the greater the business justifica-
tion for the classification, the broader the
coverage under the plan, the more repre-
sentative the classification is across sal-
ary ranges, and the smaller the difference
between the plan’s ratio percentage and
the employer’s safe harbor percentage, the
more likely the classification is to be non-
discriminatory. The Treasury Department
and the IRS propose these regulations to
provide a flexible but administrable stan-
dard for evaluating classifications that
do not satisfy the numerical safe harbor
while ensuring that the classification does
not discriminate in favor of HCEs or their
dependents.
Proposed §§ 1.128-3(b)(3)(iii) and
1.129-2(b)(3)(iii) would provide a safe
harbor under which the classification
would be treated as nondiscriminatory
if the plan’s ratio percentage is greater
than or equal to the safe harbor per-
centage of the employer. Proposed §§
1.128-3(b)(3)(iii) and 1.129-2(b)(3)(iii)
would define the plan’s ratio percentage
by comparing the percentage of NHCEs
who are eligible under the program to
the percentage of HCEs who are eligi-
ble under the program. The proposed
regulations would define the safe har-
bor percentage of an employer as 90
percent, reduced by 3/4 of a percentage
point for each whole percentage point
by which the NHCE concentration per-
centage exceeds 60 percent. The NHCE
concentration percentage is the percent-
age of all the employer’s employees
who are NHCEs. Under this approach,
a classification that satisfies the safe
harbor is treated as nondiscriminatory
without the need to establish, based on
all the relevant facts and circumstances,
that the classification is nondiscrimina-
tory. The Treasury Department and the
IRS propose this safe harbor to provide
employers with certainty and to align the
testing of eligibility classifications with
established nondiscrimination concepts
used in other employee benefit contexts.
See, e.g., § 1.410(b)-4(c)(2) (safe harbor
for nondiscriminatory classification test
under section 410(b)).
As discussed in Part B.6 of this Expla-
nation of Provisions, excluded employees
are not taken into account under the eligi-
bility rules in proposed §§ 1.128-3(b) and
1.129-2(b).
4. Owner concentration
Proposed § 1.129-2(c) would provide
rules for applying the owner concentration
limitation in section 129(d)(4). Under that
statutory rule, not more than 25 percent
of the amounts paid or incurred by the
employer for dependent care assistance
during the year may be provided for the
class of individuals who are shareholders
or owners (or their spouses or dependents)
each of whom owns more than 5 percent
of the stock or of the capital or profits
interest in the employer on any day of the
year. Proposed § 1.129-2(c) would restate
this statutory requirement, which imposes
a separate limitation based on ownership
rather than compensation. No similar
owner concentration limitation applies
under section 128, and accordingly the
proposed regulations under section 128
do not include a corresponding rule. How-
ever, as discussed in Part A of this Expla-
nation of Provisions, the income exclu-
sion under section 128 is not available to
self-employed individuals. Accordingly,
self-employed individuals in their capac-
ity as such may not participate in a sec-
tion 128 Trump account contribution pro-
gram.
5. Average benefits
Proposed §§ 1.128-3(c) and 1.129-
2(d) would provide rules for applying the
average benefits test under sections 128(c)
and 129(d)(8), respectively. A program
satisfies this statutory test if the average
benefits provided to NHCEs under all
Trump account contribution programs and
dependent care assistance programs of the
employer, respectively, are at least 55 per-
cent of the average benefits provided to
HCEs.
Proposed §§ 1.128-3(c) and 1.129-
2(d) would provide a framework for
applying this test. In general, the aver-
age contributions and benefits provided
to a group of HCEs or NHCEs under all
Trump account contribution programs
or dependent care assistance programs
of the employer, respectively, for a plan
year would equal the total dollar amount

Bulletin No. 2026–37 257 September 8, 2026
of such contributions and benefits pro-
vided during the plan year to employees
in that group, divided by the number of
employees in that group to whom such
contributions and benefits in a dollar
amount greater than zero are provided
during the plan year, via salary reduc-
tion or otherwise. Proposed §§ 1.128-
3(c) and 1.129-2(d) would further clarify
that, solely for purposes of this calcula-
tion, an employee is taken into account
in the denominator only if the employee
is provided contributions and benefits
under a Trump account contribution
program or a dependent care assistance
program of the employer, respectively,
in an amount greater than zero during
the plan year, and that these rules apply
only for purposes of determining com-
pliance with the average benefits test.
Proposed §§ 1.128-3(c) and 1.129-2(d)
would also reflect the statutory rule per-
mitting a program, in the case of contri-
butions and benefits provided through a
salary reduction agreement, to disregard
employees whose compensation is less
than $25,000. Additionally, as discussed
in Part B.6 of this Explanation of Provi-
sions, excluded employees are not taken
into account in the average benefits test.
Proposed §§ 1.128-3(c)(3) and 1.129-
2(d)(3) would provide parallel timing
rules for applying the average benefits
test. Under proposed §§ 1.128-3(c)(3)
and 1.129-2(d)(3), compliance with the
average benefits test is determined as of
the last day of the plan year, taking into
account any individual employed on
any day of the plan year who is not an
excluded employee and who was pro-
vided section 128 contributions or depen-
dent care assistance program benefits, as
applicable, via salary reduction or oth-
erwise, on any day during the plan year.
The Treasury Department and the IRS are
proposing these rules to provide a uniform
testing date and to ensure that the test
takes into account all relevant employees,
rather than only employees employed or
participating at a particular time during
the plan year. The Treasury Department
and the IRS request comments on whether
any additional information would be help-
ful in applying the average benefits test.
6. Excluded employees
Proposed §§ 1.128-3(e) and 1.129-2(f)
would provide rules identifying employ-
ees who are excluded from consideration
for purposes of applying specified nondis-
crimination requirements. Consistent with
section 129(d)(9),
7
proposed §§ 1.128-
3(e) and 1.129-2(f) would provide that,
for purposes of the eligibility and average
benefits tests, an employer shall exclude
employees who have not attained age 21
and completed one year of service, sub-
ject to rules similar to the rules of sec-
tion 410(b)(4). An employer shall also
exclude employees not included in the
Trump account contribution program or
the dependent care assistance program
who were covered by a collective bargain-
ing agreement if there is evidence that the
relevant benefits were the subject of good
faith bargaining between employee repre-
sentatives and the employer or employers.
The Treasury Department and the IRS
are proposing these rules to reflect the
statutory exclusions from nondiscrimi-
nation testing and to clarify the circum-
stances in which those employees are
disregarded in applying the eligibility and
average benefits rules. Proposed §§ 1.128-
3(e) and 1.129-2(f) are generally parallel
in this respect.
7. Pilot match contribution arrangement
safe harbor
Employers have expressed concern that
their announced intentions to match pay-
ments made to Trump accounts of depen-
dents of employees pursuant to the section
6434 Trump accounts contribution pilot
program available to account beneficiaries
born in calendar years 2025 through 2028
may cause a plan to fail applicable non-
discrimination requirements. To address
these concerns, proposed § 1.128-3(d)
would provide a safe harbor disregard-
ing these contributions for purposes of
the contribution and benefits requirement
of proposed § 1.128-3(a), and the aver-
age benefits percentage requirement of
proposed § 1.128-3(c). The safe harbor
does not apply for purposes of proposed
§ 1.128-3(b).
To be eligible for the safe harbor, an
employer must make contributions under
a pilot match contribution arrangement
designed to provide contributions on
behalf of employees with dependents who
are eligible to receive section 6434 pilot
program contributions to their Trump
accounts. These contributions must be
made available on the same terms and
conditions to all employees who are not
excluded employees. An arrangement will
not fail to be a pilot match contribution
arrangement because the employer adopts
reasonable measures to establish eligibil-
ity. Thus, for example, an employer might
determine eligibility based on the age of a
dependent or might alternatively base eli-
gibility on validation of receipt of the pilot
program contribution into an employee’s
dependent’s Trump account. In either
case, the arrangement uses a reasonable
measure to determine eligibility.
If an employer makes pilot match
contributions and also makes other sec-
tion 128 contributions, via salary reduc-
tion or otherwise, the other contributions
must separately satisfy the contribution
and benefits requirement and the average
benefits percentage requirement. In deter-
mining whether these requirements are
separately satisfied, the employer may,
but is not required to, disregard the pilot
match contributions.
8. Failure and remediation
Proposed §§ 1.128-3(c)(5) and (g)
and 1.129-2(h) and (j) would provide rules
addressing the effect of a failure to satisfy
the nondiscrimination requirements and
the circumstances in which a program
may take remedial action. In general,
these proposed rules would provide that,
if a program would qualify as a Trump
account contribution program or depen-
dent care assistance program but for a
failure to satisfy one or more of the appli-
cable nondiscrimination requirements, the
program would continue to be treated as
satisfying those requirements with respect
to employees who are NHCEs.
The proposed rules would also provide
a remedial rule for failures of the average
benefits test and, in the case of depen-
7
Section 129(d)(9) applies for purposes of section 129(d)(3) and (8), which are incorporated by reference into section 128(c).

September 8, 2026 258 Bulletin No. 2026–37
dent care assistance programs, the owner
concentration test. Under proposed §§
1.128-3(c)(5) and 1.129-2(j), if the pro-
gram fails the average benefits test as of
the last day of the plan year, the program
may nonetheless be treated as satisfying
that requirement if, on or before the dead-
line for furnishing Form W-2 for the year
in which the benefits were provided, the
employer includes in the gross income of
affected HCEs the amount of excess bene-
fits determined under the proposed regula-
tions. In the case of dependent care assis-
tance programs, proposed § 1.129-2(j)(3)
would provide a similar remedial rule for
excess ownership concentration.
In general, if all HCEs have benefits in
excess of the amount that would satisfy
the 55-percent average benefits threshold,
the excess benefit amount for each HCE is
determined by reference to that threshold.
If not all HCEs have benefits in excess
of that amount, proposed §§ 1.128-3(c)
(5)(ii)(B)(2) and 1.129-2(j)(2)(ii) would
permit the employer to allocate the excess
benefit and required reduction among
HCEs in any reasonable manner, includ-
ing methods similar to those used under
§ 1.401(k)-2(b)(2)(iii).
A similar allocation of an excess own-
ership concentration is permitted in the
case of failures to satisfy the ownership
concentration test. In that case, the per-
mitted concentration amount is subtracted
from the benefit provided to participating
principal shareholders or owners (defined
to include their spouses and dependents)
to determine the amount to be included
in income. The permitted concentration
amount is 25 percent of the total dependent
care benefits provided by the employer to
all participants during the year divided
by the number of participating principal
shareholders or owners.
The Treasury Department and the IRS
are proposing these regulations to provide
a practical correction mechanism for fail-
ures, while preserving the statutory focus
on preventing HCEs from receiving the
benefit of discriminatory arrangements.
Proposed §§ 1.128-3(c)(5) and 1.129-2(j)
are intended to allow employers to correct
certain failures through income inclusion,
rather than by requiring adjustment of
benefits that have already been provided.
The proposed regulations regard-
ing nondiscrimination remediation rules
under sections 128 and 129 are generally
parallel, but there are certain substan-
tive differences between the two. First,
because there is no corresponding owner-
ship concentration test under section 128,
no remediation rule for an ownership
concentration failure is needed under sec-
tion 128. In contrast, proposed § 1.129-
2(j) would permit remediation for failures
of either the ownership concentration test
in section 129(d)(4) or the average bene-
fits test in section 129(d)(8). Second, pro-
posed § 1.128-3(c)(5)(ii)(A), through its
cross-reference to § 1.128-2(h)(4), would
require that the Trump account contribu-
tion program provide a corrective notice
to advise the trustee that the contribution
is not a section 128 contribution.
C. Applicability Date
These proposed regulations are pro-
posed to apply to plan years beginning on
or after the date final regulations are pub-
lished in the Federal Register. Taxpayers
may rely on these proposed regulations
for plan years beginning before the date
final regulations are published in the Fed-
eral Register.
IV. Special Analyses
Regulatory Planning and Review
Executive Orders 12866 and 13563
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, reducing costs, harmonizing
rules, and promoting flexibility.
The proposed regulations have been
designated by the Office of Management
and Budget’s (OMB’s) Office of Infor-
mation and Regulatory Affairs (OIRA)
as subject to review under Executive
Order 12866 pursuant to the Memoran-
dum of Agreement (MOA, July 4, 2025)
between the Treasury Department and
the OMB regarding review of tax reg-
ulations. OIRA has determined that the
proposed rulemaking is a significant reg-
ulatory action under section 3(f) of Exec-
utive Order 12866 and subject to review
under Executive Order 12866 and section
1(b) of the MOA. Accordingly, the pro-
posed regulations have been reviewed by
OMB. This proposed rule is not expected
to be considered a regulatory action under
Executive Order 14192 because it does
not impose any more than de minimis reg-
ulatory costs.
Need for Regulation
The proposed regulations would clar-
ify the rules for employer contributions
to Trump accounts under section 128 of
the Internal Revenue Code (Code) and the
rules for nondiscrimination testing under
sections 128 and 129 of the Code.
The Statute and the Proposed Regulations
Public Law 119-21, commonly
referred to as the One, Big, Beautiful
Bill Act (OBBBA), added new sections
530A, 128, and 6434 to the Code. Section
530A describes Trump accounts, section
128 describes certain employer contri-
butions to Trump accounts, and section
6434 describes the Trump accounts con-
tribution pilot program. The proposed
regulations provide guidance on employer
contributions to Trump accounts under
section 128.
Section 530A defines a Trump
account as a traditional individual retire-
ment account (IRA) with some special
rules. Most special rules that distinguish
Trump accounts from other IRAs apply
only during the growth period. The first
day of the growth period is the day the
account is established, and the final day
of the growth period is December 31 of
the calendar year in which the account
beneficiary attains age 17. The rules for
traditional IRAs generally apply after the
growth period. A Trump account may be
established for the benefit of a child prior
to the calendar year in which the child
attains age 18 if the child has been issued
a social security number.
In general, distributions from Trump
accounts are not permitted during the
growth period. The entire balance of a
Trump account may be rolled over in a
direct trustee-to-trustee transfer to a new
Trump account of the account beneficiary.

Bulletin No. 2026–37 259 September 8, 2026
The entire balance of a Trump account
may be rolled over in a direct trustee-to-
trustee transfer to an ABLE account of the
account beneficiary in the calendar year
the account beneficiary attains age 17.
Investments in a Trump account must
track the returns of a broad index of equi-
ties in primarily U.S. companies for which
regulated futures contracts are traded,
avoid the use of leverage, and avoid
annual fees and expenses above 0.1 per-
cent. Trump accounts may receive contri-
butions from nonprofits, governments,
employers, and individuals. In general,
contributions to a Trump account are sub-
ject to an annual limit of $5,000, adjusted
for inflation.
Governments and nonprofits may make
qualified general contributions through
the Treasury Department, and such con-
tributions must be allocated in equal
amounts to the Trump accounts of every
account beneficiary in a qualified class.
Qualified general contributions from gov-
ernments and nonprofits through the Trea-
sury Department do not count towards the
$5,000 annual contribution limit.
Section 128 sets rules for cer-
tain employer contributions to Trump
accounts. Employers may contribute to
the Trump account of an employee or
an employee’s dependent. Section 128
contributions to a Trump account are
excluded from the employee’s income, up
to an annual limit of $2,500, adjusted for
inflation. Section 128 contributions count
towards the $5,000 annual contribution
limit.
Section 6434 describes the Trump
accounts contribution pilot program. In
the pilot program, the Secretary will pay
$1,000 to the Trump accounts of eligi-
ble children. A U.S. citizen born in 2025,
2026, 2027, or 2028 who has been issued
a social security number and for whom no
request for a pilot program contribution
has previously been processed is eligible
for a pilot program contribution. Pilot pro-
gram contributions do not count towards
the $5,000 annual contribution limit.
All other contributions to a Trump
account, including contributions from
friends or family members, create invest-
ment in the contract and count towards the
$5,000 annual contribution limit.
Section 129 describes dependent care
assistance programs. Under section 129,
an employee may exclude from gross
income employer-provided dependent
care assistance furnished under a qualify-
ing program. To qualify, the program must
satisfy nondiscrimination rules for eligi-
bility and benefits, limit benefits for more-
than-5-percent shareholders or owners to
no more than 25 percent of total program
benefits and provide average benefits to
non-highly compensated employees equal
to at least 55 percent of those provided
to highly compensated employees. The
exclusion is generally limited to $7,500,
or $3,750 for married individuals filing
separately, for taxable years beginning
after December 31, 2025.
The proposed regulations are just
one piece of the implementation of sec-
tion 70204 of OBBBA; prior guidance
addressed the election to open an initial
Trump account and the election to receive
a pilot contribution, and future guidance
will address other Trump account issues.
In addition to addressing issues specific to
Trump accounts, the proposed regulations
also address nondiscrimination testing in
the context of both section 128 Trump
account contribution programs and section
129 dependent care assistance programs.
The proposed regulations would
define various terms for the purposes of
section 128. The proposed regulations
would adopt the common law definitions
of employee and employer for section
128. An implication of these definitions
of employee and employer is that a sec-
tion 128 contribution cannot be made by
a self-employed individual; a section 128
contribution must be made by an employer
to the Trump account of an employee or
an employee’s dependent. The proposed
regulations define dependent by cross ref-
erencing section 152. Other definitions in
the proposed regulations generally adhere
closely to definitions from section 128,
other statutes, or prior regulations.
The proposed regulations would pro-
vide rules for Trump account contribution
programs. Trump account contribution
programs would be required to notify eli-
gible employees of the terms of the pro-
gram, report annually to an employee on
Form W-2 or other written document the
section 128 contributions made for that
employee during the prior calendar year,
verify that the destination of a section 128
contribution is a Trump account, identify
a section 128 contribution as such to the
trustee when it is made, and notify the
trustee within a reasonable period (gener-
ally, within 21 calendar days) if a contribu-
tion previously identified as a section 128
contribution is later determined not to be
a section 128 contribution. Trump account
contribution programs would be permit-
ted to rely on an employee’s certification
of the age of the account beneficiary and
the employee’s relationship to the account
beneficiary. Trump account contribution
programs would not be permitted to limit
contributions to accounts held by one or
more particular trustees.
The proposed regulations would pro-
vide rules for the use of section 125 cafe-
teria plans by Trump account contribution
programs. A Trump account contribution
program would be permitted to allow an
employee to fund a section 128 contribu-
tion to a dependent’s Trump account via
salary reduction under a section 125 caf-
eteria plan. A cafeteria plan that includes
section 128 contributions would be
required to allow an employee to prospec-
tively change or revoke elections at least
monthly.
The proposed regulations would clarify
the statutory limit on section 128 contri-
butions. Section 128 contributions are
generally excludable from the income of
the employee and limited to $2,500 per
year. The $2,500 section 128 contribu-
tion limit would apply to each employee,
regardless of how many employers the
employee has and regardless of how many
dependents the employee has. Employer
contributions in excess of $2,500 would
not be excludable from the gross income
of the employee.
The proposed regulations would define
various terms for the purposes of sec-
tion 129. In contrast to section 128, the
definition of employee for section 129
would include both common law employ-
ees and self-employed individuals. For
both section 128 and section 129, the pro-
posed regulations would adopt the defini-
tion of HCE in section 414(q).
The proposed regulations would pro-
vide nondiscrimination rules for Trump
account contribution programs under sec-
tion 128 and dependent care assistance
programs under section 129. The pro-
posed regulations would require section
128 and section 129 benefits to be made

September 8, 2026 260 Bulletin No. 2026–37
available on terms that do not discrimi-
nate in favor of HCEs or their dependents.
The proposed regulations would require
eligibility classifications to be reason-
able, based on objective business crite-
ria, and nondiscriminatory under either a
facts-and-circumstances test or a numer-
ical safe harbor. The facts-and-circum-
stances test would include consideration
of the business reason for the classifica-
tion, the percentage of eligible HCEs, and
the percentage of eligible non-HCEs. The
numerical safe harbor would be satisfied
if the percent of non-HCEs eligible is at
least 90 percent as large as the percent of
HCEs eligible, and the 90 percent thresh-
old would be reduced by 3/4 of a percent-
age point for each whole percentage point
by which the percent of an employer’s
employees who are non-HCEs exceeds 60
percent.
The proposed regulations would clar-
ify that the average benefits test, which
requires that average benefits of non-
HCEs be at least 55 percent as large as
average benefits of HCEs, is based exclu-
sively on employees who receive more
than zero benefits during the plan year.
The proposed regulations would exclude
employees under age 21, employees who
have not completed one year of service,
and certain collectively bargained employ-
ees from the eligibility and average bene-
fits tests. The proposed regulations would
provide a nondiscrimination testing safe
harbor for section 128 contributions tied
to section 6434 pilot program contribu-
tions, if those section 128 contributions
are made available on the same terms and
conditions to all non-excluded employees.
The proposed regulations would gener-
ally preserve favorable treatment for non-
HCEs after a nondiscrimination failure
and would allow certain average benefits
failures, and section 129 owner concen-
tration failures, to be remediated no later
than the general deadline for W-2 report-
ing through income inclusion for affected
individuals.
Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Fed-
eral income tax-related behavior in the
absence of these proposed regulations.
Affected Entities and Taxpayers
The proposed regulations are expected
to affect 73 million children in 44 million
families and 3 million employers.
Economic Effects of the Proposed
Regulations
The proposed regulations generally
minimize compliance burdens on employ-
ers, subject to the access requirements of
taxpayers, operational requirements of
Trump account trustees, and applicable
law. Some employers have announced
intentions to “match” the $1,000 pilot
payments from the U.S. Treasury. The
proposed regulations facilitate the prompt
implementation of that structure by giving
employers a safe harbor from nondiscrim-
ination testing.
In the long run, the most important
aspect of section 128 is likely to be the abil-
ity of employers to facilitate pre-tax contri-
butions by their employees. The proposed
regulations clarify how section 128 contri-
butions can be made via salary reduction
through a cafeteria plan. Pre-tax contribu-
tions to a Trump account are on par with
pre-tax contributions to other traditional
IRAs, and they are even competitive with
section 529 accounts in the context of fam-
ily savings for higher education expenses.
Comparisons with other savings vehi-
cles for children are challenging in prac-
tice because they involve long time hori-
zons and uncertainty about future income
and tax rates. Nevertheless, an apples-to-
apples comparison is possible with a clear
question and clear assumptions. If a fam-
ily saves one dollar of after-tax income
now, how many after-tax dollars will the
child have in 20 years? Table 1 shows
the answers when the after-tax dollar is
saved in a section 529 account, a Trump
account through a pre-tax contribution,
and a Trump account through an after-
tax contribution, assuming a 10 percent
annual nominal rate of return, a 27 percent
present marginal tax rate (including a 22
percent federal marginal tax rate and a 5
percent state marginal tax rate), and a 17
percent future marginal tax rate (including
a 12 percent federal marginal tax rate and
a 5 percent state marginal tax rate).
39

These comparisons do not incorporate the “kiddie tax” in section 1(g) of the Code or how
financial aid might be impacted by taking distributions while a child is in college. Pre-tax
contributions to Trump accounts will not be universally better for families than contributions to
section 529 accounts, but they are competitive.
By minimizing compliance burdens for employers, the proposed regulations make
widespread adoption of Trump account contribution programs, including programs that permit
pre-tax contributions through a cafeteria plan, more likely.
Pilot program safe harbor
The proposed regulations would clarify how to apply the nondiscrimination rules to
section 128 contributions. The proposed regulations would provide a safe harbor under which
section 128 contributions are disregarded for purposes of the contributions and benefits rule and
average benefits test, but not for purposes of the eligibility rule, if the contributions are tied to
section 6434 pilot program contributions and made available on the same terms and conditions to
all non-excluded employees. An alternative would be to provide no safe harbor, such that
employers would be required to do ordinary nondiscrimination testing. The same-terms safe

Bulletin No. 2026–37 261 September 8, 2026
These comparisons do not incorporate
the “kiddie tax” in section 1(g) of the Code
or how financial aid might be impacted
by taking distributions while a child is in
college. Pre-tax contributions to Trump
accounts will not be universally better for
families than contributions to section 529
accounts, but they are competitive.
By minimizing compliance burdens for
employers, the proposed regulations make
widespread adoption of Trump account
contribution programs, including pro-
grams that permit pre-tax contributions
through a cafeteria plan, more likely.
Pilot program safe harbor
The proposed regulations would clarify
how to apply the nondiscrimination rules
to section 128 contributions. The proposed
regulations would provide a safe harbor
under which section 128 contributions are
disregarded for purposes of the contribu-
tions and benefits rule and average bene-
fits test, but not for purposes of the eligi-
bility rule, if the contributions are tied to
section 6434 pilot program contributions
and made available on the same terms and
conditions to all non-excluded employees.
An alternative would be to provide no
safe harbor, such that employers would be
required to do ordinary nondiscrimination
testing. The same-terms safe harbor gives
employers the legal certainty they need to
implement a match for section 6434 pilot
contributions and is narrow enough to pre-
vent employers from targeting the benefit
to HCEs. Employers will be more likely to
match the pilot contribution as a result of
the safe harbor, which could benefit up to
15 million children expected to be born in
2025 through 2028. With median histori-
cal returns, an additional $100 in contribu-
tions made by an employer to a newborn
would result in an additional $620 dollars
in the account when the child turns 18.
Many employers offer benefits to sup-
port families with children. As of March
2025, 13 percent of civilian employees
had access to childcare, 46 percent had
access to a dependent care flexible spend-
ing account, and 85 percent had access to
personal leave, sick leave, or paid family
leave. Using the same-terms safe harbor
makes it more likely that employers will
offer broadly available matches for sec-
tion 6434 pilot contributions through a
Trump account contribution program.
However, section 128 contributions that
are tied to section 6434 pilot contribu-
tions will be more costly to employers
than section 128 contributions that are
structured as a salary reduction through
a cafeteria plan. Section 128 contribu-
tions structured as salary reductions shift
employer costs from one purpose (sal-
aries) to a different purpose (benefits)
without increasing total costs. Section
128 contributions structured as a “match”
to the pilot contribution do not shift costs
from one purpose to another, they simply
increase the employer’s cost of providing
benefits. The extent of adoption will be
limited to employers who are willing to
bear the incremental marginal cost of a
new benefit for employees.
Eligibility classification safe harbor
The proposed regulations would clar-
ify how to apply the eligibility component
of the nondiscrimination rules for section
128 and section 129 benefits. The pro-
posed regulations would provide a safe
harbor under which benefits satisfy the
eligibility test if the percentage of non-
highly compensated employees eligible
for the benefit is at least 90 percent as large
as the percentage of highly compensated
employees eligible for the benefit. The
90 percent threshold would be reduced
by three-fourths of a percentage point for
each whole percentage point by which the
percentage of the employer’s employees
who are non-highly compensated employ-
ees exceeds 60 percent. Alternatives
would be to provide a safe harbor with a
different percentage, use a fixed threshold
that does not vary with workforce compo-
sition, or provide no safe harbor. The 90
percent threshold is high enough to ensure
that eligibility is broadly available to non-
highly compensated employees and flexi-
ble enough to account for employers with
workforces that are heavily composed of
non-highly compensated employees. A
safe harbor gives employers more cer-
tainty in designing section 128 and section
129 benefits and reduces the compliance
burden of applying a facts-and-circum-
stances eligibility test. Facts-and-circum-
stances tests are generally more costly to
comply with because they are more com-
plicated. Evaluating a multi-pronged test
is harder than checking a simple numeri-
cal threshold.
The eligibility classification safe har-
bor makes it more likely that employers
will offer section 128 and section 129
benefits. However, the safe harbor is nar-
row enough, starting at a threshold of 90
percent, such that employers meeting the
safe harbor would in any case have some
confidence of satisfying the facts-and-cir-
cumstances test. The eligibility classifica-
tion safe harbor is more of a relief from
compliance burdens than a relaxation of
the eligibility component of nondiscrimi-
nation testing. The relief from compliance
burdens makes it more likely that employ-
ers will offer Trump account contribution
programs and dependent care assistance
programs and reduces the compliance
costs of administering those programs.
Remediation deadline
The proposed regulations would clar-
ify when employers may correct certain
nondiscrimination failures for section 128
and section 129 benefits through income
inclusion for affected individuals. The pro-
posed regulations would provide that cer-
tain average benefits failures, and section
129 owner concentration failures, may be
remediated no later than the general dead-
line for W-2 reporting. Alternatives would
be to require remediation by the end of
the plan year, allow remediation through a
later amended return process, or provide no
remediation deadline. The W-2 reporting
deadline is late enough to give employers
time to identify nondiscrimination fail-
ures after year-end and early enough to
ensure that affected amounts are included
in income through the regular annual wage
reporting system. A clear remediation dead-
line gives employers certainty, preserves
administrability for payroll reporting, and
helps ensure that failed benefits are taxed
to the affected individuals.
Correction periods in other retirement
and tax contexts commonly allow time
for orderly correction rather than requir-
ing immediate action. For example, under
IRS self-correction rules, many significant
retirement plan operational failures may
be corrected before the end of the third
plan year after the year of the failure. The
excise tax rules for prohibited transactions
also distinguish between an initial tax of

September 8, 2026 262 Bulletin No. 2026–37
15 percent of the amount involved and
an additional 100 percent tax if the trans-
action is not corrected within the taxable
period. Compared with these correction
frameworks, a remediation deadline tied
to the deadline for Form W-2 is relatively
prompt. However, the remedy of includ-
ing benefits in the income of affected indi-
viduals is also relatively straightforward,
so the impact of the remediation deadline
is likely small.
Corrective notice timing
The proposed regulations would clarify
the timing and information reporting obli-
gations for Trump account contribution
programs that make section 128 contri-
butions. The proposed regulations would
require a program to identify a section 128
contribution as such to the trustee when
the contribution is made and to notify the
trustee within a reasonable period (within
21 calendar days is deemed a reasonable
period) if a contribution previously iden-
tified as a section 128 contribution is later
determined not to be a section 128 con-
tribution. Alternatives would be to require
immediate notice, provide a longer correc-
tion period, or provide no specific dead-
line. The 21-day deadline is long enough
to give contribution programs time to
identify and process errors and short
enough to allow trustees to maintain accu-
rate account records before errors become
difficult to correct. A clear 21-day deadline
gives trustees timely information, reduces
uncertainty about the tax character of con-
tributions, and supports consistent admin-
istration of Trump accounts.
As noted in the previous section, cor-
rection periods in other retirement and tax
contexts commonly allow time for orderly
correction rather than requiring immediate
action. Compared with other retirement
and tax correction frameworks, the 21-day
corrective notice requirement is relatively
prompt. However, the circumstances lead-
ing to a corrective notice are expected to be
rare, so the impact of the 21-day corrective
notice deadline is expected to be small.
Salary reduction election change
frequency
The proposed regulations would clarify
how cafeteria plan election rules apply to
section 128 contributions. The proposed
regulations would require a cafeteria
plan that includes section 128 contribu-
tions to allow an employee to prospec-
tively change or revoke elections at least
monthly. Alternatives would be to require
more frequent election changes, allow
less frequent election changes, or provide
no specific frequency rule. The monthly
frequency is frequent enough to give
employees flexibility to adjust section 128
contributions as household budgets and
savings needs change and limited enough
to avoid imposing excessive administra-
tive burdens on employers and payroll
systems. A clear monthly election-change
rule gives employers a workable standard
for plan administration and gives employ-
ees meaningful access to adjust section
128 contributions during the plan year.
The impact of requiring a cafeteria plan to
allow changes at least monthly is expected
to be small. The marginal cost to employ-
ers of building the capacity for employees
to change elections at least monthly is
likely to be a one-time cost. Most cafeteria
plans already have this capacity for HSA
and section 401(k) contributions because
the proposed timing rule is similar to the
timing rules for HSA and section 401(k)
contributions, and Treasury and the IRS
expect most employees to rarely change
their contributions within a plan year.
Statement of contributions by W-2
The proposed regulations would clar-
ify how Trump account contribution pro-
grams must notify employees of section
128 contributions made for them during
the prior calendar year. The proposed reg-
ulations would allow the annual notice
requirement to be satisfied on Form W-2
or another written document. Alternatives
would be to require a separate stand-alone
notice, prescribe a specific Treasury or
IRS form, or require reporting only on
Form W-2. Allowing Form W-2 reporting
is flexible enough to let employers use
an existing wage reporting process and
specific enough to ensure that employees
receive annual information about section
128 contributions in a familiar year-end
document. A Form W-2 option reduces
compliance costs for employers, limits
duplicative reporting, and helps employ-
ees identify section 128 contributions
when preparing their tax returns. Allowing
the statement of contributions requirement
to be satisfied by Form W-2 is expected to
minimize compliance burdens.
Summary
Based on the available models and
data, the Treasury Department and the
IRS estimate that the proposed regula-
tions would minimize compliance bur-
dens and make employers more likely
to create Trump account contribution
programs, including programs that allow
employees to fund pre-tax contributions
to Trump accounts. The Treasury Depart-
ment and the IRS invite public comments
and additional data on the economic
effects that would result from these pro-
posed regulations.
Paperwork Reduction Act
The collection of information con-
tained in this notice of proposed rulemak-
ing will be submitted, under approval
number 1545-NEW, to the Office of Man-
agement and Budget in accordance with
the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collec-
tion of information should be sent to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and Reg-
ulatory Affairs, Washington, DC 20503,
with copies to the Internal Revenue Ser-
vice, Attn: IRS Reports Clearance Officer,
C:DC:TS:CAR:MP:T:M:S, Washington,
DC 20224. Comments on the collection of
information should be received by Octo-
ber 13, 2026. Comments are specifically
requested concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the IRS,
including whether the information will
have practical utility;
The accuracy of the estimated burden
associated with the proposed collection of
information;
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through the
application of automated collection tech-

Bulletin No. 2026–37 263 September 8, 2026
niques or other forms of information tech-
nology; and
Estimates of capital or start-up costs
and costs of operation, maintenance, and
purchase of services to provide informa-
tion.
The collection of information in this
proposed regulation is in §§ 1.128-2,
1.128-3, 1.129-1, and 1.129-2. This infor-
mation is necessary to provide guidance
with respect to employer contributions to
Trump accounts and the nondiscrimina-
tion rules for dependent care assistance
programs. The collection of information
is required to comply with the provisions
of section 70204 of the OBBBA. The
likely respondents are employers main-
taining a Trump account contribution
program or a dependent care assistance
program.
The estimated number of respondents
is 217,000.
The estimated average annual burden
per respondent varies from 2 to 14 hours,
depending on individual circumstances,
with an estimated average of 8 hours.
The estimated total annual reporting
burden is 1,736,000 hours.
The estimated frequency of responses
is annually.
An agency may not conduct or sponsor,
and a person is not required to respond to
a collection of information unless it dis-
plays a valid control number assigned by
the Office of Management and Budget.
Regulatory Flexibility Act
The Secretary of the Treasury certi-
fies that these proposed regulations will
not have a significant economic impact
on a substantial number of small entities
pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6). This certifica-
tion is based on the fact that these pro-
posed regulations would not impose sig-
nificant reporting requirements on small
entities.
These proposed regulations would
apply to employers maintaining a Trump
account contribution program under
section 128 or a dependent care assis-
tance program under section 129. For
purposes of section 128, these proposed
regulations would include requirements
related to a written plan, employee cer-
tifications, section 125 cafeteria plan
elections (if applicable), notifications
to employees, statements of contribu-
tions, employer-to-trustee communica-
tions, corrective notices (if applicable),
and nondiscrimination requirements.
It is estimated that the written plan
requirement would take no more than
three hours to complete, the nondis-
crimination requirements would take
no more than two hours to complete,
and the other requirements would take
no more than one hour to complete. For
purposes of section 129, these proposed
regulations would not impose any new
requirements on small entities but rather
provide clarifications to assist employ-
ers in satisfying existing requirements
under the statute, including require-
ments for a written plan and nondis-
crimination requirements. It is estimated
that the written plan requirement would
take no more than three hours to com-
plete, if a written plan has not already
been adopted, and the nondiscrimination
requirements would take no more than
two hours to complete and are largely
already performed by employers with
dependent care assistance programs.
The Treasury Department and the IRS
also expect that Trump account contribu-
tion programs and dependent care assis-
tance programs are primarily maintained
by large employers, given that small
employers are less likely to adopt these
programs. Small employers that do adopt
these programs may be more likely to use
third-party administrators to satisfy any
reporting requirements.
For these reasons, these proposed regu-
lations are unlikely to impact a substantial
number of small entities and any economic
impact to small entities is expected to be
insignificant. Therefore, a Regulatory
Flexibility Act analysis is not required.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments on the impacts these proposed
regulations may have on small entities.
Section 7805(f)
Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business.
Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions
before issuing a final rule that includes
any Federal mandate that may result in
expenditures in any one year by a State,
local, or Tribal government, in the aggre-
gate, or by the private sector, of $100
million (updated annually for inflation).
This proposed rule does not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Execu-
tive order. These proposed regulations do
not have federalism implications and do
not impose substantial direct compliance
costs on State and local governments or
preempt State law within the meaning of
the Executive order.
V. Comments and Public Hearing
Before these proposed amendments to
the regulations are adopted as final regu-
lations, consideration will be given to any
comments that are submitted timely to the
IRS as prescribed in the preamble under
the ADDRESSES section. The Treasury
Department and the IRS request com-
ments on all aspects of the proposed reg-
ulations. Any comments submitted will be
made available at www.regulations.gov or
upon request. Once submitted to the Fed-
eral eRulemaking Portal, comments can-
not be edited or withdrawn.
A public hearing is being held on Octo-
ber 15, 2026, beginning at 10 a.m. ET, in
the Auditorium at the Internal Revenue
Building, 1111 Constitution Avenue, N.W.,
Washington, DC. Due to building security
procedures, visitors must enter at the Con-

September 8, 2026 264 Bulletin No. 2026–37
stitution Avenue entrance. In addition, all
visitors must present photo identification
to enter the building. Because of access
restrictions, visitors will not be admitted
beyond the immediate entrance area more
than 30 minutes before the hearing starts.
Participants may alternatively attend the
public hearing by telephone.
The public hearing will be conducted
according to the procedures set out in
26 CFR 601.601(a)(2) and (3). Persons
who wish to testify at the hearing must
submit written or electronic comments
and an outline of the topics to be discussed
as well as the time to be devoted to each
topic by September 25, 2026. A period
of ten minutes will be allocated to each
person for making comments. After the
deadline for receiving outlines has passed,
the IRS will prepare an agenda containing
the schedule of speakers. Copies of the
agenda will be made available at www.
regulations.gov, search IRS and REG-
101355-26. Copies of the agenda will
also be available by emailing a request
to publichearings@irs.gov. Please put
“REG-101355-26 Agenda Request” in
the subject line of the email. Copies of the
agenda will be available free of charge at
the hearing. If no outlines of the topics to
be discussed at the hearing are received
by September 25, 2026, the public hearing
will be cancelled. If the public hearing is
cancelled, a notice of cancellation of the
hearing will be published in the Federal
Register.
Individuals who want to testify in per-
son at the public hearing must send an
email to publichearings@irs.gov to have
their name added to the building access
list. The subject line of the email must
contain the regulation number (REG-
101355-26) and the language TESTIFY
In Person. For example, the subject line
may say: Request to TESTIFY in Person
at Hearing for REG-101355-26.
Individuals who want to testify by
telephone at the public hearing must send
an email to publichearings@irs.gov to
receive the telephone number and access
code for the hearing. The subject line
of the email must contain the regulation
number REG-101355-26 and the language
TESTIFY Telephonically. For example,
the subject line may say: Request to TES-
TIFY Telephonically at Hearing for REG-
101355-26.
Individuals who want to attend the
public hearing in person without testify-
ing must also send an email to publichear-
ings@irs.gov to have the individual’s
name added to the building access list.
The subject line of the email must con-
tain the regulation number REG-101355-
26 and the language ATTEND In Person.
For example, the subject line may say:
Request to ATTEND Hearing In Person
for REG-101355-26. Requests to attend
the public hearing must be received by 5
p.m. ET on October 13, 2026.
Individuals who want to attend the
public hearing by telephone without tes-
tifying must also send an email to pub-
lichearings@irs.gov to receive the tele-
phone number and access code for the
hearing. The subject line of the email
must contain the regulation number REG-
101355-26 and the language ATTEND
Telephonically. For example, the subject
line may say: Request to ATTEND Hear-
ing Telephonically for REG-101355-26.
Requests to attend the public hearing must
be received by 5 p.m. ET on October 13,
2026.
Any questions regarding speaking at
or attending the public hearing may also
be emailed to publichearings@irs.gov.
Hearings will be made accessible to peo-
ple with disabilities. To request special
assistance during a hearing please contact
the Publications and Regulations Section
of the Office of Associate Chief Counsel
(Procedure and Administration) by send-
ing an email to publichearings@irs.gov
(preferred) or by telephone at (202) 317-
6901 (not a toll-free number) by October
9, 2026.
VI. Statement of Availability of IRS
Documents
Guidance cited in this preamble is pub-
lished in the Internal Revenue Bulletin
and is available from the Superintendent
of Documents, U.S. Government Publish-
ing Office, Washington, DC 20402, or by
visiting the IRS website at https://www.
irs.gov.
VII. Drafting Information
The principal author of these pro-
posed regulations is the Office of Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). Personnel from the Treasury
Department and the IRS also participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Par. 2. Sections 1.128-1 through
1.129-2 are added to read as follows:
* * * * *
Sec.
1.128-1 Trump account contribution pro-
gram; definitions.
1.128-2 Trump account contribution pro-
gram; in general.
1.128-3 Nondiscrimination requirements.
1.129-1 Dependent care assistance pro-
grams.
1.129-2 Nondiscrimination requirements.
* * * * *
§ 1.128-1 Trump account contribution
program; definitions.
Definitions. For purposes of sec-
tion 128 and this section and §§ 1.128-2
and 1.128-3—
(a) Dependent. The term dependent
means an individual who, for the calendar
year in which the contribution is made,
the employee anticipates will be a depen-
dent of the employee under section 152.
In the case of a married couple filing a
joint return, an individual is treated as the
dependent of both individuals filing the
joint return.
(b) Employee—(1) In general. The
term employee means an individual who
is an employee under the common-law

Bulletin No. 2026–37 265 September 8, 2026
standard described in § 31.3401(c)-1 of
this chapter.
(2) Self-employed individuals not
treated as employees. The term employee
does not include a self-employed individ-
ual within the meaning of section 401(c)
(1). A self-employed individual may
maintain a Trump account contribution
program covering the employees of the
self-employed individual’s trade or busi-
ness, but the self-employed individual
may not participate in the program.
(c) Employer. The term employer
means the person that is the employer
of an employee under the common-law
standard described in § 31.3401(c)-1 of
this chapter. If the employer is a member
of a group of employers that are treated
as a single employer under the rules of
section 414(b), (c), (m), or (o), then all
employers in that group will be treated as
a single employer for purposes of section
128. The rules of section 414 shall apply
with respect to a Trump account contri-
bution program in the same manner as
they would with respect to a dependent
care assistance program under section
129.
(d) Growth period. The term growth
period means, with respect to an account
beneficiary, the period that begins when
the initial Trump account is established
and ends on December 31 of the calen-
dar year in which the account beneficiary
attains age 17. For example, a child born
on October 1, 2025, would attain age 17
on October 1, 2042, and the last day of
the growth period with respect to the child
would be December 31, 2042.
(e) Highly compensated employee.
The term highly compensated employee
or HCE has the meaning set forth in sec-
tion 414(q).
(f) Non-highly compensated employee.
The term non-highly compensated
employee or NHCE means an employee
who is not a highly compensated
employee.
(g) Plan year. The term plan year
means the 12-month period on the basis
of which the Trump account contribution
program is administered or, if shorter, the
period for which the program is main-
tained.
(h) Section 128 contribution. The term
section 128 contribution means a contri-
bution made by an employer to a Trump
account under a Trump account contribu-
tion program.
(i) Trump account. The term Trump
account has the meaning set forth in sec-
tion 530A(b)(1).
(j) Trump account contribution pro-
gram. The term Trump account contri-
bution program means a separate written
plan of an employer for the exclusive
benefit of its employees to provide con-
tributions to the Trump accounts of the
employees or their dependents that meets
the requirements of § 1.128-2(b) through
(h).
(k) Applicability date. This section
applies to plan years beginning on or after
the date of publication of the final rule in
the Federal Register.
§ 1.128-2 Trump account contribution
program; in general.
(a) Exclusion from gross income
for contributions. Gross income of an
employee does not include an amount
paid by the employer as a contribution,
including by salary reduction to the
extent permitted under paragraph (d)(7)
of this section, to the Trump account of
the employee or of any dependent of the
employee pursuant to a Trump account
contribution program.
(b) Requirement of separate written
plan.
(1) A Trump account contribution pro-
gram must be set forth in a separate writ-
ten plan that includes the items specified
in paragraph (b)(2) of this section.
(2) The written plan must specify—
(i) The classes of employees eligible to
participate;
(ii) The rules governing employer con-
tributions, including the amount of con-
tributions and whether contributions may
be made via a section 125 cafeteria plan
salary reduction arrangement;
(iii) The procedures under which an
employee must designate the Trump
account of the employee or of a dependent
of the employee to receive contributions;
(iv) The certification, notice, and
reporting procedures required under para-
graphs (d), (f), and (g) of this section;
(v) The plan year; and
(vi) The procedures for correcting
administrative failures and for furnish-
ing notices to employees and trustees
when amounts previously designated
as section 128 contributions are subse-
quently determined not to be excludable
from an employee’s gross income under
section 128(a) (for example, due to the
nondiscrimination requirements of para-
graph (e) of this section).
(c) Operational compliance. The
employer must follow the terms of the
Trump account contribution program’s
written plan.
(d) Permitted contributions—(1) Per-
mitted recipients. A Trump account contri-
bution program may make contributions
only to a Trump account whose account
beneficiary—
(i) Is in his or her growth period; and
(ii) Is an employee or an employee’s
dependent.
(2) Permitted amounts. The aggregate
amount contributed with respect to any
employee under a Trump account con-
tribution program may not exceed the
annual limit specified in paragraph (d)(5)
of this section.
(3) Treatment of impermissible
amounts. Amounts contributed by an
employer that are not permitted under
paragraph (d)(1) or (d)(2) of this sec-
tion are not made pursuant to a Trump
account contribution program (and thus
are not section 128 contributions and are
not excludable from income under para-
graph (a) of this section).
(4) Certification and employer reli-
ance—(i) In general. Except as provided
in paragraph (d)(4)(iii) of this section, an
employer may rely on an employee certi-
fication meeting the requirements of para-
graph (d)(4)(ii) of this section for purposes
of determining whether a contribution sat-
isfies the requirements of paragraph (d)(1)
of this section, unless the employer has
actual knowledge that the certification is
incorrect.
(ii) Content of employee certification.
An employee certification relied on under
paragraph (d)(4)(i) of this section must
be made in writing, in paper or electronic
form, and must include the following rep-
resentations:
(A) The beneficiary of the account
designated for the employer contribu-
tion is the employee or anticipated to be
the dependent of the employee for the
employee’s taxable year in which the con-
tribution is to be made;

September 8, 2026 266 Bulletin No. 2026–37
(B) Such account beneficiary’s date of
birth; and
(C) No facts known to the employee
would make such account beneficiary
ineligible to receive a contribution to his
or her Trump account for that calendar
year.
(iii) No reliance on an employee cer-
tification that a Trump account is valid.
An employer may not rely solely on an
employee certification to establish that
the recipient account is a valid Trump
account. The employer must use a method
reasonably designed to verify, through
information provided by the trustee, pay-
roll processor, or other service provider,
that the contribution is made to a valid
Trump account.
(5) Annual limits—(i) In general. With
respect to an employee, total contributions
under a Trump account contribution pro-
gram for a calendar year may not exceed
the lesser of—
(A) The amount specified in sec-
tion 128(b), as adjusted for inflation under
section 128(b)(2); or
(B) The amount specified under the
terms of the Trump account contribution
program’s written plan.
(ii) Limit by employee. The annual
limit applies with respect to the employee
as an individual, taking into account sec-
tion 128 contributions made with respect
to the employee by all employers for the
employee’s taxable year. The excess of
any section 128 contributions received by
an individual over the amount specified
in section 128(b), as adjusted for inflation
under section 128(b)(2) for the taxable
year, (for example, due to contributions
being received from Trump account con-
tribution programs of two employers of
an employee), may not be excluded from
the individual’s gross income under sec-
tion 128(a). Thus, an individual’s section
128 contributions in excess of the section
128(b) limit must be included in gross
income for the employee’s taxable year.
See paragraph (d)(5)(iii) of this section for
the effect of such contributions in excess
of the limit under section 128(b) on the
Trump account contribution program.
(iii) Effect on plan. Notwithstanding
the provisions of paragraph (d)(5)(ii) of
this section, an arrangement does not fail
to be a Trump account contribution pro-
gram by reason of an individual being in
receipt of excess contributions for the tax-
able year, provided that the plan prohibits
contributions under that plan with respect
to an employee in excess of the amount
specified in paragraph (d)(5)(i) of this sec-
tion.
(iv) Allocation. A program may permit
the contribution to be allocated (either by
the terms of the program or by election by
the employee) among the Trump account
of the employee and the Trump account of
one or more dependents of the employee,
provided that the aggregate amount an
employer contributes with respect to an
employee for the calendar year does not
exceed the limit specified in this para-
graph (d)(5).
(v) Section 530A(c)(2) limit. The
employer does not have any obligation
with respect to compliance with the sec-
tion 530A(c)(2) limit.
(vi) Examples. The rules of this para-
graph (d)(5) are illustrated by the follow-
ing examples. The examples assume that
the Trump account contribution program
written plan allows for contributions up to
$2,500, via salary reduction or otherwise;
that there are no nondiscrimination fail-
ures; that there are no other contributions
to the Trump account(s) for the year; and
that the Trump account contribution pro-
gram has a calendar year plan year.
(A) Example 1. For 2027, Employee has two
dependents and works for an employer that offers a
Trump account contribution program under which
the employer provides a section 128 contribution in
the amount of $2,500 with respect to each employee.
The program allows Employee to allocate the sec-
tion 128 contribution among the Trump accounts of
the two dependents, but the total amount allocated
by Employee may not exceed $2,500 for 2027. The
program complies with the annual limit requirement
of this paragraph (d)(5). The conclusion would not
change if the section 128 contributions were made
via salary reduction.
(B) Example 2. For 2027, Employee and
Employee’s spouse, who are married and file jointly,
have one dependent. The employers of Employee
and Employee’s spouse each offer Trump account
contribution programs under which each employer
provides a section 128 contribution in the amount
of $2,500 with respect to each employee. Employee
and Employee’s spouse each allocate the $2,500 sec-
tion 128 contribution to the Trump account of their
dependent through their respective Trump account
contribution programs. The programs comply with
the annual limit requirement of this paragraph (d)(5).
The conclusion would not change if the section 128
contributions were made via salary reduction.
(C) Example 3. The facts are the same as in
paragraph (d)(5)(vi)(B) of this section (Example 2),
except Employee and Employee’s spouse both work
for the same employer. Employee and Employee’s
spouse each allocate the $2,500 section 128 con-
tribution to the Trump account of their dependent
through the employer’s Trump account contribution
program. The program complies with the annual
limit requirement of this paragraph (d)(5). The con-
clusion would not change if the section 128 contribu-
tions were made via salary reduction.
(D) Example 4. For 2027, Individual has one
dependent. Individual is employed by two unrelated
employers, each of which offers a Trump account
contribution program under which the employer
provides a section 128 contribution in the amount
of $2,500 with respect to each employee. Each plan
prohibits contributions under that plan with respect
to an employee in excess of the amount specified
in section 128(b), as adjusted for inflation under
section 128(b)(2). Individual allocates the $2,500
section 128 contribution under each program
with respect to a Trump account for Individual’s
dependent. The programs comply with the annual
limit requirement of this paragraph (d)(5). Nei-
ther employer is required to provide a corrective
notice described in paragraph (h)(4) of this section
solely because of the other employer’s contribu-
tion. However, Individual must include the excess
contribution of $2,500 in Individual’s gross income
on Individual’s Federal income tax return for that
taxable year. The conclusion would not change if
the section 128 contributions were made via salary
reduction.
(E) Example 5. For 2027, Employee has one
dependent and works for Employer, which offers a
Trump account contribution program under which
Employer provides a section 128 contribution in the
amount of $2,500 with respect to each employee.
Employee allocates the $2,500 section 128 contribu-
tion to the Trump account of Employee’s dependent
through Employer’s Trump account contribution
program. In addition to the section 128 contribution
made under the Trump account contribution program,
Employer contributes an additional $1,000 to the
Trump account that is not a section 128 contribution
made under the Trump account contribution program
to Employee’s dependent’s Trump account. No other
exclusion from gross income or wages applies to the
$1,000 contribution. In accordance with the require-
ments of paragraph (h)(1) of this section, Employer
identifies the $2,500 to the trustee as a section 128
contribution and does not identify the $1,000 as a
section 128 contribution. On Employee’s Form W-2,
Employer reports the $2,500 to Employee as a sec-
tion 128 contribution, and the $1,000 to Employee as
gross income and wages. The program complies with
the annual limit requirement of this paragraph (d)(5).
(6) Selection of trustee. An arrange-
ment is not a Trump account contribution
program if an employer limits contribu-
tions to Trump accounts held by a particu-
lar trustee or trustees.
(7) Section 125 salary reduction
arrangements—(i) In general. A Trump
account contribution program may be
offered via salary reduction under a sec-
tion 125 cafeteria plan but only if the con-
tribution is made to a Trump account of

Bulletin No. 2026–37 267 September 8, 2026
the dependent of an employee. A contri-
bution to a Trump account of an employee
may not be offered via salary reduction
under a section 125 cafeteria plan.
(ii) Elections. A section 125 cafeteria
plan providing for section 128 contribu-
tions through salary reduction may permit
employees to make a prospective salary
reduction election or change or revoke a
salary reduction election for section 128
contributions (for example, to increase
or decrease a salary reduction election) at
any time during the plan year, provided
that the election is effective only as to
salary that is not yet currently available.
The section 125 cafeteria plan must spe-
cifically describe the Trump account con-
tribution benefit and permit participants to
prospectively change or revoke elections
at least monthly, before salary becomes
currently available.
(e) No discrimination in favor of
HCEs. A Trump account contribution
program must satisfy the nondiscrimina-
tion requirements of § 1.128-3(a) through
(c). An arrangement that fails to satisfy
such requirements will not be considered
a Trump account contribution program
with respect to HCEs participating in the
program, but will not affect the program’s
status as a Trump account contribution
program with respect to the NHCE partic-
ipants.
(f) Notification to eligible employees.
Reasonable notification of the availability
and terms of the Trump account contribu-
tion program must be provided to all eligi-
ble employees.
(g) Statement of contributions. A writ-
ten statement showing the amount of sec-
tion 128 contributions that were made for
an employee during the previous calendar
year under the employer’s Trump account
contribution program must be furnished
to that employee. This requirement is sat-
isfied by including the amount of Trump
account contributions on the employee’s
Form W-2, Wage and Tax Statement, in
the manner specified in the form’s instruc-
tions for reporting of section 128 contri-
butions.
(h) Employer communications—(1)
Affirmative statement. With respect to an
amount contributed under a Trump account
contribution program, the employer must,
at the time the amount is transmitted to the
trustee, affirmatively identify the amount
as a section 128 contribution in writing to
the trustee.
(2) Procedures. The employer must
adopt procedures to ensure that sec-
tion 128 contributions are properly iden-
tified and to notify the trustee when a con-
tribution is a section 128 contribution and
when a contribution previously identified
as a section 128 contribution is not a sec-
tion 128 contribution.
(3) Reliance by the trustee. The trustee
of a Trump account receiving a contribu-
tion may rely on the identification of a
contribution as a section 128 contribution
for purposes of section 530A until such
time that the trustee receives a corrective
notice pursuant to paragraph (h)(4) of this
section or has contrary knowledge.
(4) Corrective notice—(i) In gen-
eral. If an amount previously identified
under paragraph (h)(1) of this section as
a section 128 contribution is subsequently
determined not to be a section 128 contri-
bution, in whole or in part, the employer
must provide notice in writing to the
trustee identifying the affected account,
the calendar year in which the contribution
was made, and the amount determined not
to be a section 128 contribution.
(ii) Timing. The notice described in
paragraph (h)(4)(i) of this section must
be furnished within a reasonable period
of time following the date the employer
determines that an amount is not a sec-
tion 128 contribution. For purposes of
this section, 21 calendar days following
the date the employer makes this deter-
mination is deemed to be a reasonable
period of time.
(i) Applicability date. This section
applies to plan years beginning on or after
the date of publication of the final rule in
the Federal Register.
§ 1.128-3 Nondiscrimination
requirements.
(a) Contributions and benefits. The
contributions or benefits provided under
the Trump account contribution program
must not discriminate in favor of HCEs or
their dependents. A Trump account contri-
bution program that provides benefits on
the same terms for all eligible employees
satisfies this requirement. For example, a
term that allows all NHCEs to reduce sal-
ary in the same amount as HCEs does not
discriminate as to contributions or bene-
fits.
(b) Eligibility—(1) In general. The
program must benefit employees who
qualify under an eligibility classification
established by the employer that is rea-
sonably based on objective business cri-
teria in satisfaction of paragraph (b)(2) of
this section and not found by the Secretary
to be discriminatory in favor of HCEs or
their dependents in satisfaction of para-
graph (b)(3) of this section. For these pur-
poses, an employee is eligible under the
program only if the employee had a mean-
ingful opportunity to receive benefits, via
salary reduction or otherwise, regardless
of whether any benefits were actually
received.
(2) Reasonable eligibility classification
established by the employer. An eligibility
classification must be, based on all facts
and circumstances, reasonable and estab-
lished under objective business criteria
that identify the category or categories
of employees who are eligible under the
plan. Reasonable classifications generally
include specified job categories, nature of
compensation (that is, salaried or hourly),
geographic location, and similar bona
fide business criteria. An enumeration of
employees by name or other specific crite-
ria having substantially the same effect as
an enumeration by name is not considered
a reasonable classification.
(3) Nondiscriminatory classification—
(i) In general. An eligibility classifica-
tion must be found by the Secretary not
to be discriminatory in favor of HCEs or
their dependents. A classification is non-
discriminatory for a plan year if and only
if the group of employees included in
the classification eligible under the plan
satisfies the requirements of either para-
graph (b)(3)(ii) or (iii) of this section for
the plan year.
(ii) Facts and circumstances. A plan
satisfies the requirements of this para-
graph (b)(3)(ii) if and only if, based on all
the relevant facts and circumstances, the
Secretary finds that the classification is
nondiscriminatory. No one particular fact
is determinative. Included among the facts
and circumstances relevant in determining
whether a classification is nondiscrimina-
tory are the following—
(A) The underlying business reason for
the classification. The greater the busi-

September 8, 2026 268 Bulletin No. 2026–37
ness reason for the classification, the more
likely the classification is to be nondis-
criminatory.
(B) The percentage of the employer’s
employees eligible under the plan. The
higher the percentage, the more likely the
classification is to be nondiscriminatory.
(C) Whether the number of employees
eligible under the plan in each salary range
is representative of the number of employ-
ees in each salary range of the employer’s
workforce. In general, the more represen-
tative the percentages of employees eli-
gible under the plan in each salary range,
the more likely the classification is to be
nondiscriminatory.
(D) The difference between the plan’s
ratio percentage (within the meaning of
paragraph (b)(3)(iii)(A) of this section)
and the employer’s safe harbor percent-
age (within the meaning of paragraph (b)
(3)(iii)(B) of this section). The smaller the
difference, the more likely the classifica-
tion is to be nondiscriminatory.
(iii) Safe harbor. A plan satisfies the
requirements of this paragraph (b)(3)(iii)
for a plan year if and only if the plan’s ratio
percentage (as defined in paragraph (b)(3)
(iii)(A) of this section) is greater than or
equal to the employer’s safe harbor per-
centage (as defined in paragraph (b)(3)(iii)
(B) of this section).
(A) Ratio percentage. For purposes
of this paragraph (b)(3)(iii), with respect
to a plan for a plan year, the plan’s ratio
percentage means the ratio expressed as
a percentage (rounded to the nearest hun-
dredth of a percentage point) determined
by dividing the eligibility percentage of
NHCEs by the eligibility percentage of
HCEs, as such eligibility percentages are
defined in paragraph (b)(3)(iii)(C) of this
section.
(B) Safe harbor percentage. The safe
harbor percentage of an employer is 90
percent, reduced by 3/4 of a percentage
point for each whole percentage point by
which the NHCE concentration percent-
age exceeds 60 percent.
(C) Eligibility percentage. The eligibil-
ity percentage of NHCEs is determined by
dividing the number of NHCEs who are
eligible under the plan by the total number
of NHCEs of the employer. The eligibil-
ity percentage of HCEs is determined by
dividing the number of HCEs who are eli-
gible under the plan by the total number
of HCEs of the employer. In determining
these eligibility percentages, employees
described in paragraph (e) of this section
are excluded.
(D) NHCE concentration percentage.
The NHCE concentration percentage
of an employer is the percentage of all
the employees of the employer who are
NHCEs.
(c) Average benefits test—(1) In gen-
eral. A plan satisfies the requirements
of this paragraph (c)(1) if the average
benefits provided to employees who are
NHCEs under all Trump account con-
tribution programs of the employer is
at least 55 percent of the average bene-
fits provided to HCEs under all Trump
account contribution programs of the
employer.
(2) Average benefits provided—(i) Gen-
eral rule. For purposes of paragraph (c)(1)
of this section, the average benefits pro-
vided to a group of HCEs or NHCEs for
a plan year equals the total dollar amount
of contributions provided under all Trump
account contribution programs of the
employer during the plan year to employ-
ees in that group, divided by the number
of employees in that group to whom any
such contributions are provided during the
plan year, via salary reduction or other-
wise.
(ii) Employees taken into account.
For purposes of applying the calculation
in paragraph (c)(2)(i) of this section, any
individual employed by the employer
on any day of the plan year is taken into
account in the denominator if:
(A) The employer makes a section 128
contribution to a Trump account as to
which the employee or the employee’s
dependent is the beneficiary during the
plan year, via salary reduction or other-
wise; and
(B) The employee is not described in
paragraph (e) of this section.
(3) Time to perform nondiscrimina-
tion test. The requirements of this para-
graph (c) must be satisfied as of the last
day of the plan year.
(4) Salary reduction agreements. For
purposes of this paragraph (c), in the case
of any benefits provided through a salary
reduction agreement, a plan may disregard
any employee whose compensation is less
than $25,000. For purposes of this para-
graph (c)(4), the term “compensation”
has the meaning given such term by sec-
tion 414(q)(4).
(5) Correction of nondiscrimination
failures—(i) In general. If a plan fails the
requirements of the average benefits test
of this paragraph (c) as of the last day of
the plan year, the plan may nonetheless
be treated as satisfying the requirements
with respect to HCEs and their depen-
dents if the plan takes remedial action as
described in paragraph (c)(5)(ii) of this
section.
(ii) Remedial measures—(A) Cor-
rection. If a Trump account contribution
program fails to satisfy the requirements
of this paragraph (c) as of the last day of
the plan year, the plan may be treated as
satisfying those requirements by includ-
ing in income any excess benefit amounts
received by HCEs. For this purpose, an
excess benefit amount is included in
income if the amount is treated by the
employer as gross income and, to the
extent applicable, wages within the
meaning of sections 3401, 3121, and
3306, and compensation within the
meaning of section 3231, and reported as
such with respect to the year being tested
by the deadline prescribed in § 31.6051-
1(d)(1)(i) of this chapter for furnishing
statements on Form W-2, Wage and Tax
Statement, for the year in which the
excess benefits were received. In addi-
tion, because the excess benefit amounts
are not provided under a Trump account
contribution program, the plan must pro-
vide a corrective notice as provided in
§ 1.128-2(h)(4).
(B) Allocation of excess benefits. (1) If
all HCEs have section 128 contributions
in excess of the quotient of the amount of
the average section 128 contribution for
all NHCEs divided by 0.55, the amount of
excess benefits to be included in income
of each HCE is the excess of the amount
of that HCE’s section 128 contribution
over that quotient.
(2) If not all HCEs have section 128
contributions in excess of the quotient
of the amount of the average section 128
contribution for all NHCEs divided by
0.55, the plan may allocate the reduc-
tion of section 128 contributions among
HCEs in any reasonable manner, includ-
ing methods for apportioning distributions
of excess amounts similar to those used in
§ 1.401(k)-2(b)(2)(iii).

Bulletin No. 2026–37 269 September 8, 2026
(d) Safe harbor for contributions made
with respect to pilot program amounts—
(1) In general. Contributions under a pilot
match contribution arrangement described
in paragraph (d)(2) of this section are dis-
regarded for the purposes of paragraphs
(a) and (c) of this section.
(2) Pilot match contribution arrange-
ments. A pilot match contribution arrange-
ment must—
(i) Be designed to provide contri-
butions to Trump accounts because the
account beneficiary is:
(A) A dependent of an employee; and
(B) An eligible child within the mean-
ing of section 6434(c); and
(ii) Make contributions under the
arrangement available on the same terms
and conditions to all employees not
described in paragraph (e) of this section.
(3) Establishment of eligibility. An
arrangement will not fail to be a pilot
match contribution arrangement because
the arrangement relies on reasonable
measures to establish that an employee’s
dependent is an eligible child within the
meaning of section 6434(c). For this pur-
pose, employee certification of a depen-
dent’s date of birth is a reasonable mea-
sure to ensure eligibility.
(4) Additional section 128 contribu-
tions. If an employer makes contributions
under a pilot match contribution arrange-
ment described in paragraph (d)(2) of this
section and also makes section 128 contri-
butions that are not under such an arrange-
ment, via salary reduction or otherwise,
such contributions that are not pilot match
contributions must separately satisfy para-
graphs (a) and (c) of this section. In deter-
mining whether paragraphs (a) and (c) of
this section are so separately satisfied, the
pilot match contributions may be disre-
garded.
(e) Excluded employees. For purposes
of paragraphs (b) and (c) of this section,
there shall be excluded from consider-
ation—
(1) Subject to rules similar to the rules
of section 410(b)(4), employees who have
not attained the age of 21 and completed
one year of service (as defined in sec-
tion 410(a)(3)); and
(2) Employees not included in a Trump
account contribution program who are
included in a unit of employees covered
by an agreement that the Secretary finds
to be a collective bargaining agreement
between employee representatives and
one or more employers, if there is evi-
dence that the Trump account contribu-
tion program was the subject of good
faith bargaining between such employee
representatives and such employer or
employers.
(f) Contributions taken into account.
For purposes of paragraphs (a), (b), and
(c) of this section, an employer’s contribu-
tions to the Trump account of an employee
or an employee’s dependent outside any
Trump account contribution program
(such as taxable contributions in excess of
the § 1.128-2(d)(5) annual limit) are not
taken into account.
(g) Effect of failure. Except as oth-
erwise provided in paragraph (c)(5) of
this section, if a plan would qualify as a
Trump account contribution program but
for a failure to satisfy one or more of the
requirements of this section, then the plan
is not a Trump account contribution pro-
gram with respect to HCEs. Notwithstand-
ing such failure, the plan is treated as a
Trump account contribution program with
respect to employees who are NHCEs.
(h) Examples. The following examples
illustrate the rules in this section.
(1) Example 1. For 2026, an employer has 15
HCEs and 15 NHCEs. The employer maintains a
Trump account contribution program funded solely
via salary reduction elections made by employees
under the employer’s section 125 cafeteria plan. All
30 employees are eligible to make salary reduction
elections under the plan on the same terms. Eleven
of the HCEs elect benefits under the plan of $2,500
each, and four of the NHCEs elect benefits under
the plan of $2,500 each. The remaining employees
elect no benefits under the plan. The average ben-
efits provided to the HCEs is $2,500 ($27,500/11)
and the average benefits provided to the NHCEs is
also $2,500 ($10,000/4). Accordingly, the average
benefits provided to the NHCEs is 100 percent of
the average benefits provided to the HCEs, and the
required threshold of 55 percent under paragraph (c)
(1) of this section is satisfied.
(2) Example 2. For 2026, an employer has 15
HCEs and 15 NHCEs. The employer maintains a
Trump account contribution program funded solely
via salary reduction elections made by employees
under the employer’s section 125 cafeteria plan. All
30 employees are eligible to make salary reduction
elections under the plan on the same terms. Eleven
of the HCEs elect benefits under the plan of $2,500
each; one of the NHCEs elects benefits of $2,500;
three of the NHCEs elect benefits of $1,500; one of
the NHCEs elects benefits of $1,000; and two of the
NHCEs elect benefits of $500, for a collective $9,000
in benefits provided to seven NHCEs, and an average
benefits provided to NHCEs of $1,285.71 ($9,000/7).
The average benefits provided to the HCEs is $2,500
($27,500/11). Accordingly, the average benefits pro-
vided to the NHCEs is 51.4 percent of the average
benefits provided to the HCEs ($1,285.71/$2,500),
and the required threshold of 55 percent under para-
graph (c)(1) of this section is not satisfied.
(3) Example 3. The facts are the same as in para-
graph (h)(2) of this section (Example 2) except that
the following four NHCEs are excluded employees
within the meaning of paragraph (e) of this section:
two of the NHCEs who elected benefits under the
plan of $1,500; and the two NHCEs who elected ben-
efits of $500. With the exclusion of these employ-
ees, a collective $5,000 in benefits are provided to
three NHCEs, and the average benefits provided to
NHCEs is $1,666.67 ($5,000/3). Accordingly, the
average benefits provided to the NHCEs is 66.7 per-
cent of the average benefits provided to the HCEs
($1,666.67/$2,500), and the required threshold of
55 percent under paragraph (c)(1) of this section is
satisfied.
(4) Example 4. The facts are the same as in para-
graph (h)(2) of this section (Example 2) except that
on or before the furnishing deadline for the Form W-2
for the year in which the benefits were provided,
the employer treats $500 of the benefits elected by
each of the HCEs as gross income and wages for the
year in which the benefits were provided, reducing
the benefits provided to the HCEs to a collective
$22,000 in benefits provided to 11 HCEs, reducing
the average benefit to HCEs to $2,000 ($22,000/11).
Accordingly, the average benefits provided to the
NHCEs is 64.29 percent of the average benefits
provided to the HCEs ($1,285.71/$2,000), and the
required threshold of 55 percent under paragraph (c)
(1) of this section is satisfied.
(5) Example 5. The facts are the same as in para-
graph (h)(3) of this section (Example 3) except the
employer also makes a contribution of $1,000 that
is not excludable from income under section 128 (a
non-section 128 contribution) to each of the employ-
ees who elected benefits under the plan. The taxable
employer contributions are not considered when
calculating the average benefits. Accordingly, the
conclusion is the same as in paragraph (h)(3) of this
section (Example 3).
(6) Example 6. The facts are the same as in para-
graph (h)(1) of this section (Example 1) except that
the 11 NHCEs to whom benefits are not provided
are not eligible to elect benefits under the terms of
the plan. The 11 excluded NHCEs are not excluded
employees within the meaning of paragraph (e) of
this section. The plan has discriminated in favor of
HCEs as to eligibility and thus does not satisfy the
requirements of paragraph (b) of this section. Thus,
the plan is not a Trump account contribution program
with respect to HCEs and the benefits provided to
HCEs are included in their income and wages within
the meaning of sections 3401, 3121 (or compensa-
tion within the meaning of section 3231), and 3306.
Because the benefits are not provided under a Trump
account contribution program, the plan must provide
a corrective notice as provided in § 1.128-2(h)(4).
(i) Applicability date. This section
applies to plan years beginning on or after
the date of publication of the final rule in
the Federal Register.

September 8, 2026 270 Bulletin No. 2026–37
§ 1.129-1 Dependent care assistance
programs.
(a) Definitions. For purposes of section
129, this section and § 1.129-2—
(1) Dependent care assistance. The
term dependent care assistance has the
meaning set forth in section 129(e)(1).
(2) Dependent care assistance pro-
gram. The term dependent care assistance
program means a separate written plan of
an employer for the exclusive benefit of
its employees to provide such employees
with dependent care assistance that sat-
isfies the requirements of section 129(d)
and this section.
(3) Dependent care assistance pro-
vided to an employee. The term dependent
care assistance provided to an employee
means amounts paid or incurred by the
employer to provide dependent care assis-
tance to the employee that are excludable
under section 129, including amounts pro-
vided through a salary reduction agree-
ment under a section 125 cafeteria plan.
(4) Employee. The term employee
means an individual who is an employee
under the common-law standard described
in § 31.3401(c)-1 of this chapter, and
a self-employed individual within the
meaning of section 401(c)(1).
(5) Employer. The term employer
means the person that is the employer of
an employee under the common-law stan-
dard described in § 31.3401(c)-1 of this
chapter. All persons treated as a single
employer under section 414(b), (c), (m),
or (o) are treated as a single employer for
purposes of section 129.
(6) Highly compensated employee
or HCE. The term highly compensated
employee has the meaning set forth in sec-
tion 414(q).
(7) Non-highly compensated employee
or NHCE. The term non-highly compen-
sated employee means an employee who
is not a highly compensated employee.
(8) Principal shareholder or owner.
The term principal shareholder or owner
means an individual, or such individual’s
spouse or dependent, who (on any day of
the taxable year) owns more than 5 per-
cent of the stock or of the capital or profits
interest in the employer.
(9) Plan year. The term plan year
means the 12-month period on the basis
of which the dependent care assistance
program is administered (or, if shorter,
the period for which the program is main-
tained).
(b) Applicability date. This section
applies to plan years beginning on or after
the date of publication of the final rule in
the Federal Register.
§ 1.129-2 Nondiscrimination
requirements.
(a) Contributions and benefits. The
contributions or benefits provided under
a plan that provides dependent care assis-
tance must not discriminate in favor of
HCEs or their dependents. A plan that
provides benefits on the same terms for all
eligible employees satisfies this require-
ment. For example, a term that allows
all NHCEs to reduce salary in the same
amount as HCEs does not discriminate as
to contributions or benefits.
(b) Eligibility—(1) In general. The
dependent care assistance program must
benefit employees who qualify under an
eligibility classification established by
the employer that is reasonably based on
objective business criteria in satisfaction
of paragraph (b)(2) of this section and not
found by the Secretary to be discrimina-
tory in favor of HCEs or their dependents
in satisfaction of paragraph (b)(3) of this
section. For these purposes, an employee
is eligible under the dependent care assis-
tance program only if the employee had
a meaningful opportunity to receive ben-
efits, via salary reduction or otherwise,
regardless of whether any benefits were
actually received.
(2) Reasonable eligibility classification
established by the employer. An eligibility
classification must be, based on all facts
and circumstances, reasonable and estab-
lished under objective business criteria
that identify the category or categories
of employees who are eligible under the
plan. Reasonable classifications generally
include specified job categories, nature of
compensation (that is, salaried or hourly),
geographic location, and similar bona
fide business criteria. An enumeration of
employees by name or other specific crite-
ria having substantially the same effect as
an enumeration by name is not considered
a reasonable classification.
(3) Nondiscriminatory classification—
(i) In general. An eligibility classifica-
tion must be found by the Secretary not
to be discriminatory in favor of HCEs or
their dependents. A classification is non-
discriminatory for a plan year if and only
if the group of employees included in
the classification eligible under the plan
satisfies the requirements of either para-
graph (b)(3)(ii) or (iii) of this section for
the plan year.
(ii) Facts and circumstances. A plan
satisfies the requirements of this para-
graph (b)(3)(ii) if and only if, based on all
the relevant facts and circumstances, the
Secretary finds that the classification is
nondiscriminatory. No one particular fact
is determinative. Included among the facts
and circumstances relevant in determining
whether a classification is nondiscrimina-
tory are the following—
(A) The underlying business reason for
the classification. The greater the busi-
ness reason for the classification, the more
likely the classification is to be nondis-
criminatory.
(B) The percentage of the employer’s
employees eligible under the plan. The
higher the percentage, the more likely the
classification is to be nondiscriminatory.
(C) Whether the number of employees
eligible under the plan in each salary range
is representative of the number of employ-
ees in each salary range of the employer’s
workforce. In general, the more represen-
tative the percentages of employees eli-
gible under the plan in each salary range,
the more likely the classification is to be
nondiscriminatory.
(D) The difference between the plan’s
ratio percentage (within the meaning of
paragraph (b)(3)(iii)(A) of this section)
and the employer’s safe harbor percent-
age (within the meaning of paragraph (b)
(3)(iii)(B) of this section). The smaller the
difference, the more likely the classifica-
tion is to be nondiscriminatory.
(iii) Safe harbor. A plan satisfies the
requirements of this paragraph (b)(3)(iii)
for a plan year if and only if the plan’s ratio
percentage (as defined in paragraph (b)(3)
(iii)(A) of this section) is greater than or
equal to the employer’s safe harbor per-
centage (as defined in paragraph (b)(3)(iii)
(B) of this section).
(A) Ratio percentage. For purposes
of this paragraph (b)(3)(iii), with respect
to a plan for a plan year, the plan’s ratio
percentage means the ratio expressed as

Bulletin No. 2026–37 271 September 8, 2026
a percentage (rounded to the nearest hun-
dredth of a percentage point) determined
by dividing the eligibility percentage of
NHCEs by the eligibility percentage of
HCEs, as such eligibility percentages are
defined in paragraph (b)(3)(iii)(C) of this
section.
(B) Safe harbor percentage. The safe
harbor percentage of an employer is 90
percent, reduced by 3/4 of a percentage
point for each whole percentage point by
which the NHCE concentration percent-
age exceeds 60 percent.
(C) Eligibility percentage. The eligibil-
ity percentage of NHCEs is determined by
dividing the number of NHCEs who are
eligible under the plan by the total number
of NHCEs of the employer. The eligibil-
ity percentage of HCEs is determined by
dividing the number of HCEs who are eli-
gible under the plan by the total number
of HCEs of the employer. In determining
these eligibility percentages, employees
described in paragraph (f) of this section
are excluded.
(D) NHCE concentration percentage.
The NHCE concentration percentage
of an employer is the percentage of all
the employees of the employer who are
NHCEs.
(c) Principal shareholders or owners.
Not more than 25 percent of the amounts
paid or incurred by the employer for
dependent care assistance during the year
may be provided for the class of individ-
uals who are principal shareholders or
owners.
(d) Average benefits test—(1) In gen-
eral. A plan satisfies the requirements of
this paragraph (d) if the average benefits
provided to employees who are NHCEs
under all dependent care assistance pro-
grams of the employer is at least 55 per-
cent of the average benefits provided to
HCEs under all dependent care assistance
programs of the employer.
(2) Average benefits provided—(i) Gen-
eral rule. For purposes of paragraph (d)
(1) of this section, the “average benefits
provided” to a group of HCEs or NHCEs
for a plan year equals the total dollar
amount of dependent care assistance pro-
vided under all dependent care assistance
programs of the employer during the plan
year to employees in that group, divided
by the number of employees in that group
to whom any dependent care assistance is
provided during the plan year, via salary
reduction or otherwise.
(ii) Employees taken into account. For
purposes of applying the calculation in
paragraph (d)(2)(i) of this section, any
individual employed by the employer
on any day of the plan year is taken into
account in the denominator if:
(A) The employer provides any amount
of dependent care assistance to that
employee during the plan year, via salary
reduction or otherwise; and
(B) The employee is not described in
paragraph (f) of this section.
(3) Time to perform nondiscrimina-
tion test. The requirements of this para-
graph (d) must be satisfied as of the last
day of the plan year.
(4) Salary reduction agreements. For
purposes of this paragraph (d), in the case
of any benefits provided through a salary
reduction agreement, a plan may disregard
any employee whose compensation is less
than $25,000. For purposes of this para-
graph (d)(4), the term “compensation”
has the meaning given such term by sec-
tion 414(q)(4).
(e) Utilization rates. Notwithstanding
paragraph (d)(2)(ii) of this section, utili-
zation rates are taken into account to the
extent provided in section 129(e)(6) in
determining whether a plan satisfies sec-
tion 129(d)(4) and (8).
(f) Excluded employees. For purposes
of paragraphs (b) and (d) of this section,
there shall be excluded from consider-
ation—
(1) Subject to rules similar to the rules
of section 410(b)(4), employees who have
not attained the age of 21 and completed
one year of service (as defined in sec-
tion 410(a)(3)); and
(2) Employees not included in a depen-
dent care assistance program who are
included in a unit of employees covered
by an agreement that the Secretary finds
to be a collective bargaining agreement
between employee representatives and
one or more employers, if there is evi-
dence that dependent care benefits were
the subject of good faith bargaining
between such employee representatives
and such employer or employers.
(g) Contributions taken into account.
For purposes of paragraphs (a) through
(d) of this section, an employer’s pay-
ment or reimbursement for an employee’s
dependent care outside any dependent
care assistance program is not taken into
account.
(h) Effect of failure. Except as other-
wise provided in paragraph (j) of this sec-
tion, if a plan would qualify as a dependent
care assistance program but for a failure to
satisfy one or more of the requirements of
section 129(d) and this section, then the
plan is not a dependent care assistance
program with respect to HCEs. Notwith-
standing such failure, the plan is treated as
a dependent care assistance program with
respect to employees who are NHCEs.
(i) [Reserved]
(j) Correction of nondiscrimination
failures—(1) In general. If a plan fails
the requirements of the nondiscrimination
tests of paragraphs (c) or (d) of this section
as of the last day of the plan year, the plan
may nonetheless be treated as satisfying
the requirements if the plan takes reme-
dial action as described in paragraph (j)
(2) (with respect to HCEs) or (j)(3) (with
respect to principal shareholders and own-
ers) of this section.
(2) Remedial measures to correct
average benefits testing failures—(i)
Correction. If a plan fails to satisfy the
requirements of paragraph (d) of this sec-
tion as of the last day of the plan year, the
plan may be treated as satisfying those
requirements by including in income
any excess benefit amounts received by
HCEs. For this purpose, an excess ben-
efit amount is included in income if the
amount is treated by the employer as
gross income and, to the extent appli-
cable, wages within the meaning of sec-
tions 3401, 3121, and 3306, and com-
pensation within the meaning of section
3231, and reported as such with respect
to the year being tested by the deadline
prescribed in § 31.6051-1(d)(1)(i) of
this chapter for furnishing statements
on Form W-2, Wage and Tax Statement,
for the year in which the excess benefits
were received.
(ii) Allocation of excess benefits.
(A) If all HCEs have dependent care
benefits in excess of the quotient of the
amount of the average dependent care
benefits of all NHCEs divided by 0.55, the
amount of excess benefits to be included
in income of each HCE is the excess of
the amount of that HCE’s dependent care
benefit over that quotient.

September 8, 2026 272 Bulletin No. 2026–37
(B) If not all HCEs have dependent
care benefits in excess of the quotient of
the amount of the average dependent care
benefits of all NHCEs divided by 0.55,
the plan may allocate the reduction of
dependent care benefits among HCEs in
any reasonable manner, including meth-
ods for apportioning distributions of
excess amounts similar to those used in
§ 1.401(k)-2(b)(2)(iii).
(3) Remedial measures to correct prin-
cipal shareholders and owners concentra-
tion failures—(i) Correction. If a plan fails
to satisfy the requirements of paragraph (c)
of this section as of the last day of the plan
year, the plan may be treated as satisfying
those requirements by including in income
any excess ownership concentration as
defined in paragraph (j)(3)(ii) of this sec-
tion. For this purpose, an excess owner-
ship concentration is included in income
if the amount is treated by the employer
as gross income and, to the extent applica-
ble, wages within the meaning of sections
3401, 3121, and 3306, and compensation
within the meaning of section 3231, and
reported as such with respect to the year
being tested by the deadline prescribed
in § 31.6051-1(d)(1)(i) of this chapter for
furnishing statements on Form W-2, Wage
and Tax Statement, for the year in which
the excess ownership concentration was
received.
(ii) Allocation of excess ownership
concentration.
(A) If each of the principal sharehold-
ers or owners has dependent care benefits
in excess of the permitted concentration
amount, the excess ownership concentra-
tion for each such individual is the depen-
dent care benefits received by that indi-
vidual less the permitted concentration
amount. For this purpose, the permitted
concentration amount is 25 percent of the
total dependent care benefits provided by
the employer to all participants during the
year divided by the number of such indi-
viduals to whom benefits were provided.
(B) If not all principal shareholders
or owners have dependent care benefits
in excess of the permitted concentration
amount, the plan may allocate the reduc-
tion of dependent care benefits among
such individuals in any reasonable man-
ner, including methods for apportioning
distributions of excess amounts similar to
those used in § 1.401(k)-2(b)(2)(iii).
(k) Examples. The following examples
illustrate the rules of this section.
(1) Example 1. For 2026, an employer has 15
HCEs and 15 NHCEs. The employer maintains a
dependent care assistance program funded solely
via salary reduction elections made by employees
under the employer’s section 125 cafeteria plan. All
30 employees are eligible to make salary reduction
elections under the plan on the same terms. Eleven
of the HCEs elect benefits under the plan of $7,500
each, and four of the NHCEs elect benefits under
the plan of $7,500 each. The remaining employees
elect no benefits under the plan. The average ben-
efits provided to the HCEs is $7,500 ($82,500/11)
and the average benefits provided to the NHCEs is
also $7,500 ($30,000/4). Accordingly, the average
benefits provided to the NHCEs is 100 percent of
the average benefits provided to the HCEs, and
the required threshold of 55 percent under sec-
tion 129(d)(8) and paragraph (d)(1) of this section
is satisfied.
(2) Example 2. An employer has 15 HCEs and
15 NHCEs. The employer maintains a dependent
care assistance program funded solely via sal-
ary reduction elections made by employees under
the employer’s section 125 cafeteria plan. All 30
employees are eligible to make salary reduction
elections under the plan on the same terms. Eleven
of the HCEs elect benefits under the plan of $7,500
each for a collective $82,500 in benefits provided to
eleven HCEs, and an average benefits provided to
HCEs of $7,500 ($82,500/11); one of the NHCEs
elects benefits of $7,500; three of the NHCEs elect
benefits of $5,000; one of the NHCEs elects benefits
of $2,500; and two of the NHCEs elect benefits of
$1,000, for a collective $27,000 in benefits provided
to seven NHCEs, and an average benefits provided
to NHCEs of $3,857.14 ($27,000/7). Accordingly,
the average benefits provided to the NHCEs is 51.4
percent of the average benefits provided to the HCEs
($3,857.14/$7,500), and the required threshold of 55
percent under section 129(d)(8) and paragraph (d)(1)
of this section is not satisfied.
(3) Example 3. The facts are the same as in para-
graph (k)(2) of this section (Example 2) except that
the following four NHCEs are excluded employees
within the meaning of paragraph (f) of this section:
two of the NHCEs who elected benefits under the
plan of $5,000; and the two NHCEs who elected
benefits of $1,000. With the exclusion of these
employees, a collective $15,000 in benefits are
provided to three NHCEs, and the average bene-
fits provided to NHCEs is $5,000 ($15,000/3). The
average benefits provided to the HCEs is $7,500
($82,500/11). Accordingly, the average benefits
provided to the NHCEs is 66.7 percent of the aver-
age benefits provided to the HCEs ($5,000/$7,500),
and the required threshold of 55 percent under sec-
tion 129(d)(8) and paragraph (d)(1) of this section
is satisfied.
(4) Example 4. The facts are the same as in
paragraph (k)(2) of this section (Example 2) except
that on or before the furnishing deadline for the
Form W-2 for the year in which the benefits were
provided, the employer treats $500 of the benefits
elected by each of the HCEs as gross income and
wages for the year in which the benefits were pro-
vided, reducing the benefits provided to the HCEs
to a collective $77,000 in benefits provided to 11
HCEs, reducing the average benefit to HCEs to
$7,000 ($77,000/11). Accordingly, the average
benefits provided to the NHCEs is 55.1 percent
of the average benefits provided to the HCEs
($3,857.14/$7,000), and the required threshold of
55 percent under section 129(d)(8) and paragraph
(d)(1) of this section is satisfied.
(5) Example 5. The facts are the same as in
paragraph (k)(1) of this section (Example 1)
except that the 11 NHCEs to whom benefits are
not provided are not eligible to elect benefits under
the terms of the plan. The 11 excluded NHCEs are
not excluded employees within the meaning of
section 129(d)(9) and paragraph (f) of this section.
The plan has discriminated in favor of HCEs as
to eligibility and thus does not satisfy the require-
ments of section 129(d)(3) and paragraph (b) of
this section.
(l) Applicability date. This section
applies to plan years beginning on or after
the date of publication of the final rule in
the Federal Register.
Frank J. Bisignano,
Chief Executive Officer.
(Filed by the Office of the Federal Register August
10, 2026, 8:45 a.m., and published in the issue of the
Federal Register for August 11, 2026, 91 FR 51611)
Notice of Proposed
Rulemaking
Foreign Currency Gain or
Loss of Controlled Foreign
Corporations
REG-103844-26
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations providing rules
relating to the determination and recog-
nition of foreign currency gain or loss
with respect to qualified business units
(“QBUs”) of controlled foreign corpora-
tions (“CFCs”). The proposed regulations
provide an election under which a CFC
generally would not be required to com-
pute or recognize foreign currency gain
or loss upon a remittance from a QBU,

Bulletin No. 2026–37 273 September 8, 2026
except in connection with certain inbound
nonrecognition transactions.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 12, 2026.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemak-
ing Portal at https://www.regulations.gov
(indicate IRS and REG-103844-26) by
following the online instructions for sub-
mitting comments. Requests for a public
hearing must be submitted as prescribed
in the “Comments and Requests for a
Public Hearing” section. Once submitted
to the Federal eRulemaking Portal, com-
ments cannot be edited or withdrawn. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comments submit-
ted to the IRS’s public docket. Send paper
submissions to: CC:PA:01:PR (REG-
103844-26), Room 5503, Internal Reve-
nue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Mark Terrell at (202) 317-
6938; concerning submissions of com-
ments or requests for a public hearing, the
Publications and Regulations Section at
(202) 317-6901 (not toll-free numbers) or
by e-mail at publichearings@irs.gov (pre-
ferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed addi-
tions and amendments to 26 CFR part 1
(Income Tax Regulations) addressing the
application of section 987 of the Inter-
nal Revenue Code (“Code”) and related
provisions (the “proposed regulations”).
The additions and amendments are issued
under sections 987 and 989, pursuant to
the express delegations of authority pro-
vided under those sections. The express
delegations relied upon are referenced in
the Background section of this preamble.
The proposed regulations are also issued
under the express delegation of authority
under section 7805(a).
Background
I. Overview
Section 987 applies to any taxpayer
that has a qualified business unit (“QBU”)
with a functional currency other than the
dollar. Section 987(1) and (2) provide
rules for determining and translating tax-
able income or loss (“section 987 taxable
income or loss”) with respect to a QBU
that is subject to section 987 (“section
987 QBU”). In addition, section 987(3)
requires proper adjustments (as prescribed
by the Secretary) for transfers of property
between QBUs of the taxpayer having
different functional currencies (including
transfers of property between a controlled
foreign corporation (“CFC”) and its
QBUs). Under section 987(3), a taxpayer
that owns a QBU generally must recog-
nize foreign currency gain or loss (“sec-
tion 987 gain or loss”) upon a remittance
from the QBU.
Sections 987 and 989 provide several
explicit grants of regulatory authority.
Section 987(3) directs the Secretary to
prescribe proper adjustments for transfers
of property between QBUs of the tax-
payer having different functional curren-
cies. Section 989(c) directs the Secretary
to “prescribe such regulations as may be
necessary or appropriate to carry out the
purposes of this subpart.”
1

On December 11, 2024, the Treasury
Department and the IRS published Trea-
sury Decision 10016, which contained
final regulations under sections 861, 985,
987 through 989, and 1502 (the “2024
final regulations”), in the Federal Reg-
ister (89 FR 100138). Concurrently with
the publication of the 2024 final regu-
lations, the Treasury Department and
the IRS published a notice of proposed
rulemaking (REG-117213-24) under
section 987, which addressed the treat-
ment of frequently recurring disregarded
transactions (the “2024 proposed regula-
tions”), in the Federal Register (89 FR
99782).
On February 25, 2026, the Treasury
Department and the IRS issued Notice
2026-17, 2026-12 IRB 698, which
announced that proposed regulations
would be issued under section 987 for the
purpose of simplifying the operation of
the 2024 final regulations, reducing com-
pliance burdens, and refining the scope
of certain rules under section 987 to limit
their effect on ordinary course transac-
tions.
II. Application of Section 987 to
Controlled Foreign Corporations
A. 2024 final regulations
The 2024 final regulations provide
that section 987(3) and the related regula-
tions apply to CFCs in which at least one
United States shareholder (“U.S. share-
holder”), within the meaning of section
951(b), directly or indirectly owns stock,
within the meaning of section 958(a). See
§ 1.987-1(b)(1).
B. 2024 proposed regulations
The preamble to the 2024 proposed
regulations requested comments as to
whether the final regulations should be
modified to provide that section 987(3)
does not apply to CFCs. The pream-
ble explained that, when a United States
person (“U.S. person”) owns a section
987 QBU, foreign currency gain or loss
must be recognized under section 987(3)
in order to accurately measure the U.S.
person’s accession to wealth in U.S. dol-
lars. By contrast, alternative rules may be
appropriate in the case of a section 987
QBU owned by a CFC, because a CFC is
permitted to compute its income in a func-
tional currency other than the dollar. See
section 985(b).
In the preamble to the 2024 proposed
regulations, however, the Treasury Depart-
ment and the IRS also expressed concern
that, if section 987(3) were not applied to
a section 987 QBU owned by a CFC, the
CFC’s basis in assets distributed from the
section 987 QBU could be increased or
reduced due to exchange rate fluctuations.
This is because, in the absence of special
1
The reference to “this subpart” refers to subpart J of part III of subchapter N of chapter 1 of the Code, which includes section 987.

September 8, 2026 274 Bulletin No. 2026–37
rules requiring the CFC to track basis in
the section 987 QBU’s assets using his-
toric exchange rates, the CFC’s basis in
assets distributed by the section 987 QBU
would be translated at the spot rate on the
date of the distribution. If the U.S. share-
holders of the CFC were then to ultimately
sell their CFC stock in a taxable transac-
tion, the gain or loss recognized on the
sale generally would reflect any economic
foreign currency gain or loss attributable
to the distributed assets. However, in the
case of an inbound liquidation or reorgani-
zation, asset basis attributable to apprecia-
tion in the value of the section 987 QBU’s
functional currency could be imported into
the United States without a corresponding
income inclusion. As a result, economic
foreign currency gain with respect to the
assets distributed by the section 987 QBU
would permanently escape U.S. taxation.
C. Comments received in response to the
2024 proposed regulations
The Treasury Department and the IRS
received several comments in response
to the 2024 proposed regulations. Two of
the commenters requested that CFCs be
excluded completely from the application
of section 987(3). The commenters noted
that section 987(3) provides the Secretary
with discretion to determine the nature
of the proper adjustments required to
account for foreign currency gain or loss
with respect to a QBU. The commenters
asserted that, if section 987(3) did not
apply to CFCs, foreign currency gain or
loss with respect to a section 987 QBU of
a CFC typically would be accounted for
under other provisions of the Code (for
example, under section 301(c)(3)). There-
fore, according to the commenters, it
would not be necessary for a CFC to sep-
arately recognize section 987 gain or loss.
D. Notice 2026-17
Notice 2026-17 announced that the
Treasury Department and the IRS intend
to issue forthcoming proposed regula-
tions that would provide an election under
which CFCs generally would not com-
pute or recognize section 987 gain or loss
with respect to their section 987 QBUs.
The Notice described the rules and pro-
cedures for making the election (includ-
ing consistency requirements) that would
apply under the proposed regulations. The
Notice explained that, under the rules of
the proposed regulations, unrecognized
section 987 gain or loss of a CFC arising
before the election was made would be
amortized over a period of 120 months,
consistent with the elective rules for amor-
tizing pretransition gain or loss under the
2024 final regulations. See § 1.987-10(e)
(5)(ii). The Notice further explained that
the proposed regulations would require
taxpayers to account for foreign cur-
rency gain (but not loss) in the case of
an inbound liquidation or reorganization
described in § 1.367(b)-3(a) of a CFC that
is subject to the election.
Although Notice 2026-17 summarized
the rules that would be provided in the
proposed regulations relating to the CFC
election and its consequences, the Notice
did not describe these rules in detail. In
addition, the Notice did not permit tax-
payers to rely on the rules relating to the
CFC election.
Notice 2026-17 also announced that
the proposed regulations would (i) per-
mit taxpayers to determine section 987
taxable income or loss and section 987
gain or loss using an equity and basis pool
method that is substantially similar to the
method provided in regulations proposed
in 1991; (ii) narrow the scope of the loss
suspension rules; (iii) simplify the loss-
to-the-extent-of-gain rule under which
suspended section 987 loss is recognized;
(iv) modify the definition of a successor
for purposes of the deferral rules; and (v)
expand the definition of a section 987
hedging transaction. The Notice described
rules expected to be included in the pro-
posed regulations regarding these issues
and provided that taxpayers are permit-
ted to rely on these rules. Proposed reg-
ulations addressing these provisions of
Notice 2026-17 will be included in a
future notice of proposed rulemaking.
E. Comments received in response to
Notice 2026-17
The Treasury Department and the
IRS received a number of comments in
response to Notice 2026-17. The com-
menters generally requested that guidance
relating to the CFC election be issued as
quickly as possible, so that taxpayers have
sufficient time to make the election for the
2025 taxable year. Several of the recom-
mendations made by the commenters are
addressed in the Explanation of Provi-
sions section of this preamble. The Trea-
sury Department and the IRS are continu-
ing to evaluate the remaining comments
and will address these comments in future
guidance.
III. Election to Amortize Pretransition
Gain or Loss
The 2024 final regulations provide
transition rules for the determination and
recognition of section 987 gain or loss that
arose before the 2024 final regulations
became applicable (“pretransition gain or
loss”). See § 1.987-10. In particular, under
§ 1.987-10(e)(5)(ii)(A), taxpayers can
elect to recognize pretransition gain or
loss ratably over the transition period (the
“amortization election”). Under the 2024
final regulations, the transition period is a
period of ten taxable years beginning with
the first taxable year in which the section
987 regulations apply. Therefore, a tax-
payer that makes the amortization election
recognizes one tenth of its pretransition
gain or loss in each year of the transition
period, including short taxable years.
In Notice 2025-72, 2025-51 IRB 840,
the Treasury Department and the IRS
announced that proposed regulations
would modify the effect of the amortiza-
tion election for short taxable years by
providing that pretransition gain or loss
is recognized ratably over a period of
120 months. Thus, for example, in a one-
month short taxable year, the owner would
recognize 1/120th (rather than one tenth)
of its pretransition gain or loss.
Explanation of Provisions
I. CFC Exemption Election
A. Overview
Consistent with Notice 2026-17, the
proposed regulations would permit taxpay-
ers to make an election (“CFC exemption
election”) that would limit the application
of section 987(3) and the related regula-
tions with respect to CFCs. Proposed §
1.987-15. In a taxable year to which the
election applies, a CFC generally would

Bulletin No. 2026–37 275 September 8, 2026
not compute or recognize section 987 gain
or loss, except in connection with certain
inbound nonrecognition transactions. Pro-
posed § 1.987-15(b). However, the rules
of section 987(1) and (2) would continue
to apply, for example, for purposes of
computing the taxable income and earn-
ings and profits of the CFC.
The CFC exemption election is
intended to reduce the compliance and
administrative burdens of applying
section 987(3) with respect to section
987 QBUs owned by CFCs. Additional
flexibility is warranted in this context
because, under section 985, many CFCs
have a functional currency other than the
U.S. dollar; thus, a CFC’s income is not
necessarily measured by its accession to
wealth in U.S. dollar terms. Moreover,
if a CFC does not recognize section 987
gain or loss with respect to a section 987
QBU, the economic currency gain or loss
with respect to the section 987 QBU gen-
erally should be taken into account by the
CFC’s U.S. shareholders under other pro-
visions of the Code (for example, in the
case of a taxable sale of the CFC stock,
under section 1001), such that the U.S.
shareholders would, over time, recognize
the correct amount of total income with
respect to the CFC.
Section 987(3) provides broad author-
ity to prescribe proper adjustments for
transfers of property between QBUs of
the taxpayer having different functional
currencies. Section 989(c) also provides
broad authority to “prescribe such regula-
tions as may be necessary or appropriate
to carry out the purposes” of subpart J.
The Treasury Department and the IRS are
of the view that this authority allows for
special elective rules to be prescribed with
respect to CFCs that are different from the
rules applicable to U.S. persons.
The proposed regulations would pro-
vide that, for taxable years in which the
CFC exemption election is in effect, a
CFC generally would not compute or rec-
ognize section 987 gain or loss. However,
as explained in parts I.E and I.G of this
Explanation of Provisions, a CFC would
continue to compute and recognize sec-
tion 987 gain or loss that arises in taxable
years for which the CFC exemption elec-
tion is not in effect, and a CFC would be
required to recognize section 987 gain in
connection with certain inbound transac-
tions when a CFC exemption election is
in effect.
B. Rules for making and revoking the
election
1. In general
A CFC exemption election would be a
section 987 election within the meaning
of § 1.987-1(g) and, therefore, would be
subject to the general rules for making and
revoking elections under § 1.987-1(g). In
general, the election would be made by fil-
ing an election statement before the start of
the taxable year. Proposed § 1.987-1(g)(3)
(ii)(D)(3). However, as described in part
I.B.2 of this Explanation of Provisions,
the proposed regulations would provide
special rules for taxable years beginning
after December 31, 2024, and ending on
or before December 31, 2027. The CFC
exemption election could not be revoked
without the consent of the Commissioner.
See § 1.987-1(g)(3)(ii)(A).
2. Taxable years beginning after
December 31, 2024, and ending on or
before December 31, 2027
Notice 2026-17 stated that the CFC
exemption election would generally be
made on an original, timely filed return
(including extensions). Commenters
noted that many calendar year taxpayers
will already have finished preparing their
original tax returns for the 2025 taxable
year by the time the proposed regulations
are issued. The commenters asserted that
it may be difficult for these taxpayers to
make the computations needed to account
for the CFC exemption election on their
timely filed original tax returns for the
2025 taxable year. Two commenters rec-
ommended that, for taxable years begin-
ning in 2025, taxpayers should be permit-
ted to make the CFC exemption election
on an amended return filed before a speci-
fied date (either the original tax return due
date, with extensions, for the 2026 taxable
year, or when final regulations are pub-
lished).
The Treasury Department and the IRS
agree that additional flexibility is appro-
priate in making the CFC exemption elec-
tion for the 2025 taxable year. In addition,
the Treasury Department and the IRS
acknowledge that transition issues may
also arise for the 2026 and 2027 taxable
years. Accordingly, the proposed regula-
tions provide special election timing rules
for taxable years beginning after Decem-
ber 31, 2024, and ending on or before
December 31, 2027.
In general, for taxable years begin-
ning after December 31, 2024, and end-
ing on or before December 31, 2026, the
authorized person (within the meaning
of § 1.987-1(g)(1)) would make the CFC
exemption election by attaching an elec-
tion statement to its original, timely filed
(including extensions) return. Proposed §
1.987-1(g)(3)(ii)(D)(1). Alternatively, for
taxable years beginning in 2025, taxpay-
ers would be permitted to make the CFC
exemption election on an amended return
filed by October 15, 2027. Id.
For taxable years ending in 2027, the
authorized person would make the CFC
exemption election by filing the election
statement on or before October 15, 2027.
Proposed § 1.987-1(g)(3)(ii)(D)(2). Thus,
until October 15, 2027, a calendar year
taxpayer would be permitted to make the
election for the 2025, 2026, or 2027 tax-
able years.
This timetable is intended to provide
sufficient time for taxpayers to deter-
mine whether to make the CFC exemp-
tion election after the issuance of final
regulations providing for the election,
while ensuring that the deadline for any
of these three taxable years does not fall
earlier than the deadline for a preceding
taxable year. The general rule contained
in proposed § 1.987-1(g)(3)(ii)(D)(3)
would apply for taxable years ending
after December 31, 2027. Thus, a calen-
dar year taxpayer would be required to
make a CFC exemption election for the
2028 taxable year on or before December
31, 2027.
3. Taxable year for which the CFC
exemption election first becomes relevant
As an alternative to the rules described
in parts I.B.1 and I.B.2 of this Explana-
tion of Provisions, for the taxable year in
which the CFC exemption election first
becomes relevant, the authorized person
could also make a CFC exemption elec-
tion by attaching an election statement to
its original, timely filed (including exten-

September 8, 2026 276 Bulletin No. 2026–37
sions) return. Proposed § 1.987-1(g)(3)
(ii)(D)(4). This rule would provide addi-
tional time to make the election if the CFC
exemption election first becomes relevant
for a taxable year ending after December
31, 2026.
For this purpose, the CFC exemption
election first becomes relevant in the first
taxable year beginning after December
31, 2024, in which the authorized person’s
section 987 electing group includes a CFC
that is the owner of a section 987 QBU.
Thus, for example, the alternative rule in
proposed § 1.987-1(g)(3)(ii)(D)(4) could
apply to a taxable year beginning after
December 31, 2024, in which a domes-
tic corporation acquired all the stock of a
CFC that owned a section 987 QBU, but
only if the domestic corporation did not
own a majority of the stock of any other
CFC that owned a section 987 QBU in
any previous taxable year beginning after
December 31, 2024.
C. Consistency requirements
1. In general
Under § 1.987-1(g)(2)(ii), section 987
elections must be made consistently for all
members of a section 987 electing group,
including all CFCs in which a majority
of the stock, by vote or value, is owned
(within the meaning of section 958(a)) by
the same U.S. shareholder. When a CFC
joins a section 987 electing group, it is
deemed to make or revoke any section 987
election as necessary to be consistent with
the other group members.
The proposed regulations would pro-
vide additional consistency requirements
to ensure that this election is made on a
uniform basis for all CFCs that are com-
monly controlled by affiliated U.S. share-
holders. Under proposed § 1.987-15(c)
(2)(i), all domestic corporations that
are affiliated (within the meaning of §
1.904(i)-1(b)) would be required to make
consistent CFC exemption elections with
respect to their majority-owned CFCs.
This rule would require consistent CFC
exemption elections between certain
related but non-consolidated domestic
corporations. For example, proposed
§ 1.987-15(c)(2)(i) would require con-
sistency between separate consolidated
groups that are commonly owned by a
foreign parent corporation, and between
domestic corporations that would be
members of the same consolidated group
but for the interposition of a partnership.
In addition, under proposed § 1.987-
15(c)(2)(ii), a U.S. person would be
treated as owning CFC stock that it holds
indirectly through a domestic partnership
(by treating a domestic partnership in the
same manner as a foreign partnership in
applying section 958(a)).
The proposed regulations also would
provide anti-avoidance rules to prevent
taxpayers from entering into related-party
transactions designed to avoid the consis-
tency requirements or trigger a deemed
revocation of a CFC exemption election.
Proposed § 1.987-15(c)(3).
2. Acquisitions
A commenter requested additional
guidance regarding the application of the
consistency rules when a CFC that is not
subject to a CFC exemption election (or its
U.S. shareholder) is acquired by an unre-
lated party that has made a CFC exemp-
tion election (or vice versa). The com-
menter noted that, when an acquirer with
minimal section 987 exposure acquires a
CFC that owns a substantial number of
section 987 QBUs, it may not be appropri-
ate for the acquirer’s elections to remain
in effect. The commenter suggested that
guidance be provided either solely with
respect to the CFC exemption election or
with respect to section 987 elections more
generally.
The Treasury Department and the IRS
are continuing to study the appropriate
application of the consistency rules in §
1.987-1(g) and proposed § 1.987-15(c) to
cases in which a CFC (or another domestic
or foreign entity) is acquired by an unre-
lated party. The Treasury Department and
the IRS request comments on this issue in
general, including whether special rules
should be provided for cases in which an
acquired CFC’s taxable year does not end
at the time of the acquisition and to coor-
dinate the consistency rules with the statu-
tory changes (including the modifications
to the pro rata share rules) in Public Law
119-21, 139 Stat. 72 (July 4, 2025), com-
monly known as the One, Big, Beautiful
Bill Act (OBBBA), and the related regu-
lations.
D. Effect of the CFC exemption election
1. In general
If a CFC is subject to a CFC exemption
election (an “exempt CFC”), the rules of
the section 987 regulations relating to the
determination and recognition of section
987 gain or loss (for example, §§ 1.987-4
through 1.987-6 and 1.987-11 through
1.987-14) generally would not apply to
the exempt CFC. Proposed § 1.987-15(b)
(2). However, other parts of the section
987 regulations (for example, § 1.987-3,
which relates to the determination of sec-
tion 987 taxable income or loss) would
continue to apply to the exempt CFC.
Thus, for example, a taxpayer could make
an election to use a spot rate convention
under § 1.987-1(c)(1)(ii) or a section 988
mark-to-market election under § 1.987-
3(b)(4)(ii) with respect to an exempt CFC.
The applicable rules of the section 987
regulations would be applied by deem-
ing a current rate election to be in effect
with respect to each exempt CFC, so that
exempt CFCs would not be required to
track historic exchange rates. Proposed §
1.987-15(b)(3)(i). As a result, the amount
of a section 987 QBU’s taxable income or
loss would be translated into the owner’s
functional currency at the yearly average
exchange rate, and transfers between a
section 987 QBU and its owner would be
translated at the spot rate applicable on the
date of the transfer.
2. Partnerships owned by CFCs
a. Rules of the 2024 final regulations
relating to partnerships
The 2024 final regulations do not pro-
vide detailed rules concerning the deter-
mination of section 987 taxable income
or loss and section 987 gain or loss in
the case of a partnership. Thus, taxpayers
must apply sections 987 and 989(a) with
respect to partnerships using a reasonable
method consistent with the statute, and
this method must be applied consistently
from year to year. See § 1.987-7(b).
For example, assume a CFC with the
U.S. dollar as its functional currency
owns an interest in a foreign partnership
that would be viewed as using the euro
as its functional currency if the partner-

Bulletin No. 2026–37 277 September 8, 2026
ship were treated as a QBU under section
989(a), and the partnership owns an eligi-
ble QBU that uses the Swiss franc as its
functional currency. The CFC could apply
section 987 using an aggregate approach,
under which the CFC is treated as the
indirect owner of its proportionate interest
in the eligible QBU. Alternatively, under
an entity approach, the partnership itself
could be treated as a section 987 QBU of
the CFC, and the eligible QBU could be
treated as a section 987 QBU of the part-
nership.
b. Rules of the proposed regulations
relating to partnerships owned by CFCs
The proposed regulations would pro-
vide rules relating to the effect of a CFC
exemption election when an exempt CFC
is a partner in a partnership. These rules
generally are intended to provide parity
between the treatment of a section 987
QBU that is directly owned by an exempt
CFC and the treatment of a section 987
QBU that is owned by (or through) a part-
nership whose partners are exempt CFCs.
Under proposed § 1.987-7(b)(2), an
exempt CFC generally would not com-
pute or recognize section 987 gain or loss
with respect to an “exempt partnership
QBU,” which would be defined to include
(i) a partnership that is treated as a sec-
tion 987 QBU of an exempt CFC or (ii) a
section 987 QBU that is indirectly owned
by an exempt CFC through a partner-
ship. Proposed § 1.987-7(b)(2)(iii). How-
ever, an exempt CFC would be required
to continue to apply the rules of sections
987(1) and (2) and 989(a) with respect to
its exempt partnership QBUs in a reason-
able manner using a method that is applied
consistently from year to year. Proposed §
1.987-7(b)(2).
Similarly, if a partnership is treated
as the owner of a section 987 QBU, and
at least 80 percent of the capital or prof-
its interests in the partnership are owned
by exempt CFCs that are members of the
same controlled group (an “exempt part-
nership”), the section 987 QBU would
be an exempt partnership QBU, and the
exempt partnership generally would not
compute or recognize section 987 gain or
loss with respect to the exempt partner-
ship QBU. Proposed § 1.987-7(b)(2)(iii)
and (iv). However, the exempt partnership
would be required to continue to apply the
rules of sections 987(1) and (2) and 989(a)
in a reasonable manner using a method
that is applied consistently from year to
year. Proposed § 1.987-7(b)(2). Thus, an
exempt partnership generally would be
treated in the same manner as an exempt
CFC for purposes of section 987. For this
purpose, an exempt CFC would be treated
as owning a partnership interest that it
holds indirectly through one or more other
partnerships. Proposed § 1.987-7(b)(2)
(ii).
If a partnership meets the definition
of an exempt partnership in the taxable
year in which a CFC exemption election
is made, the rules of proposed § 1.987-15
would apply to the exempt partnership
beginning in that taxable year. If a part-
nership becomes an exempt partnership in
a later taxable year (for example, because
an exempt CFC acquires an interest in
the partnership), the rules of proposed §
1.987-15 would be applied to the exempt
partnership by treating the CFC exemp-
tion election as having been made for that
taxable year. Proposed § 1.987-15(g)(3)
(iii). Similarly, in a taxable year in which
a partnership ceases to be treated as an
exempt partnership (for example, because
an exempt CFC disposes of its partnership
interest), the rules of proposed § 1.987-
15 would be applied to the partnership by
treating the CFC exemption election as
having been revoked for that taxable year.
Proposed § 1.987-15(g)(3)(iv).
E. Pre-election section 987 gain or loss
1. Requirement to compute and amortize
pre-election section 987 gain or loss
a. Comments received in response to
Notice 2026-17
Notice 2026-17 explained that, begin-
ning in the first taxable year in which a
CFC exemption election is made, unrec-
ognized section 987 gain or loss that arose
in previous taxable years (“pre-election
section 987 gain or loss”) would be amor-
tized over a period of 120 months. The
Treasury Department and the IRS received
several comments recommending that tax-
payers be permitted to elect whether or
not to compute and recognize pre-election
section 987 gain or loss. The commenters
posited that, if the CFC exemption elec-
tion is intended to prevent the application
of section 987(3) with respect to exempt
CFCs, then exempt CFCs should not be
required to account for section 987 gain or
loss that arose before the CFC exemption
election was made. Further, the comments
asserted that the computation of pre-elec-
tion section 987 gain or loss would be bur-
densome for taxpayers.
b. Proposed rules requiring computation
and amortization of pre-election section
987 gain or loss
In general, the proposed regulations
would require taxpayers to compute and
amortize pre-election section 987 gain or
loss, and they would not permit taxpay-
ers to elect out of this requirement.
2
See
parts I.E.3 and I.E.4 of this Explanation
of Provisions for a detailed description
of the proposed rules for computing and
amortizing pre-election section 987 gain
or loss.
Contrary to the commenters’ sug-
gestion, the CFC exemption election is
intended to narrow, rather than wholly
prevent, the application of section 987(3)
to exempt CFCs. Thus, the proposed reg-
ulations would leave in place the default
rule of § 1.987-1(b)(1), which provides
that section 987(3) applies to CFCs. How-
ever, pursuant to the authority to pre-
scribe proper adjustments under section
987(3), the proposed regulations would
provide an election that would limit the
circumstances in which an exempt CFC
would recognize section 987 gain or loss.
An exempt CFC generally would not be
required to recognize section 987 gain or
loss in taxable years for which the election
applies, but it would be required to amor-
tize pre-election section 987 gain or loss,
and it may also be required to recognize
2
As explained in part I.E.1.c of this Explanation of Provisions, the proposed regulations would provide special rules to relieve the compliance burden of computing pre-election section 987
gain or loss with respect to smaller QBUs of exempt CFCs.

September 8, 2026 278 Bulletin No. 2026–37
section 987 gain in the case of an inbound
reorganization or liquidation.
The Treasury Department and the IRS
are concerned that the election requested
by the commenters would allow taxpayers
to eliminate previously computed amounts
of section 987 gain or loss in a manner
similar to the elective “fresh start” transi-
tion method that was provided in earlier
proposed regulations under section 987
(the “2006 proposed regulations”) that
were published in the Federal Register in
2006 (71 FR 52876, September 7, 2006).
In response to the 2006 proposed regula-
tions, a commenter asserted that this elec-
tion was overly favorable to taxpayers and
would have one-sided effects that would
be detrimental to the fisc. Consistent with
this comment, the 2024 final regulations
require taxpayers to account for pretran-
sition gain or loss under § 1.987-10 and
do not permit use of the fresh start tran-
sition method on an elective basis. For
similar reasons, the Treasury Department
and the IRS are of the view that the elec-
tion requested by the commenters would
expose the government to whipsaw. Tax-
payers with substantial pre-election sec-
tion 987 gain could choose to eliminate
the gain, while taxpayers with substantial
pre-election section 987 loss could amor-
tize the loss over 120 months.
Accordingly, proposed § 1.987-15(e)
generally would require taxpayers that
make a CFC exemption election to com-
pute pre-election section 987 gain or loss
and amortize this gain or loss over a ten-
year period. This rule would ensure that
section 987 gain or loss arising before the
taxable year of the CFC exemption elec-
tion is properly taken into account.
c. Exception for QBUs with assets of less
than $50 million
Although proposed § 1.987-15(e) gen-
erally would require taxpayers to com-
pute and recognize pre-election section
987 gain or loss, the Treasury Depart-
ment and the IRS acknowledge that,
depending on the size of a QBU, the bur-
den of this computation may outweigh
its rationale. Therefore, the proposed
regulations would provide an exception
to the general rule of proposed § 1.987-
15(e) for QBUs that hold assets of less
than $50 million.
Under proposed § 1.987-15(e)(2)(iii),
an exempt CFC would be deemed to have
zero pre-election section 987 gain or loss
with respect to a QBU that has average
assets of less than $50 million for the
three-year period preceding the first tax-
able year for which the election is made.
See proposed § 1.987-15(e)(2)(iii)(B)(1).
The three-year averaging requirement is
intended to prevent inappropriate shifting
of assets between QBUs. All QBUs of an
exempt CFC or exempt partnership with
the same country of residence (as defined
in section 988(a)(3)(B)) would be aggre-
gated for purposes of the $50 million
threshold. Proposed § 1.987-15(e)(2)(iii)
(B)(3).
For this purpose, the amount of a
QBU’s assets for each of the three years
preceding the first taxable year for which
the CFC exemption election is made
would be equal to the amount of total
assets reflected on the QBU’s U.S. GAAP
balance sheet on the last day of the rel-
evant taxable year (which is reported
annually on Form 8858, Schedule F). Pro-
posed § 1.987-15(e)(2)(iii)(B)(2). Unlike
the items attributable to an eligible QBU
under § 1.987-2(b)(1), these amounts are
not adjusted to conform to Federal income
tax principles. Based on available data,
the Treasury Department and the IRS
anticipate that this exception would sub-
stantially reduce the overall compliance
burden of computing pre-election section
987 gain or loss.
2. Coordination with the transition rules
of § 1.987-10
The rules for computing and recog-
nizing pre-election section 987 gain or
loss under proposed § 1.987-15(e) gener-
ally would not apply if the CFC exemp-
tion election is made for the taxable year
beginning on the transition date described
in § 1.987-10(c)(1) (that is, the first day
of the first taxable year to which the 2024
final regulations apply). In this case,
because unrecognized section 987 gain
or loss arising before the transition date
is already accounted for under the transi-
tion rules of § 1.987-10, taxpayers would
not be required to separately account
for pre-election section 987 gain or loss
under proposed § 1.987-15(e). However,
because the transition rules of § 1.987-10
do not apply to partnerships, an exempt
CFC or exempt partnership would com-
pute pre-election section 987 gain or loss
under proposed § 1.987-15(e) with respect
to an exempt partnership QBU even when
the CFC exemption election is made in the
taxable year beginning on the transition
date. Proposed § 1.987-15(g)(1)(i).
In general, a CFC exemption election
would not affect the application of the
transition rules in § 1.987-10. Thus, in
the taxable year beginning on the transi-
tion date, an exempt CFC would apply §
1.987-10 to determine pretransition gain
or loss with respect to its section 987
QBUs. Additionally, the rules cross-ref-
erenced in § 1.987-10 (for example, the
rules of § 1.987-4 that are cross-refer-
enced in § 1.987-10(e)(3)(iii)) would
apply for purposes of the transition rules.
However, if the CFC exemption election
is made for the taxable year beginning on
the transition date, an exempt CFC would
be deemed to have no pretransition gain or
loss with respect to a QBU that does not
meet the $50 million asset threshold under
proposed § 1.987-15(e)(2)(iii). Proposed §
1.987-15(d)(2).
A taxpayer that makes a CFC exemp-
tion election for the taxable year begin-
ning on the transition date would be
deemed to also make the amortization
election under § 1.987-10(e)(5)(ii) with
respect to its exempt CFCs. Proposed §
1.987-15(d)(1)(i). Because an exempt
CFC does not recognize section 987 gain
or loss under § 1.987-5 at the time of a
remittance, this deemed election is needed
to provide a mechanism for recognizing
an exempt CFC’s pretransition gain or
loss. A taxpayer that is deemed to make
the amortization election by reason of
a CFC exemption election would not be
required to make the amortization election
with respect to QBU owners that are not
exempt CFCs. Proposed § 1.987-15(d)(1)
(ii).
3. Computation of pre-election section
987 gain or loss if the CFC exemption
election is made after the taxable year
beginning on the transition date
a. In general
If a CFC exemption election is made
for a taxable year beginning after the

Bulletin No. 2026–37 279 September 8, 2026
transition date, an exempt CFC (or an
exempt partnership) generally would be
required to compute pre-election sec-
tion 987 gain or loss with respect to its
section 987 QBUs, successor deferral
QBUs, and successor suspended loss
QBUs as of the last day of the preced-
ing taxable year. Proposed § 1.987-15(e)
(2). An exempt CFC’s pre-election sec-
tion 987 gain or loss with respect to a
QBU would be equal to the sum of the
CFC’s net unrecognized section 987 gain
or loss, outstanding deferred section 987
gain or loss, and cumulative suspended
section 987 loss with respect to the QBU
on the last day of the preceding taxable
year, reduced by amounts recognized in
the preceding taxable year. Id.
b. Interaction with the annual recognition
election
Commenters requested clarification
concerning the interaction of an annual
recognition election with a CFC exemp-
tion election. Under proposed § 1.987-
15(e)(2), any section 987 gain or loss
recognized before the first taxable year
in which the CFC exemption election
applies would not be taken into account in
computing pre-election section 987 gain
or loss. Therefore, if a CFC is subject to
an annual recognition election before the
CFC exemption election is made, and
the CFC does not have any outstand-
ing deferred section 987 gain or loss or
cumulative suspended section 987 loss,
the CFC’s pre-election section 987 gain
or loss would be zero (because the CFC’s
net unrecognized section 987 gain or loss
would have been recognized in prior tax-
able years as a result of the annual recog-
nition election).
4. Recognition of pre-election section
987 gain or loss
An exempt CFC would recognize
pre-election section 987 gain or loss rat-
ably over a period of 120 months begin-
ning with the first day of the first taxable
year in which the election applies. Pro-
posed § 1.987-15(e)(3)(i). In general, the
source and character of pre-election sec-
tion 987 gain or loss would be determined
by applying the rules of § 1.987-6 in the
last taxable year before the CFC exemp-
tion election takes effect. Proposed §
1.987-6(b)(1)(v). However, deferred sec-
tion 987 gain or loss and suspended sec-
tion 987 loss would retain the source and
character determined in the taxable year
of deferral or suspension, respectively.
See § 1.987-6(b)(1)(ii) and (iii).
It is possible that a CFC would amor-
tize both pre-election section 987 gain or
loss (under § 1.987-15(e)(3)(i)) and pre-
transition gain or loss (under § 1.987-10(e)
(5)(ii)) in certain years. This would be the
case, for example, if a calendar year CFC
with a transition date of January 1, 2025,
made the election to amortize pretransi-
tion gain or loss under § 1.987-10(e)(5)
(ii) but did not make the CFC exemption
election for 2025, and then made the CFC
exemption election for 2026. However, if
the CFC described in the preceding sen-
tence owned a QBU that held assets of
less than $50 million (as determined under
proposed § 1.987-15(e)(2)(iii)(B)), the
exempt CFC would continue to amortize
pretransition gain or loss under § 1.987-
10(e)(5)(ii) in 2026 and subsequent years,
but would not amortize pre-election sec-
tion 987 gain or loss with respect to the
QBU under proposed § 1.987-15(e)(2)
(iii).
5. Conversion of pre-election section 987
gain or loss into suspended section 987
loss
In two cases, pre-election section 987
loss would be converted into suspended
section 987 loss. First, under proposed §
1.987-15(e)(3)(iv), if pre-election section
987 loss of an exempt CFC is attributable
to a QBU that is owned by a different
member of the exempt CFC’s controlled
group (for example, a successor deferral
QBU), and the exempt CFC ceases to
be related to the owner of the QBU due
to a transfer of the exempt CFC’s stock,
the pre-election section 987 loss would
become suspended section 987 loss. This
rule is intended to prevent taxpayers from
engaging in loss trafficking by selling an
exempt CFC with a pre-election section
987 loss attribute to an unrelated person
that does not also acquire ownership of
the QBU to which the loss is attributable.
When this rule applies, the CFC would
recognize the suspended section 987 loss
only to the extent of section 987 gain rec-
ognized in a taxable year in which it is
no longer subject to the CFC exemption
election.
Second, under proposed § 1.987-15(f)
(2)(ii), pre-election section 987 loss would
be suspended if the CFC exemption elec-
tion is revoked (or deemed to be revoked)
during the first 60 months of the amor-
tization period. This rule is intended to
prevent taxpayers from making the CFC
exemption election for a limited period of
time in order to accelerate the recognition
of section 987 loss.
6. Exempt partnerships
An exempt partnership generally
would be required to compute pre-elec-
tion section 987 gain or loss in the same
manner as an exempt CFC. Proposed §
1.987-15(g)(3)(i). However, the exempt
partnership itself would not recognize
the pre-election section 987 gain or loss.
Instead, each partner in the exempt part-
nership would take into account its share
of the pre-election section 987 gain or
loss ratably over a period of 120 months.
Proposed § 1.987-15(g)(3)(ii). This rule is
designed to prevent pre-election section
987 gain or loss from being shifted to a
new partner upon a sale or transfer of a
partnership interest.
7. Partnership basis adjustments
Under the existing final regulations,
when a partner recognizes section 987
gain or loss with respect to a partnership
or an eligible QBU of a partnership, the
partner’s adjusted basis in the partnership
must be adjusted under the principles of
sections 704(d) and 705. See § 1.987-7(e).
Therefore, partnership basis adjustments
would be made for each taxable year in
which an exempt CFC recognizes pre-elec-
tion section 987 gain or loss with respect
to an exempt partnership QBU (including
a taxable year in which an exempt CFC
recognizes pre-election section 987 gain
or loss of an exempt partnership under
proposed § 1.987-15(g)(3)(ii)(A)). The
Treasury Department and the IRS request
comments on this issue in general, includ-
ing: whether it would be appropriate for an
exempt CFC to instead adjust the basis of
its partnership interest by the full amount
of its pre-election section 987 gain or loss

September 8, 2026 280 Bulletin No. 2026–37
in the first taxable year in which the CFC
exemption election applies; whether the
recognition of pre-election section 987
gain or loss should be accelerated when an
exempt CFC sells its partnership interest
during the 120-month amortization period
(including whether rules are needed to
ensure that capital loss on the sale of a
partnership interest is not converted into
ordinary loss); and whether special rules
should be provided for cases in which
an exempt CFC transfers its partnership
interest in a transaction described in sec-
tion 351 or 721.
F. First year for which the election is
revoked
In the first year in which a CFC exemp-
tion election ceases to apply (for exam-
ple, because the election is deemed to be
revoked under the consistency rules in
§ 1.987-1(g)(2)), any section 987 QBU
owned by the CFC would be deemed to be
newly formed on the first day of the tax-
able year. Proposed § 1.987-15(f)(1). As
a result, taxpayers would not be required
to compute net unrecognized section 987
gain or loss under § 1.987-4 for previous
taxable years in which the CFC exemption
election was in effect.
G. Special Rules for Inbound
Nonrecognition Transactions
1. Requirement to account for foreign
currency gain
Notice 2026-17 explained that, under
the rules to be provided in the proposed
regulations, taxpayers would be required
to account for foreign currency gain (but
not loss) in the case of an inbound liquida-
tion or reorganization of an exempt CFC.
In response to the Notice, some comment-
ers asserted that special rules for inbound
transactions were not necessary and
should not be included in the proposed
regulations, or should be narrowly scoped
to address transactions entered into with a
principal purpose of abuse. Alternatively,
the commenters suggested that symmetri-
cal rules should be provided to account for
foreign currency loss when the functional
currency of a section 987 QBU depreci-
ates in value. However, one commenter
acknowledged that inbound transactions
of exempt CFCs could present opportuni-
ties for importation of excess asset basis
attributable to exchange rate fluctuations,
which would implicate longstanding con-
cerns of the Treasury Department and the
IRS.
The Treasury Department and the IRS
are of the view that rules are needed to
prevent the importation of excess asset
basis resulting from unrecognized for-
eign currency gains when the assets of an
exempt CFC are acquired in an inbound
reorganization or liquidation described
in § 1.367(b)-3(a) (an “inbound nonrec-
ognition transaction”). In the absence
of such rules, an exempt CFC would
not currently recognize section 987 gain
pursuant to the CFC exemption election,
and could also permanently escape U.S.
taxation with respect to economic foreign
currency gain in the case of an inbound
nonrecognition transaction. The related
excess asset basis would be imported
into the United States and could allow the
domestic acquiring corporation to claim
excessive deductions or losses in subse-
quent taxable years. See part II.B of the
Background section.
Accordingly, under proposed § 1.987-
16, when the assets of an exempt CFC
(a “transferor CFC”) are acquired in an
inbound nonrecognition transaction, the
transferor CFC would compute and recog-
nize gain equal to the amount of its “sec-
tion 987 asset basis.” Conceptually, sec-
tion 987 asset basis is intended to reflect
the amount by which the aggregate basis
of the assets acquired in the inbound non-
recognition transaction has been increased
due to appreciation in the value of a sec-
tion 987 QBU’s functional currency. This
rule is consistent with one of the purposes
of § 1.367(b)-3, which is to ensure that
any asset basis repatriated in an inbound
nonrecognition transaction either reflects
earnings and profits that have already
been subject to tax, or gives rise to an
inclusion of income or recognition of gain
at the time of the inbound nonrecognition
transaction.
The Treasury Department and the IRS
are of the view that an anti-abuse rule tied
to a taxpayer’s subjective intent would
not sufficiently address concerns regard-
ing the importation of excess asset basis.
Because a CFC does not recognize section
987 gain on remittances from a section
987 QBU when a CFC exemption elec-
tion is in effect, the CFC should recognize
foreign currency gain when excess asset
basis attributable to the section 987 QBU
is imported into the United States, regard-
less of the taxpayer’s reason for entering
into the inbound nonrecognition transac-
tion.
In addition, the proposed regulations
do not provide rules under which a trans-
feror CFC would recognize foreign cur-
rency loss in connection with an inbound
nonrecognition transaction. The Trea-
sury Department and the IRS are con-
cerned that, if such rules were adopted,
taxpayers could choose to enter into
inbound nonrecognition transactions
for the purpose of triggering substantial
foreign currency losses. This approach
is also consistent with the longstanding
treatment under § 1.367(b)-3, which,
upon an inbound nonrecognition trans-
action, requires an inclusion of income
or recognition of gain and does not per-
mit a deduction or recognition of loss.
See §§ 1.367(b)-3(b)(3)(i) and (c)(2) and
1.367(b)-2(d)(1).
2. Computation of section 987 asset basis
a. Comments received in response to
Notice 2026-17
Notice 2026-17 identified two potential
options for computing section 987 asset
basis. Under the first option described in
the Notice, section 987 asset basis would
equal the transferor CFC’s aggregate net
unrecognized section 987 gain computed
for a lookback period of ten taxable years
preceding the inbound transaction, using
the simplified method provided in §
1.987-10(e)(3). Under the second option,
section 987 asset basis would be equal
to the amount of the transferor CFC’s
excess asset basis computed under §
1.367(b)-3(g)(2)(i).
Two commenters recommended a mod-
ified version of the first option described
in Notice 2026-17, under which the sim-
plified method provided in § 1.987-10(e)
(3) would be applied for only five years
(rather than ten) unless taxpayers elected
to utilize a ten-year lookback period.
Another commenter asserted that the
lookback period should not exceed ten
years, but did not suggest a shorter period.

Bulletin No. 2026–37 281 September 8, 2026
Some commenters recommended that the
simplified method provided in § 1.987-
10(e)(3) should be applied using financial
statement balance sheets. The comment-
ers requested clarification as to whether
adjustments would need to be made to the
financial statement balance sheets for this
purpose.
Other commenters suggested that sec-
tion 987 asset basis be computed using a
simplified version of the equity and basis
pool method described in Notice 2026-17.
One commenter requested that taxpayers
be provided the option to compute section
987 asset basis by applying the rules of §
1.987-4(d) in their entirety to all taxable
years preceding the inbound nonrecogni-
tion transaction.
Some commenters criticized the sec-
ond option described in Notice 2026-
17 (which looks to excess asset basis
computed under § 1.367(b)-3(g)(2)(i))
because it does not isolate excess asset
basis attributable to foreign currency gain
with respect to a section 987 QBU. The
commenters requested guidance as to how
the foreign currency-related component
of excess asset basis (“EAB”) could be
identified for this purpose. Another com-
menter, however, asserted that the EAB
method would be appropriate for taxpay-
ers that are unable to use other methodol-
ogies due to data limitations.
Several commenters suggested that
the cumulative translation adjustment
(“CTA”) computed under GAAP could
be used as a reasonable proxy for the
amount of section 987 asset basis. The
commenters requested guidance as to
adjustments that would need to be made
to the CTA amount for this purpose. One
commenter recommended that taxpayers
be permitted to use the CTA to compute
section 987 asset basis only if the CTA
methodology used for GAAP purposes is
substantially similar to the computations
required under section 987. However,
the Treasury Department and the IRS
also received feedback indicating that,
as a result of remittances, disregarded
transactions, and other factors, there can
be significant book-to-tax differences
between the CTA amount and section
987 gain or loss amounts, and it may not
be feasible to provide administrable rules
for making the necessary book-to-tax
adjustments.
b. Proposed rules for computing section
987 asset basis
The proposed regulations would pro-
vide rules for determining a transferor
CFC’s section 987 asset basis using
administrable proxies based on informa-
tion that is expected to be readily available
at the time of the inbound nonrecognition
transaction. These rules are intended to
avoid the need for retroactive application
of the rules of § 1.987-4 (for determin-
ing net unrecognized section 987 gain or
loss) to prior taxable years based on his-
torical information. The Treasury Depart-
ment and the IRS are of the view that
an approximation is appropriate in this
context, given the limited circumstances
under which the determination would be
necessary (in light of the likely nonrecur-
ring aspect of an inbound nonrecognition
transaction) and the potential compliance
and administrative burdens of requiring a
precise calculation.
In particular, proposed § 1.987-16(c)
would require the transferor CFC to deter-
mine its section 987 asset basis under one
of two methodologies. The transferor CFC
would establish its choice of methodology
with respect to an inbound nonrecognition
transaction by applying that methodology
in computing the amount of section 987
asset basis (if any) to be recognized under
proposed § 1.987-16(d)(1) with respect to
the inbound nonrecognition transaction.
Under the first methodology (the “look-
back methodology”), section 987 asset
basis would be equal to the aggregate net
amount of unrecognized section 987 gain
computed using the simplified method
provided in § 1.987-10(e)(3) for taxable
years ending within the 72-month period
preceding the inbound nonrecognition
transaction (excluding any taxable year
predating the CFC exemption election).
Proposed § 1.987-16(c)(2). This approach
is expected to capture the appropriate
amount of foreign currency gain for those
taxable years with a reasonable degree of
accuracy. In response to comments, the
proposed regulations would provide for a
lookback period of only 72 months (rather
than ten years) in order to reduce the com-
pliance burden of computing section 987
asset basis.
Under the second methodology, sec-
tion 987 asset basis would be equal to the
amount of EAB with respect to the trans-
feror CFC determined under the rules of §
1.367(b)-3(g)(2)(i) (but without regard to
the application of proposed § 1.987-16).
Proposed § 1.987-16(c)(3). This approach
relies on asset basis amounts determined
at the time of the inbound nonrecognition
transaction, rather than historical section
987 computations, and therefore may be
simpler for taxpayers to apply in some
cases. The other components of the EAB
formula—earnings and profits and outside
stock basis—are also expected to be avail-
able at the time of the inbound nonrecog-
nition transaction. However, the Treasury
Department and the IRS acknowledge that
this approach can result in an imprecise
amount of section 987 asset basis (for
example, when the transferor CFC has
excess asset basis for reasons unrelated
to, or in addition to, exchange rate fluc-
tuations).
The Treasury Department and the IRS
are continuing to study whether, in addi-
tion to the two methodologies described
in proposed § 1.987-16(c), other alter-
native methodologies recommended by
commenters could be used to compute a
transferor CFC’s section 987 asset basis.
Accordingly, the comments described in
part I.G.2.a of this Explanation of Provi-
sions may be addressed further in future
guidance.
3. Gain recognition
a. In general
Under proposed § 1.987-16(d)(1), a
transferor CFC would recognize section
987 gain equal to the amount of its sec-
tion 987 asset basis immediately before
the inbound nonrecognition transaction.
This rule aligns with the rules that apply
when a CFC exemption election is not in
effect. In particular, under § 1.987-8, all
section 987 QBUs owned by a CFC are
treated as terminated immediately before
an inbound nonrecognition transaction,
and any net unrecognized section 987 gain
is recognized by the CFC at that time.
An example in the proposed regula-
tions would confirm that section 987 gain
recognized under proposed § 1.987-16(d)
(1) is not gain recognized with respect to
property distributed in a liquidation within
the meaning of section 334(b)(1)(A) (or

September 8, 2026 282 Bulletin No. 2026–37
gain recognized on a transfer of property
within the meaning of section 362(b)).
See proposed § 1.987-16(f)(2)(iii). Under
proposed § 1.987-16(d)(1), the section
987 gain would be recognized immedi-
ately before the inbound nonrecognition
transaction, but not as part of the inbound
nonrecognition transaction. Therefore, the
domestic acquiring corporation’s basis
in the property received would not be
affected by the recognition of section 987
gain under proposed § 1.987-16(d)(1).
3

This result is appropriate because sec-
tion 987 gain recognized under proposed
§ 1.987-16(d) is intended to reflect the
amount by which a CFC’s inside asset
basis has previously been increased due
to exchange rate fluctuations without gain
recognition. If the domestic acquiring
corporation’s asset basis were increased
under section 334(b)(1)(A) (or section
362(b)) due to the recognition of section
987 gain under proposed § 1.987-16(d),
that would reintroduce the misalignment
between asset basis and taxable income or
gain that the rules of proposed § 1.987-16
are meant to address.
b. Source and character
The source and character of section
987 gain recognized under § 1.987-16(d)
would be determined under § 1.987-6 in
the taxable year of recognition. Proposed
§ 1.987-6(b)(1)(vi). In general, source
and character would be determined based
on the relative tax book value of all of
the transferor CFC’s assets. Proposed §
1.987-16(d)(2)(ii). However, stock of a
lower-tier subsidiary held by the trans-
feror CFC would not be taken into account
for this purpose, because this stock is not
attributable to a section 987 QBU under §
1.987-2(b)(2)(i)(A).
c. Comments received in response to
Notice 2026-17
In response to Notice 2026-17,
the Treasury Department and the IRS
received a number of comments regard-
ing the manner in which section 987 asset
basis should be taken into account. One
commenter recommended that, immedi-
ately before the inbound nonrecognition
transaction, the basis of the transferor
CFC’s assets should be reduced by the
amount of its section 987 asset basis.
Other commenters requested that tax-
payers be permitted to elect between
different methods for taking into account
section 987 asset basis, including (i) gain
recognition, (ii) adjustments to asset
basis, and (iii) adjustments to the domes-
tic acquiring corporation’s net unrecog-
nized section 987 gain or loss following
the inbound nonrecognition transaction.
The Treasury Department and the IRS are
continuing to evaluate these comments.
Accordingly, these comments may be
addressed in future guidance.
4. De minimis rule
Under the proposed regulations, tax-
payers would not be required to compute
a transferor CFC’s section 987 asset basis,
or recognize an amount of section 987
gain equal to the section 987 asset basis,
if the aggregate tax basis of the transferor
CFC’s assets is less than $25 million.
Proposed § 1.987-16(e). This de minimis
rule is intended to reduce the compliance
and administrative burdens of applying §
1.987-16 when a CFC is unlikely to have
a significant amount of section 987 asset
basis. It is anticipated that the de minimis
rule will relieve burdens on small busi-
nesses by eliminating the need for taxpay-
ers to determine section 987 asset basis for
a significant number of transactions.
In general, the $25 million de mini-
mis threshold is applied with respect to
all of a transferor CFC’s assets, regard-
less of whether the assets are attributable
to a section 987 QBU at the time of the
inbound nonrecognition transaction. This
rule is intended to ensure that any assets
that may have been previously owned by
a section 987 QBU are taken into account
for purposes of the de minimis threshold,
even if the assets were distributed to the
transferor CFC (or the section 987 QBU
terminated) before the inbound nonrecog-
nition transaction.
Non-portfolio stock held by the trans-
feror CFC generally would not be taken
into account for purposes of the de mini-
mis threshold, because this stock is not
attributable to a section 987 QBU under
§ 1.987-2(b)(2)(i)(A). Proposed § 1.987-
16(e)(2). Non-portfolio stock would, how-
ever, be taken into account to the extent
that other assets of the transferor CFC had
been exchanged for such stock (whether
or not gain or loss was recognized on the
exchange) during the 120-month period
preceding the inbound nonrecognition
transaction. Thus, for example, if a trans-
feror CFC contributes a section 987 QBU
to a lower-tier subsidiary in a section 351
transaction, the basis of the subsidiary
stock received by the transferor CFC in
exchange for the section 987 QBU would
be taken into account under proposed §
1.987-16(e)(2).
The Treasury Department and the
IRS received several comments relating
to potential de minimis exceptions. One
commenter suggested a de minimis rule
tied to the amount of the CTA determined
for GAAP purposes. Another commenter
recommended that a de minimis exception
should apply if the transferor CFC’s inside
asset basis does not exceed 10 percent
of the aggregate gross basis of all of the
domestic acquiring corporation’s assets,
or if the amount of section 987 asset basis
is less than 10 percent of the transferor
CFC’s inside asset basis. The Treasury
Department and the IRS are continuing
to study these comments and will address
them in future guidance.
5. Coordination with § 1.367(b)-3(g)
As described in part I.G.2.b of this
Explanation of Provisions, the proposed
regulations under § 1.987-16 would pro-
vide that excess asset basis has the mean-
ing provided in § 1.367(b)-3(g)(2)(i) but
is determined prior to the application of
§ 1.987-16(d). Proposed § 1.987-16(c)
(3). To ensure that amounts that give
rise to excess asset basis are not double
counted (once in applying the proposed
regulations under § 1.987-16(d) and
again in applying § 1.367(b)-3(g)), §
1.367(b)-3(g)(2)(i) would be modified to
provide that excess asset basis generally
is determined after the application of §
1.987-16(d).
3
The same principle would apply with respect to section 987 gain recognized when a section 987 QBU terminates under § 1.987-8.

Bulletin No. 2026–37 283 September 8, 2026
II. Amortization of Pretransition Gain or
Loss in a Short Taxable Year
Consistent with Notice 2025-72, pro-
posed § 1.987-10(e)(5)(ii)(A) would pro-
vide that an owner that is subject to an
amortization election would recognize
pretransition gain or loss ratably over a
period of 120 months beginning with the
first day of the first taxable year in which
the section 987 regulations apply. This
rule is intended to prevent distortions that
could arise from the accelerated recogni-
tion of pretransition gain or loss in a short
taxable year.
Applicability Dates
The proposed regulations generally are
proposed to apply to taxable years end-
ing on or after the date final regulations
are filed with the Federal Register (the
“finalization date”). Proposed § 1.987-
10(e)(5)(ii) (relating to the amortization
election for pretransition gain or loss) is
proposed to apply to taxable years begin-
ning after December 31, 2024, and ending
on or after November 25, 2025.
Except as provided in the following
sentence, a taxpayer may rely on the pro-
posed regulations for a taxable year begin-
ning after December 31, 2024, and ending
before the finalization date, provided that
the taxpayer and all members of its con-
solidated group and section 987 electing
group consistently follow the proposed
regulations for the taxable year and all
subsequent taxable years ending before
the finalization date. A taxpayer may rely
separately on proposed § 1.987-10(e)
(5)(ii) for a taxable year beginning after
December 31, 2024, and ending before
the finalization date, provided that the tax-
payer and all members of its consolidated
group and section 987 electing group con-
sistently follow proposed § 1.987-10(e)(5)
(ii) for the taxable year and all subsequent
taxable years ending before the finaliza-
tion date.
Special Analyses
I. Regulatory Planning and Review –
Economic Analysis
Executive Orders 12866 and 13563
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs
and benefits, reducing costs, harmoniz-
ing rules, and promoting flexibility. This
rule is expected to be an Executive Order
14192 deregulatory action.
The proposed regulations have been
designated by the Office of Management
and Budget’s (OMB’s) Office of Infor-
mation and Regulatory Affairs (OIRA) as
subject to review under Executive Order
12866 pursuant to the Memorandum of
Agreement (MOA, July 4, 2025) between
the Treasury Department and the Office
of Management and Budget regarding
review of tax regulations. OIRA has deter-
mined that the proposed rulemaking is a
significant regulatory action and subject
to review under section 3(f) of Executive
Order 12866 and section 1(b) of the Mem-
orandum of Agreement. Accordingly, the
proposed regulations have been reviewed
by OMB.
A. Background
Section 987 applies when a taxpayer
owns a qualified business unit, or QBU,
that has a functional currency different
from the taxpayer’s functional currency.
In general, section 987(1) and (2) provide
rules for determining and translating the
QBU’s taxable income or loss, while sec-
tion 987(3) requires proper adjustments
for transfers of property between QBUs
with different functional currencies. In
practical terms, section 987(3) generally
requires the owner of a section 987 QBU
to recognize foreign currency gain or loss
when the QBU makes a remittance to its
owner or is terminated.
The Treasury Department and the IRS
have issued several sets of regulations
and proposed regulations under section
987. In 1991, Treasury and the IRS issued
proposed regulations that provided an
earnings and capital method for determin-
ing section 987 gain or loss. Under that
approach, taxpayers maintained an equity
pool in the QBU’s functional currency
and a basis pool in the owner’s functional
currency; the equity pool generally rep-
resented the QBU’s branch equity, and
the basis pool generally represented the
owner’s basis in that branch equity. The
pools were adjusted for the QBU’s taxable
income or loss and for contributions and
remittances. During the years following
the 1991 proposed regulations, many tax-
payers became familiar with this frame-
work.
In 2006, Treasury and the IRS issued
new proposed regulations and withdrew
the 1991 proposed regulations. The new
proposed regulations were later finalized
with modifications in 2016. Unlike the
1991 pool-based approach, the 2016 final
regulations adopted a more detailed bal-
ance-sheet-based framework that required
the recognition of currency gain or loss
only on financial assets and liabilities,
referred to as “marked items,” and not
other assets and liabilities, referred to as
“historic items.” In general, that frame-
work required taxpayers to determine the
items of income, gain, deduction, and loss
attributable to a section 987 QBU in the
QBU’s functional currency and translate
those items into the owner’s functional
currency, with the marked items referenc-
ing a spot exchange rate and the historic
items referencing the historic exchange
rate at which the item was acquired or
incurred. The rules also required taxpay-
ers to compute and maintain net unrecog-
nized section 987 gain or loss with respect
to each section 987 QBU, based on
changes in the QBU’s balance sheet, and
to recognize a portion of that accumulated
currency gain or loss when the QBU made
a remittance to its owner. However, the
applicability date of the 2016 final regula-
tions was deferred several times, and tax-
payers continued to face uncertainty about
how to apply section 987 to their QBUs.
In December 2024, Treasury and the
IRS finalized regulations under section
987 that retained the balance-sheet-based
framework of the 2016 final regulations,
with modifications intended to improve
administrability, including an election (the
current rate election) to recognize currency
gain or loss with respect to all of a QBU’s
assets and liabilities, which eliminates the
need to track historic exchange rates for
historic items. The 2024 final regulations
generally apply to taxable years beginning
after December 31, 2024, and apply to

September 8, 2026 284 Bulletin No. 2026–37
CFCs that own section 987 QBUs. Under
those rules, a CFC generally must deter-
mine section 987 taxable income or loss
with respect to a section 987 QBU, com-
pute net unrecognized section 987 gain
or loss, and recognize section 987 gain or
loss when the QBU makes a remittance or
in connection with certain terminations.
The 2024 final regulations also provide
elections and related rules, including the
current rate election, an annual recogni-
tion election, loss suspension rules, and
transition rules for preexisting section 987
gain or loss.
At the same time, Treasury and the IRS
issued 2024 proposed regulations address-
ing frequently recurring disregarded trans-
actions between a section 987 QBU and
its owner. Those proposed regulations also
requested comments on the application of
section 987 to partnerships and CFCs. In
particular, Treasury and the IRS requested
comments on whether section 987(3) and
the related regulations should apply to
CFCs, noting both the potential compli-
ance burden of applying section 987(3) to
section 987 QBUs of CFCs and the need
to address concerns about excess asset
basis in inbound transactions if section
987(3) were not applied to section 987
QBUs of CFCs.
In February 2026, Treasury and the
IRS issued Notice 2026-17. The Notice
announced forthcoming proposed reg-
ulations intended to simplify the opera-
tion of the 2024 final regulations, reduce
compliance burdens, and limit the effect
of certain section 987 rules on ordinary
course transactions. In particular, the
Notice described an election to use an
equity and basis pool method for deter-
mining section 987 taxable income or
loss and section 987 gain or loss, in lieu
of certain balance-sheet-based compu-
tations under the 2024 final regulations.
Under that method, taxpayers would gen-
erally maintain an equity pool in the sec-
tion 987 QBU’s functional currency and a
basis pool in the owner’s functional cur-
rency, with those pools adjusted for QBU
income or loss and transfers between
the QBU and its owner. In addition, the
Notice announced that forthcoming pro-
posed regulations would provide an elec-
tion under which CFCs generally would
not compute or recognize section 987
gain or loss under section 987(3), except
in connection with certain inbound non-
recognition transactions.
The proposed regulations in this NPRM
implement that CFC exemption election.
Under the proposed regulations, taxpay-
ers may elect to not apply section 987(3)
and the related regulations generally to
CFCs covered by the election (except to
the extent provided in the proposed reg-
ulations). Section 987(1) and (2) would
continue to apply, so CFCs would still
determine and translate section 987 tax-
able income or loss as necessary for Fed-
eral income tax purposes. The proposed
regulations also provide rules for making
and revoking the election, consistency
requirements for commonly controlled
CFCs, treatment of pre-election section
987 gain or loss, and special rules for
inbound nonrecognition transactions. The
inbound nonrecognition transaction rules
are intended to prevent exchange-rate-
driven asset basis increases from being
imported into the United States without
appropriate recognition of section 987
gain. The other parts of Notice 2026-17
regarding the simplification of the 2024
final regulations will be addressed in other
forthcoming proposed regulations.
B. Need for proposed regulations
Proposed regulations are needed to
provide taxpayers with operative rules for
making and applying the CFC exemption
election, in order to reduce the compli-
ance and administrative burdens of apply-
ing section 987(3) with respect to sec-
tion 987 QBUs owned by CFCs. Notice
2026-17 announced that Treasury and
the IRS intended to issue rules allowing
CFCs generally not to compute or recog-
nize section 987 gain or loss under section
987(3), except in connection with certain
inbound nonrecognition transactions, but
the Notice functioned as a preview of
future guidance rather than a complete set
of rules taxpayers could rely on to make
the election.
Sections 987 and 989 provide regu-
latory authority for these rules. Section
987(3) directs the Secretary to prescribe
the proper adjustments needed for trans-
fers between QBUs with different func-
tional currencies, and section 989(c)
authorizes regulations necessary or appro-
priate to carry out the purposes of the for-
eign currency rules, including rules for
related-party and QBU transactions.
Absent proposed regulations, tax-
payers would not have the specific rules
needed to implement the CFC exemption
election on tax returns. Taxpayers need
guidance on which CFCs are covered,
who makes the election, when and how
the election is made, whether the election
must be applied consistently across com-
monly controlled CFCs, how pre-election
section 987 gain or loss is treated, and
what happens in inbound nonrecognition
transactions or revocations of the election.
C. The proposed regulations
The proposed regulations provide an
election, referred to as the CFC exemption
election, under which an electing CFC
generally would not compute or recognize
section 987 gain or loss with respect to its
section 987 QBUs, i.e., branches or disre-
garded entities with functional currencies
different from the CFC’s functional cur-
rency. The election is intended to reduce
the compliance and administrative bur-
dens associated with applying the 2024
final regulations to CFCs that own section
987 QBUs.
The proposed regulations do not
exempt CFCs from section 987 entirely.
Section 987(1) and (2) would continue
to apply for purposes of determining and
translating section 987 taxable income or
loss, including for purposes of computing
taxable income and earnings and profits.
Thus, the election is targeted at section
987(3) gain or loss recognition, rather than
the broader rules for determining QBU
income. For example, in taxable years in
which the CFC exemption election is in
effect, a CFC would continue to translate
section 987 taxable income or loss under
the applicable section 987 rules, generally
using the yearly average exchange rate
and by deeming a current rate election to
be in effect. But if property is transferred
from a section 987 QBU to the CFC owner
in a transaction that would be treated as a
remittance, the CFC generally would not
compute or recognize section 987 gain or
loss under section 987(3) as a result of that
transfer.
The proposed regulations provide
rules for making and revoking the CFC
exemption election. In general, the elec-

Bulletin No. 2026–37 285 September 8, 2026
tion would be made by the authorized per-
son for the relevant section 987 electing
group. Special timing rules would apply
for early years to allow taxpayers suffi-
cient time to evaluate the election after
issuance of the proposed and final reg-
ulations. The proposed regulations also
provide that the election generally could
not be revoked without the consent of the
Commissioner. These rules are intended
to make the election administrable and to
reduce uncertainty for taxpayers prepar-
ing returns for the first years in which the
2024 final regulations apply.
The proposed regulations also include
consistency requirements. The CFC exemp-
tion election generally must be made con-
sistently for commonly controlled CFCs,
including majority-owned CFCs of affili-
ated domestic corporations. The proposed
regulations also include rules address-
ing CFC stock owned through domestic
partnerships and an anti-avoidance rule
for related-party transactions designed to
avoid the consistency requirements or trig-
ger an inappropriate deemed revocation.
These rules are intended to prevent taxpay-
ers from selectively applying the election
to CFCs with expected section 987 gains
while leaving other CFCs with expected
section 987 losses outside the election.
The proposed regulations address sec-
tion 987 gain or loss that arose before the
CFC exemption election became effec-
tive. In general, an exempt CFC would
compute its pre-election section 987 gain
or loss and recognize that amount rat-
ably over a 120-month period beginning
with the first month of the taxable year
for which the CFC exemption election is
made. This rule preserves the tax conse-
quences of section 987 gain or loss that
accrued before the election by requiring
both pre-election gain and pre-election
loss to be taken into account over the same
120-month period. The proposed regula-
tions would provide a mandatory asset
basis test for certain smaller section 987
QBUs. Under this test, a QBU with assets
of less than $50 million would not be
required to compute or recognize pre-elec-
tion unrecognized section 987 gain or loss
in connection with the CFC exemption
election. The $50 million threshold would
be applied separately to each QBU (or to
each group of same-country QBUs), based
on the QBU’s average assets for the three-
year period preceding the first taxable year
for which the election is made. This rule
is intended to reduce transition-related
compliance burdens for smaller QBUs for
which the cost of computing pre-election
section 987 pools may be relatively high
compared to the potential tax amounts at
issue.
The proposed regulations also provide
rules for partnerships owned by exempt
CFCs. If an exempt CFC owns a sec-
tion 987 QBU through a partnership, or
if a partnership is sufficiently owned by
exempt CFCs, the proposed regulations
generally would extend the CFC exemp-
tion election to the relevant QBU as if the
QBU were owned directly by an exempt
CFC. These rules are intended to provide
similar treatment for section 987 QBUs
owned directly by exempt CFCs and sec-
tion 987 QBUs owned through partner-
ships by exempt CFCs, while continuing
to require reasonable and consistent appli-
cation of section 987(1), section 987(2),
and section 989(a).
Finally, the proposed regulations
include an important limitation on the
election for certain inbound nonrecog-
nition transactions. If an exempt CFC
engages in an inbound liquidation or
reorganization, the proposed regulations
would require the CFC to recognize sec-
tion 987 gain to the extent exchange-rate
fluctuations have increased the basis
of assets transferred to a domestic cor-
poration in the transaction. This rule is
intended to prevent unrecognized cur-
rency gain from increasing the basis of
assets transferred to a domestic corpo-
ration without a corresponding income
inclusion. For this purpose, the proposed
regulations would provide two proxy
methods for computing the amount of
section 987 asset basis, giving taxpayers
flexibility to use the method that is more
administrable in their circumstances. The
first method is based on net unrecognized
section 987 gain over a specified histori-
cal period, and the second one is based on
excess asset basis concepts under section
367(b). The proposed regulations would
not provide a corresponding rule allow-
ing an exempt CFC to recognize section
987 loss in an inbound transaction.
4
This
limitation is intended to prevent taxpay-
ers from using elective inbound transac-
tions to selectively recognize losses, and
is consistent with the longstanding treat-
ment of inbound nonrecognition transac-
tions under section 367(b), which does
not permit the recognition of a deduction
or loss. A de minimis rule would exclude
certain smaller inbound transactions
from the requirement to compute and rec-
ognize section 987 asset basis.
D. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Fed-
eral income tax-related behavior in the
absence of these proposed regulations.
E. Economic effects of the proposed
regulations
1. Affected taxpayers
The proposed regulations would affect
U.S. taxpayers that own CFCs with section
987 QBUs. Based on 2023 filing-year data
from the IRS Research, Applied Analytics,
and Statistics Division, the Treasury Depart-
ment and the IRS estimate that approxi-
mately 1,500 taxpayers would be affected
by the proposed regulations. This estimate
is based on the number of entities that own
at least one CFC with a section 987 QBU.
The taxpayers most directly affected
are multinational groups with CFCs that
conduct foreign branch operations in
currencies different from the functional
currency of the CFC owner. These tax-
payers may otherwise be required under
the 2024 final regulations to compute and
track section 987 gain or loss, remittances,
transition amounts, and related attributes
for their CFC-owned section 987 QBUs.
Taxpayers that do not own CFCs with sec-
tion 987 QBUs, or that do not make the
CFC exemption election, generally would
not be materially affected by the election
rules.
4
This approach is consistent with the 2024 final regulations’ treatment of suspended section 987 losses in inbound nonrecognition transactions, under which suspended losses generally are
not imported into the United States and may be recognized only under the applicable loss-to-the-extent-of-gain rules.

September 8, 2026 286 Bulletin No. 2026–37
2. Reduction in compliance and
administrative burden from the CFC
exemption election
The principal economic effect of the
proposed regulations is expected to be
a reduction in recurring compliance and
administrative burden for taxpayers that
make the CFC exemption election. Under
the baseline, CFCs generally must compute
net unrecognized section 987 gain or loss
and recognize section 987 gain or loss on
remittances or certain terminations. These
computations can require detailed infor-
mation about section 987 QBU assets and
liabilities, transfers between a QBU and
its owner, exchange rates, remittances,
suspended losses, deferred amounts, and
transition items. By contrast, once the CFC
exemption election applies, an electing
CFC generally would not compute or recog-
nize section 987 gain or loss under section
987(3) for ordinary CFC branch operations.
Public comments on prior section 987
regulations indicate that these computa-
tions can impose meaningful taxpayer-spe-
cific burdens. One commenter, a public
company with approximately 10 to 15
QBUs using a functional currency different
from their owner, stated that its historical
section 987 monitoring and calculation
burden had been approximately 20 hours
or less per year, but that the 2016 section
987 regulations would require substan-
tially more work.
5
The commenter esti-
mated at least 80 hours merely to obtain a
working knowledge of the rules, elections,
and calculations, and at least 80 hours for
a single QBU to transition to the Foreign
Exchange Exposure Pool (FEEP) method
in one example involving historic asset and
exchange-rate tracking. The same com-
menter stated that annual calculations and
disclosures would be needed for each QBU
and would require weeks of work.
By allowing CFCs covered by the elec-
tion generally not to compute or recognize
section 987 gain or loss under section
987(3), the proposed regulations would
reduce the need for ongoing section 987(3)
computations for ordinary CFC branch
operations. Taxpayers would still need to
apply section 987(1) and (2) to determine
and translate section 987 taxable income
or loss, and certain computations would
remain necessary for pre-election gain or
loss and inbound nonrecognition transac-
tions.
6
However, for electing taxpayers,
the proposed regulations are expected to
reduce recurring compliance costs and
reduce the administrative burden on the
IRS associated with reviewing routine
CFC remittance computations.
The exact magnitude of these compli-
ance cost savings is uncertain. Although
the compliance burden reduction may
encourage some taxpayers to make the
CFC exemption election, it is possible not
all eligible taxpayers will do so.
7
Further,
available tax return data do not directly
measure the number of hours taxpayers
spend applying section 987(3) to each
affected QBU, nor the exact cost associ-
ated with those hours worked. Treasury
and the IRS therefore consider a range of
estimates using three inputs: the number
of affected section 987 QBUs, the hours
saved per affected QBU, and the hourly
labor cost of the tax professionals per-
forming the work.
As noted above, it is estimated that
approximately 1,500 entities own at least
one CFC with a section 987 QBU. For a
lower bound on the number of affected
QBUs, it is assumed that two-thirds of the
entities make the CFC exemption election,
and that each entity owns only one CFC
with one section 987 QBU, yielding 1,000
affected QBUs. However, many of these
entities in fact own multiple CFCs with
section 987 QBUs, and their compliance
costs are therefore higher, as they must be
incurred for each section 987 QBU. For
an upper bound on the number of affected
QBUs, it is assumed that all of the enti-
ties make the election, and that each owns
three QBUs on average, yielding 4,500
affected QBUs.
For the number of hours saved per
affected QBUs, Treasury and the IRS con-
sider the compliance activities avoided
and the public comment described above.
These imply that the proposed regula-
tions may reduce recurring compliance
work by approximately 20-60 hours per
affected QBU per year. The lower end
reflects a conservative recurring bur-
den estimate; the higher end reflects the
greater complexity of applying the section
987 regulations to taxpayers with multi-
ple currencies, multiple CFCs, frequent
disregarded transactions, remittances, or
more complex branch balance sheets. The
hourly cost of this work is estimated using
a monetization rate of $88.50 per hour,
which IRS Research, Applied Analytics,
and Statistics applies for certain informa-
tion collection burdens specifically related
to tax filing.
Using a central estimate of 4,500
affected QBUs, 40 hours saved per QBU,
and $88.50 per hour of tax professional
work, the Treasury and the IRS estimate
that the proposed regulations would gen-
erate approximately $16 million in annual
compliance cost savings.
Table 1: Estimated annual compliance savings
Affected QBUsHours saved per QBUCost per hourEstimated annual compliance savings (millions)
1,00020$88.50$1.8
4,50040$88.50$15.9
4,50060$88.50$23.9
5
Alternative methodologies introduced in subsequent guidance are likely to entail lower compliance costs relative to the 2016 section 987 regulations.
6
The proposed regulations include a mandatory asset-based test that would exempt taxpayers from calculating pre-election gain or loss pool for QBUs with less than $50 million in assets.
7
Some taxpayers may decline to make the CFC exemption election. One reason may be that the CFC exemption election would apply consistently across commonly controlled CFCs and
could be revoked only with the consent of the Commissioner. These limitations may reduce the value of the CFC exemption election for taxpayers that expect their structures, currency
exposures, or planning needs to change in the future and therefore prefer flexibility across CFCs, QBUs, or taxable years. Another reason may be that the election does not eliminate all
section 987-related compliance obligations: section 987(1) and (2) would continue to apply, and special rules would require recognition of section 987 gain in certain inbound nonrecognition
transactions to prevent excess asset basis attributable to exchange-rate fluctuations from escaping U.S. tax.

Bulletin No. 2026–37 287 September 8, 2026
This estimate should be interpreted
as an order-of-magnitude estimate rather
than a precise measurement. The actual
savings will depend on the number of
CFCs and QBUs for which taxpayers
make the election, the extent of exist-
ing section 987 compliance systems, the
number and complexity of currencies and
disregarded transactions, the frequency
of remittances and restructurings, and
the amount of residual work required for
pre-election section 987 gain or loss and
inbound transactions.
3. Effects of pre-election gain or loss
amortization and the QBU-level asset-
based test
The proposed regulations would
require pre-election section 987 gain or
loss to be recognized ratably over a 120-
month period. This rule applies to taxpay-
ers that make the CFC exemption election
after unrecognized section 987 gain or
loss has already accrued. It is intended to
preserve the tax consequences of currency
gain or loss that arose before the election
became effective and to prevent asym-
metric results under which taxpayers with
accrued gains could elect out of section
987(3) and eliminate those gains, while
taxpayers with accrued losses could pre-
serve or accelerate those losses.
The 120-month period also smooths the
transition into the CFC exemption elec-
tion. Relative to immediate recognition,
ratable recognition reduces the likelihood
that making the election would produce
a large one-year tax effect for taxpayers
with substantial pre-election section 987
gain. Similarly, taxpayers with substantial
pre-election section 987 loss would not
receive an immediate deduction for the
full amount. This treatment reduces the
extent to which the election itself creates a
timing benefit or cost unrelated to current
business operations.
Using months rather than taxable years
also avoids acceleration in short taxable
years. For a taxpayer with full 12-month
taxable years, a 120-month period gener-
ally produces the same annual recognition
pattern as a 10-year period. For a taxpayer
with a one-month short taxable year, how-
ever, the monthly rule would require rec-
ognition of 1/120th of the relevant amount
rather than one-tenth. This reduces the
extent to which the occurrence or timing
of a short taxable year affects the tax con-
sequences of entering the election.
The proposed regulations would also
include a mandatory QBU-level asset-
based test intended to reduce transition
burden for smaller QBUs. Under this test,
a QBU with average assets of less than
$50 million for the three-year period pre-
ceding the election would not be required
to compute or recognize pre-election
unrecognized section 987 gain or loss in
connection with the CFC exemption elec-
tion. Because reconstructing historical
or pretransition section 987 pools may
involve fixed costs per QBU, the test is
expected to reduce entry costs for smaller
QBUs for which those fixed costs may be
large relative to the expected future com-
pliance savings from the election.
Based on Form 8858 returns for tax
year 2021, the Treasury Department and
the IRS estimate that a $50 million thresh-
old would exempt about 75 percent of sec-
tion 987 QBUs from calculating pre-elec-
tion pools, while excluding less than 5
percent of reported QBU assets. Thus,
the test would provide broad compliance
relief by QBU count while retaining the
transition rules for larger QBUs, where
the potential tax consequences are more
likely to be material.
For QBUs above the asset threshold,
taxpayers making the election would
need to compute pre-election section 987
gain or loss and track the recognized and
remaining unrecognized amounts over the
120-month period.
8
These costs are likely
to be greatest for taxpayers that make the
CFC exemption election after the transi-
tion date, taxpayers with multiple CFC-
owned section 987 QBUs, taxpayers with
outstanding deferred section 987 gain or
loss or cumulative suspended section 987
loss, and taxpayers that own section 987
QBUs through partnerships. These costs
are transitional and targeted; they are
linked to preserving pre-election amounts
while the CFC exemption election gener-
ally reduces ongoing section 987(3) com-
putations for ordinary CFC branch opera-
tions after the election takes effect.
Overall, the 120-month amortization
rule and the QBU-level asset-based test
are expected to make the CFC exemption
election more administrable while lim-
iting selective tax effects from accrued
section 987 positions. The amortization
rule preserves pre-election amounts and
reduces incentives to time the election to
eliminate gains or accelerate losses. The
asset-based test reduces the principal tran-
sition cost for smaller QBUs—the need to
compute historical or pre-election section
987 pools—while retaining the transition
rules for QBUs for which the potential tax
consequences are more likely to be mate-
rial.
4. Effects of the inbound transaction rules
The proposed regulations include
special rules for certain inbound nonrec-
ognition transactions involving exempt
CFCs. These rules are intended to pre-
vent exchange-rate-driven increases in
asset basis from being imported into the
United States without corresponding gain
recognition. Without these rules, a CFC
exemption election could reduce the com-
pliance burden for ordinary CFC branch
operations but also create an opportunity
for untaxed section 987 currency gain to
be reflected in the basis of assets trans-
ferred to a domestic corporation in an
inbound liquidation or reorganization.
That imported basis could then reduce
U.S. taxable income through depreciation,
amortization, gain reduction, or loss rec-
ognition in later years.
The economic effect of these rules
is expected to be targeted. The rules
apply only when assets of an exempt
CFC are acquired in an inbound non-
recognition transaction, rather than to
ordinary-course remittances or ongoing
CFC branch operations. In addition, the
gain-recognition rule generally approxi-
mates the treatment that would apply if
the CFC exemption election were not in
effect, because the 2024 final regulations
generally treat section 987 QBUs owned
8
The Treasury Department and the IRS expect most taxpayers transitioning to the 2024 final regulations generally will have incurred those same costs for all of their QBUs in deciding whether
to make the 10-year amortization election under the 2024 final regulations. Therefore, the CFC exemption election is unlikely to create a new burden for these taxpayers.

September 8, 2026 288 Bulletin No. 2026–37
by a CFC as terminated immediately
before an inbound nonrecognition trans-
action and require recognition of any net
unrecognized section 987 gain at that
time. Thus, relative to the baseline, the
inbound transaction rules principally pre-
vent the CFC exemption election from
changing the treatment of a targeted class
of restructuring transactions in a way that
could allow excess asset basis to enter
the U.S. tax system.
The proposed regulations would
require recognition of section 987 gain
based on two alternative methods for
determining section 987 asset basis.
These methods are intended to serve as
administrable proxies that reduce the
need for full historical section 987 com-
putations while preserving gain recogni-
tion in transactions where the basis-im-
portation concern is most significant.
The first methodology would generally
use a six-year lookback computation
of net unrecognized section 987 gain,
while the second methodology would use
excess asset basis concepts under section
367(b). These alternatives may reduce
compliance costs by allowing taxpayers
to use the method that is more adminis-
trable in their circumstances, although
either method may be imprecise for some
taxpayers. The proposed regulations also
include a de minimis rule, which reduces
compliance burden for smaller inbound
transactions of CFCs with less than $25
million in assets, where any potential
basis-importation concern is less likely
to be economically significant.
Consistent with the 2024 final regula-
tions’ treatment of suspended section 987
losses in inbound nonrecognition transac-
tions, the proposed regulations would not
provide a special rule allowing an exempt
CFC to recognize section 987 loss in an
inbound transaction. This asymmetric
treatment may deny loss recognition in
some cases, but it reduces the risk that tax-
payers could selectively enter into elective
inbound transactions to trigger foreign
currency losses. This approach is also
consistent with the longstanding treatment
of inbound nonrecognition transactions
under section 367(b), which does not per-
mit the recognition of a deduction or loss.
For these reasons, the inbound trans-
action rules are expected to have limited
effects on ordinary business operations
and investment decisions, while reduc-
ing opportunities for tax-motivated basis
importation in a narrow class of transac-
tions.
5. Effects of consistency and anti-
avoidance requirements
The proposed regulations require the
CFC exemption election to be made con-
sistently for commonly controlled CFCs
and include anti-avoidance rules for relat-
ed-party transactions designed to avoid
those consistency requirements or produce
inappropriate deemed revocations. These
rules are intended to reduce selective use
of the election. In particular, they limit the
ability of a taxpayer group to apply the
CFC exemption election selectively for
tax-motivated reasons. This helps ensure
that the election functions as a simplifi-
cation rule, rather than as a tool for one-
sided gain avoidance or loss preservation.
The consistency requirements may
reduce flexibility for taxpayers with CFCs
that have different section 987 profiles.
A taxpayer may have some CFCs with
expected section 987 gains and others
with expected section 987 losses, or some
CFCs with relatively simple branch oper-
ations and others with more complex cur-
rency exposures. A consistent election
rule may therefore cause some taxpayers
to forgo the election, especially if the tax-
payer values flexibility to recognize losses
under the baseline rules or is uncertain
about future currency movements, acqui-
sitions, dispositions, or restructurings.
The constraint is targeted, however: tax-
payers remain able to choose whether to
make the election, and the rules primarily
limit selective use of the election within
commonly controlled groups, where the
potential for tax-motivated sorting is
greatest.
Absent consistency requirements, tax-
payers would have stronger incentives
to organize CFC ownership and branch
structures around expected section 987
outcomes. A taxpayer could elect exempt
treatment for CFCs with built-in or
expected section 987 gains while declin-
ing the election for CFCs with built-in or
expected section 987 losses, producing
one-sided results across CFCs that are
economically part of the same multina-
tional group. The rules also reduce incen-
tives to alter ownership chains, branch
structures, or related-party transactions to
separate gain-producing and loss-produc-
ing section 987 QBUs into different elec-
tion groups. By requiring the taxpayer to
evaluate the election across its commonly
controlled CFC structure, the rules reduce
the extent to which tax outcomes depend
on formal ownership structure rather than
underlying economic activity.
The anti-avoidance rules reinforce the
consistency requirements by addressing
controlled-group transactions undertaken
with a principal purpose of avoiding the
requirement to make the CFC exemption
election, causing an inappropriate deemed
revocation, or causing a partnership to
cease to be an exempt partnership. These
rules reduce the value of related-party
restructuring designed to change election
status without a corresponding change in
the group’s economic position. As a result,
they are expected to preserve the compli-
ance-cost reduction objective of the elec-
tion while limiting the use of related-party
transactions to obtain one-sided section
987 outcomes.
Overall, the consistency and anti-avoid-
ance requirements are expected to improve
the integrity and administrability of the
CFC exemption election. Although they
may reduce election uptake at the margin,
they also reduce opportunities for selec-
tive gain avoidance and loss recognition,
limit incentives for tax-motivated restruc-
turing, and promote more consistent treat-
ment among taxpayer groups with similar
CFC branch operations and common con-
trol relationships.
6. Summary
Overall, the proposed regulations are
expected to be taxpayer-favorable and
burden-reducing relative to the 2024
final regulations. The principal economic
effects are expected to be reduced annual
compliance costs of approximately $16
million, greater certainty for return prepa-
ration, reduced administrative burden, and
targeted protection against basis importa-
tion in inbound nonrecognition transac-
tions. The Treasury Department and the
IRS invite public comments and addi-
tional data on the economic effects that
would result from these proposed regula-
tions.

Bulletin No. 2026–37 289 September 8, 2026
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) (PRA) requires
that a Federal agency obtain the approval
of the Office of Management and Bud-
get (OMB) before collecting information
from the public, whether such collection
of information is mandatory, voluntary, or
required to obtain or retain a benefit. An
agency may not conduct or sponsor, and
a person is not required to respond to, a
collection of information unless it dis-
plays a valid control number assigned by
the OMB.
The collection of information in the
proposed regulations is in proposed §
1.987-1(g)(3). The likely respondents are
U.S. shareholders of CFCs that own sec-
tion 987 QBUs.
The collection of information in pro-
posed § 1.987-1(g)(3) is required only
when a taxpayer makes or revokes a
CFC exemption election under proposed
§ 1.987-15. In general, taxpayers can
make a CFC exemption election without
the Commissioner’s consent, but consent
is required to revoke the election. The
Commissioner’s consent may be granted
with a private letter ruling. When a tax-
payer makes or revokes a CFC exemption
election, the collection of information is
mandatory. The collection of information
required by proposed § 1.987-1(g)(3) will
be used by the IRS for tax compliance
purposes.
The Treasury Department and the IRS
intend that the information described in
proposed § 1.987-1(g)(3) will be collected
by attaching a statement to Form 8964-
ELE. For purposes of the PRA, the report-
ing burden associated with those collec-
tions of information will be reflected in the
PRA submissions associated with Form
8964-ELE. The OMB Control Number for
Form 8964-ELE will be included within
1545-0123 for business filers, 1545-0074
for individual filers, and 1545-0092 for
trust and estate filers in accordance with
the PRA procedures under 5 CFR 1320.10.
To the extent that a taxpayer makes or
revokes an election by obtaining a private
letter ruling, the reporting burden associated
with those collections of information will be
reflected in the PRA submissions associated
with revenue procedures governing private
letter rulings. The OMB Control Number for
those revenue procedures is control number
1545-1522. The proposed regulations would
require taxpayers merely to follow the pro-
cedures under Revenue Procedure 2026-1,
IRB 2026-1 (or future revenue procedures
governing private letter rulings) and would
not change the collection requirements of
the Revenue Procedure.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any Internal
Revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility
Act (5 U.S.C. chapter 6), it is hereby cer-
tified that this rulemaking will not have a
significant economic impact on a substan-
tial number of small entities within the
meaning of section 601(6) of the Regula-
tory Flexibility Act.
The proposed regulations affect U.S.
shareholders of CFCs with foreign
branch operations. The number of small
entities potentially affected by the pro-
posed regulations is unknown; however,
it is unlikely to be a substantial number
because taxpayers that are U.S. share-
holders of CFCs are typically larger busi-
nesses. The Treasury Department and
the IRS estimate that the total number of
entities that own a CFC with a foreign
branch subject to section 987 is approx-
imately 1,500 (many of which may not
make the CFC exemption election). This
estimate is based on the number of corpo-
rations and partnerships that filed a Form
8858 in 2023 that showed that the filer:
(1) owned at least one disregarded entity
or branch with a functional currency dif-
ferent from the functional currency of the
owner, (2) indicated that the disregarded
entity or branch was a section 989 QBU,
and (3) indicated that the disregarded
entity or branch was owned by a CFC.
As shown in the following table, only a
small percentage of those filers are small
entities.
Total Receipts/Positive Income (2023)Percentage of Filers
Under $10 Million12%
$10 Million to $25 Million5%
$25 Million to $50 Million4%
Over $50 Million79%
A portion of the economic impact of
the proposed regulations may derive from
the collection of information require-
ments imposed under proposed § 1.987-
1(g)(3). The Treasury Department and
the IRS have determined that the aver-
age burden is 1.95 hours per response.
The IRS’s Research, Applied Analytics,
and Statistics division estimates that
the appropriate wage rate for this set of
taxpayers is $88.50 per hour. Thus, the
annual burden per taxpayer from each
collection of information requirement is
$172.60.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code,
this proposed regulation will be submitted
to the Chief Counsel for Advocacy of the
Small Business Administration for com-
ment on their impact on small business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a State, local, or Tribal gov-
ernment, in the aggregate, or by the pri-
vate sector, of $100 million in 1995 dol-

September 8, 2026 290 Bulletin No. 2026–37
lars, updated annually for inflation. The
proposed regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled
“Federalism”) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on
State and local governments, and is not
required by statute, or preempts State
law, unless the agency meets the consul-
tation and funding requirements of sec-
tion 6 of the Executive order. The pro-
posed regulations do not have federalism
implications and do not impose substan-
tial direct compliance costs on State and
local governments or preempt State law
within the meaning of the Executive
order.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance
cited in this document are published in the
Internal Revenue Bulletin or Cumulative
Bulletin and are available from the Super-
intendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
https://www.irs.gov.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to comments that are sub-
mitted timely to the IRS as prescribed in
this preamble under the ADDRESSES
heading. The Treasury Department and
the IRS request comments on all other
aspects of the proposed regulations. Any
comments submitted will be made avail-
able at https://www.regulations.gov or
upon request. Pursuant to the Administra-
tive Procedure Act at 5 U.S.C. 553(b)(4),
a plain language summary of the proposed
rule is also available at https://www.regu-
lations.gov.
A public hearing concerning the pro-
posed regulations will be scheduled if
requested in writing by any person who
timely submits electronic or written com-
ments. Requests for a public hearing are
also encouraged to be made electronically.
If a public hearing is scheduled, notice of
the date and time for the public hearing
will be published in the Federal Register.
Drafting Information
The principal authors of these pro-
posed regulations are Raphael J. Cohen
and Mark T. Terrell of the Office of Asso-
ciate Chief Counsel (International). How-
ever, other personnel from the Treasury
Department and the IRS participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Adoption of Amendments to
the Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as fol-
lows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Par. 2. Section 1.367(b)-3 is amended
by:
1. Revising the introductory text of
paragraph (g)(2)(i); and
2. Adding a sentence to the end of para-
graph (g)(7)(i).
The revisions and addition read as fol-
lows:
§ 1.367(b)-3 Repatriation of
foreign corporate assets in certain
nonrecognition transactions.
* * * * *
(g) * * *
(2) * * *
(i) Excess asset basis. The term excess
asset basis means, with respect to a for-
eign acquired corporation, the amount
(determined after the application of §
1.987-16(d)) by which the inside asset
basis of that corporation exceeds the sum
of the following amounts:
* * * * *
(7) * * *
(i) * * * Paragraph (g)(2)(i) of this sec-
tion, to the extent it relates to the appli-
cation of § 1.987-16(d), applies to trans-
actions completed within taxable years of
the domestic acquiring corporation ending
on or after [date of filing of final regula-
tions with the Federal Register].
* * * * *
Par. 3. Section 1.987-1 is amended by:
1. In paragraph (a):
a. In the first sentence, removing the
language “1.987-15” and adding
the language “1.987-17” in its
place;
b. Revising the current last sen-
tence of the paragraph and add-
ing two sentences to the end of
the paragraph;
2. In paragraph (g):
a. Adding paragraphs (g)(2)(iv)
and (v);
b. Revising the first sentence of
paragraph (g)(3)(ii)(A); and
c. Adding paragraph (g)(3)(ii)(D).
3. In paragraph (h), adding defini-
tions for “CFC exemption election”,
“Domestic acquiring corporation,”
“Exempt CFC”, “Exempt partner-
ship”, “Exempt partnership QBU”,
“Inbound nonrecognition transac-
tion”, “Pre-election section 987 gain
or loss”, “Pre-transaction period”,
“Pre-transaction taxable year,” and
“transferor CFC” in alphabetical
order.
The revisions and additions read as fol-
lows:
§ 1.987-1 Scope, definitions, and special
rules.
(a) * * * Section 1.987-15 provides
rules relating to the CFC exemption elec-
tion. Section 1.987-16 provides rules that
apply to an inbound liquidation or reorga-
nization of a CFC that was subject to the
CFC exemption election. Section 1.987-
17 provides the applicability date of the
section 987 regulations.
* * * * *

Bulletin No. 2026–37 291 September 8, 2026
(g) * * *
(2) * * *
(iv) Commissioner consent. An elec-
tion is not deemed to be made or revoked
under this paragraph (g)(2) or § 1.987-
15(c) if the authorized person requests and
receives consent from the Commissioner
(as described in paragraph (g)(3)(ii)(A) of
this section) to not make or to not revoke
the election, as applicable.
(v) CFC exemption election. See §
1.987-15(c) for additional rules that apply
with respect to the CFC exemption elec-
tion.
(3) * * *
(ii) * * *
(A) * * * Except as provided in para-
graph (g)(3)(ii)(B), (C), or (D) of this
section, a section 987 election may not be
made or revoked without the consent of
the Commissioner. * * *
* * * * *
(D) CFC exemption election—(1) Ta x-
able years beginning after December 31,
2024 and ending on or before December
31, 2026. For a taxable year beginning
after December 31, 2024, and ending on
or before December 31, 2026, the autho-
rized person may make a CFC exemption
election without the Commissioner’s con-
sent by attaching the election statement
described in paragraph (g)(3)(i) of this sec-
tion to its original, timely filed (including
extensions) return for such taxable year, in
accordance with the prescribed form or its
instructions (or other guidance). In addi-
tion, for a taxable year beginning in 2025,
the authorized person may make a CFC
exemption election without the Commis-
sioner’s consent by attaching the election
statement described in paragraph (g)(3)(i)
of this section to an amended return for
such taxable year filed on or before Octo-
ber 15, 2027, in accordance with the pre-
scribed form or its instructions (or other
guidance).
(2) Taxable years ending in 2027. For a
taxable year ending in 2027 (other than a
taxable year to which paragraph (g)(3)(ii)
(D)(4) of this section applies), the autho-
rized person may make a CFC exemption
election without the Commissioner’s con-
sent by filing the statement described in
paragraph (g)(3)(i) of this section with the
Internal Revenue Service in accordance
with the prescribed form or its instructions
(or other guidance) on or before October
15, 2027, and attaching a copy of the state-
ment to its return for such taxable year.
(3) Taxable years ending after Decem-
ber 31, 2027. For a taxable year ending
after December 31, 2027 (other than a
taxable year to which paragraph (g)(3)(ii)
(D)(4) of this section applies), the autho-
rized person may make a CFC exemption
election without the Commissioner’s con-
sent by filing the statement described in
paragraph (g)(3)(i) of this section with the
Internal Revenue Service in accordance
with the prescribed form or its instruc-
tions (or other guidance) on or before the
first day of the taxable year to which the
election applies, and attaching a copy of
the statement to its return for such taxable
year.
(4) Taxable year in which election first
becomes relevant. For the taxable year in
which the CFC exemption election first
becomes relevant, the authorized person
may make a CFC exemption election
without the Commissioner’s consent by
attaching the election statement described
in paragraph (g)(3)(i) of this section to
its original, timely filed (including exten-
sions) return for such taxable year, in
accordance with the prescribed form or
its instructions (or other guidance). For
this purpose, the CFC exemption election
first becomes relevant with respect to an
authorized person in the first taxable year
of the authorized person beginning after
December 31, 2024, in which a CFC that
is the owner of a section 987 QBU is part
of the authorized person’s section 987
electing group.
* * * * *
(h) * * *
* * * * *
CFC exemption election. CFC exemp-
tion election has the meaning provided in
§ 1.987-15(a).
* * * * *
Domestic acquiring corporation.
Domestic acquiring corporation has the
meaning provided in § 1.987-16(b).
* * * * *
Exempt CFC. Exempt CFC has the
meaning provided in § 1.987-15(a).
Exempt partnership. Exempt partner-
ship has the meaning provided in § 1.987-
7(b)(2)(iv).
Exempt partnership QBU. Exempt
partnership QBU has the meaning pro-
vided in § 1.987-7(b)(2)(iii).
* * * * *
Inbound nonrecognition transaction.
Inbound nonrecognition transaction has
the meaning provided in § 1.987-16(b).
* * * * *
Pre-election section 987 gain or loss.
Pre-election section 987 gain or loss has
the meaning provided in § 1.987-15(e)(2).
Pre-transaction period. Pre-transac-
tion period has the meaning provided in §
1.987-16(b)(2).
Pre-transaction taxable year.
Pre-transaction taxable year has the
meaning provided in § 1.987-16(c)(2)(ii).
* * * * *
Transferor CFC. Transferor CFC has
the meaning provided in § 1.987-16(b).
* * * * *
Par. 4. Section 1.987-6 is amended by
adding paragraphs (b)(1)(v) and (vi) to
read as follows:
§ 1.987-6 Character and source of
section 987 gain or loss.
* * * * *
(b) * * *
(1) * * *
(v) In the case of net unrecognized
section 987 gain or loss that is recognized
as pre-election section 987 gain or loss
under § 1.987-15(e)(3), the taxable year
immediately preceding the first taxable
year in which the CFC exemption election
applies.
(vi) The taxable year in which the
amount of section 987 asset basis is rec-
ognized under § 1.987-16(d).
* * * * *
Par. 5. Section 1.987-7 is amended by:
1. Revising paragraph (b);
2. In paragraph (c)(2)(i), removing the
language “1.987-15” and adding the
language “1.987-17” in its place; and
3. Adding paragraphs (c)(2)(iv) and (d)
(2)(iv).
The revisions and additions read as fol-
lows:
§ 1.987-7 Application of the section
987 regulations to partnerships and S
corporations.
* * * * *
(b) Section 987 regulations generally
do not apply to partnerships—(1) In gen-
eral. Except as otherwise provided in this

September 8, 2026 292 Bulletin No. 2026–37
section, the section 987 regulations do
not apply to a partnership, and the section
987 regulations do not apply to an eligible
QBU if a partnership is the direct owner of
the eligible QBU.
(2) Application of section 987 and sec-
tion 989(a). In general, a taxpayer must
apply sections 987 and 989(a) to partner-
ships and eligible QBUs directly owned
by partnerships in a reasonable manner.
However, in the case of an exempt part-
nership QBU, section 987(3) applies only
to the extent provided in §§ 1.987-15 and
1.987-16.
(i) Consistency. In applying sections
987 and 989(a) with respect to a partner-
ship or an eligible QBU directly owned
by a partnership, taxpayers must use the
same method consistently from year to
year with respect to a particular part-
nership or eligible QBU. In addition, all
members of the same controlled group
must apply the same method consistently
with respect to a particular partnership or
eligible QBU.
(ii) Tiered partnerships. For purposes
of the section 987 regulations, a taxpayer
that owns an interest in a partnership (low-
er-tier partnership) indirectly through one
or more other partnerships is treated as a
partner in the lower-tier partnership.
(iii) Exempt partnership QBU. For pur-
poses of the section 987 regulations, an
exempt partnership QBU is a partnership
(or an interest in the partnership) or an eli-
gible QBU directly owned by a partner-
ship, if the taxpayer applies sections 987
and 989(a) using a method under which—
(A) The partnership, interest in the
partnership, or eligible QBU is a section
987 QBU; and
(B) The owner of the section 987 QBU
is either an exempt CFC or an exempt
partnership.
(iv) Exempt partnership. For purposes
of the section 987 regulations, an exempt
partnership is a partnership in which at
least 80 percent of the capital or profits
interests are owned (directly or indirectly
through other partnerships) by exempt
CFCs that are members of the same con-
trolled group on the last day of the part-
nership’s taxable year.
(c) * * *
(2) * * *
(iv) Rules relating to the CFC exemp-
tion election—(A) In general. Sections
1.987-15 and 1.987-16 apply to an exempt
partnership QBU.
(B) Certain rules not applicable to
exempt partnership QBUs. Notwithstand-
ing paragraphs (c)(2)(i) and (ii) of this
section, §§ 1.987-6 and 1.987-11 through
1.987-13 do not apply to an exempt part-
nership QBU (except to the extent pro-
vided in §§ 1.987-15 and 1.987-16), and
an annual recognition election does not
apply to an exempt partnership QBU.
* * * * *
(d) * * *
(2) * * *
(iv) Exempt partnership QBU. Para-
graph (d)(1)(ii) of this section does not
apply to an exempt partnership QBU.
* * * * *
Par. 6. Section 1.987-10 is amended
by:
1. In paragraph (c)(1), removing the lan-
guage “1.987-15(a)(1)” and adding
the language “1.987-17(a)(1)” in its
place;
2. Revising paragraph (e)(5)(ii)(A) and
the last sentence of paragraph (e)(5)
(ii)(C); and
3. Adding paragraph (e)(5)(ii)(D).
The revisions and addition read as fol-
lows:
§ 1.987-10 Transition rules.
* * * * *
(e) * * *
(5) * * *
(ii) * * *
(A) In general. A taxpayer may elect to
recognize pretransition gain or loss ratably
over the transition period. If an election
is made to recognize pretransition gain
or loss ratably over the transition period,
then paragraph (e)(5)(i) of this section
does not apply, and each owner to which
the election applies recognizes its pretran-
sition gain or loss with respect to each sec-
tion 987 QBU, original deferral QBU, and
outbound loss QBU ratably over a period
of 120 months beginning with the first
month of the taxable year that begins on
the transition date described in paragraph
(c)(1) of this section. See § 1.987-1(g)
for rules relating to section 987 elections
(including consistency rules).
* * * * *
(C) * * * The pretransition gain or loss
is recognized ratably over a period of 120
months beginning with the first month of
the taxable year that begins on the transi-
tion date described in paragraph (c)(1) of
this section.
(D) Amounts previously recognized
under ten-year amortization rule. For
purposes of this paragraph (e)(5)(ii), if an
owner recognized a ratable portion of its
pretransition gain or loss in one or more
taxable years under § 1.987-10(e)(5)(ii)
(A) or (C), as contained in 26 CFR in part
1 in effect on April 1, 2025, each such
taxable year is deemed to contain twelve
months. Thus, for example, if the first tax-
able year of an owner in which the section
987 regulations apply is a short taxable
year lasting one month, and the owner
recognized one tenth of its pretransition
gain or loss in that taxable year under §
1.987-10(e)(5)(ii)(A) or (C), as contained
in 26 CFR in part 1 in effect on April 1,
2025, the owner recognizes its remaining
pretransition gain or loss ratably over 108
months beginning with the first month of
the next taxable year.
* * * * *
Par. 7. Section 1.987-15 is redesig-
nated as § 1.987-17 and new § 1.987-15 is
added to read as follows:
§ 1.987-15 CFC exemption election.
(a) Overview. This section provides
rules for an election (CFC exemption elec-
tion) under which section 987(3) applies
to a CFC only to the extent provided in
this section and § 1.987-16. Paragraph
(b) of this section provides rules regard-
ing the effect of making a CFC exemp-
tion election. Paragraph (c) of this section
provides consistency requirements for
making the election. Paragraph (d) of this
section provides rules for coordinating the
CFC exemption election with the transi-
tion rules of § 1.987-10. Paragraph (e) of
this section provides rules under which a
CFC that is subject to the CFC exemption
election (an exempt CFC) must account
for pre-election section 987 gain or loss.
Paragraph (f) of this section provides rules
that apply if a CFC exemption election is
revoked. Paragraph (g) of this section pro-
vides rules for applying this section with
respect to a partnership. Paragraph (h) of
this section provides examples that illus-
trate the application of the rules of this
section.

Bulletin No. 2026–37 293 September 8, 2026
(b) Effect of CFC exemption election—
(1) In general. Except as otherwise pro-
vided in this section or § 1.987-16, sec-
tion 987(3) does not apply to an exempt
CFC. In addition, the rules of the section
987 regulations apply to an exempt CFC
only to the extent provided in this section
or § 1.987-16. See § 1.987-7(b)(2), (c)(2)
(iv), and (d)(2)(iv) for rules relating to
the effect of a CFC exemption election on
partnerships and eligible QBUs directly
owned by partnerships.
(2) Applicable provisions. The rules of
this section, and the rules of the section
987 regulations listed in this paragraph (b)
(2), apply to an exempt CFC, subject to
the modifications described in paragraph
(b)(3) of this section.
(i) Section 1.987-1 (scope, definitions,
and special rules);
(ii) Section 1.987-2 (attribution of
items to eligible QBUs and other rules);
(iii) Section 1.987-3 (determination of
section 987 taxable income or loss);
(iv) Section 1.987-5(f) (determination
of the owner’s adjusted basis in trans-
ferred assets and the amount of transferred
liabilities);
(v) Section 1.987-7 (rules relating to
partnerships);
(vi) Section 1.987-8 (QBU termi-
nations), subject to the modifications
described in paragraph (b)(3)(ii) of this
section;
(vii) Section 1.987-9 (recordkeeping
requirements), subject to the modifica-
tions described in paragraph (b)(3)(iii) of
this section;
(viii) Section 1.987-10 (transition
rules), including the application (for pur-
poses of § 1.987-10) of rules cross-refer-
enced in § 1.987-10;
(ix) Section 1.987-16 (inbound nonrec-
ognition transactions involving an exempt
CFC); and
(x) Section 1.987-17 (applicability
dates).
(3) Modifications to applicable pro-
visions—(i) Current rate election. With
respect to an exempt CFC, the rules
described in paragraph (b)(2) of this sec-
tion are applied as if a current rate election
were in effect.
(ii) QBU terminations. An exempt
CFC does not recognize section 987 gain
or loss under § 1.987-8(e) when a section
987 QBU terminates.
(iii) Recordkeeping requirements. With
respect to an exempt CFC, the recordkeep-
ing requirements set forth in § 1.987-9(b)
(2), (b)(4) through (12), and (b)(14) do not
apply. A taxpayer must retain the records
necessary to substantiate the determina-
tions required under this section and §
1.987-16, including the records needed
to support the chosen methodology for
computing section 987 asset basis under
§ 1.987-16(c).
(iv) Partnerships. See § 1.987-7(c)(2)
for the rules that apply to an exempt part-
nership QBU.
(c) Consistency requirements—(1)
In general. The consistency rules of §
1.987-1(g)(2) apply with respect to a CFC
exemption election, subject to the modi-
fications described in paragraph (c)(2) of
this section and the anti-avoidance rule
provided in paragraph (c)(3) of this sec-
tion.
(2) Modifications—(i) Affiliates
treated as a single United States person.
All domestic corporations that are affil-
iates described in § 1.904(i)-1(b) on the
last day of the taxable year described
in § 1.904(i)-1(c) are treated as a single
United States person. Thus, in applying §
1.987-1(g)(2)(ii) for purposes of the CFC
exemption election, all such domestic cor-
porations are part of the same section 987
electing group.
(ii) Ownership through domestic part-
nerships. For purposes of determining
whether a United States person (other than
a partnership) owns stock of a CFC within
the meaning of section 958(a), stock of a
foreign corporation owned by a domestic
partnership is treated in the same manner
as stock of a foreign corporation owned by
a foreign partnership.
(3) Anti-avoidance rule—(i) In gen-
eral—(A) No deemed revocation. Not-
withstanding the rules of § 1.987-1(g)
(2), if a transaction involving two or more
members of the same controlled group is
entered into with a principal purpose of
causing a deemed revocation of a CFC
exemption election under § 1.987-1(g)(2)
or otherwise causing a CFC exemption
election to cease to be effective, the CFC
exemption election is not deemed to be
revoked and remains in effect.
(B) Deemed election. If a transaction
involving two or more members of the
same controlled group is entered into
with a principal purpose of avoiding the
requirement to make a CFC exemption
election with respect to one or more CFCs
under § 1.987-1(g)(2) and paragraph (c)
(2) of this section, the CFC exemption
election is deemed to be made with respect
to those CFCs.
(C) Exempt partnerships. If a transac-
tion involving two or more members of the
same controlled group is entered into with
a principal purpose of causing an exempt
partnership to cease to be an exempt part-
nership, the CFC exemption election is
deemed to be made with respect to any
CFC that is a partner in the partnership
and is a member of the controlled group.
(ii) Subsequent application of the
consistency rule. If a CFC is subject to
a deemed CFC exemption election under
paragraph (c)(3)(i) of this section, the
CFC exemption election is also deemed to
be made with respect to the other members
of the CFC’s section 987 electing group.
(d) Coordination with transition rules
provided in § 1.987-10—(1) Deemed elec-
tion to recognize pretransition gain or loss
ratably over the transition period—(i) In
general. If a CFC exemption election is
made for the taxable year beginning on the
transition date described in § 1.987-10(c)
(1), the election to recognize pretransi-
tion gain or loss ratably over the transi-
tion period under § 1.987-10(e)(5)(ii) is
deemed to be made with respect to each
CFC for which the CFC exemption elec-
tion is made.
(ii) Consistency rules. Notwithstanding
the rules of § 1.987-1(g)(2), the election
described in § 1.987-10(e)(5)(ii) is not
required to be made with respect to the
members of an exempt CFC’s section 987
electing group (other than exempt CFCs)
solely by reason of a deemed election
described in paragraph (d)(1)(i) of this
section.
(2) Pretransition gain or loss with
respect to QBUs that hold assets of less
than $50 million. Notwithstanding the
rules of § 1.987-10, if a CFC exemp-
tion election is made for the taxable year
beginning on the transition date described
in § 1.987-10(c)(1), an exempt CFC is
treated as having no pretransition gain or
loss with respect to any QBU described in
paragraph (e)(2)(iii)(B) of this section.
(e) Election made in a subsequent
taxable year—(1) In general. This para-

September 8, 2026 294 Bulletin No. 2026–37
graph (e) provides rules under which an
exempt CFC must compute and recognize
pre-election section 987 gain or loss if
the CFC exemption election is made for
a taxable year other than the taxable year
beginning on the transition date described
in § 1.987-10(c)(1) (or, in the case of a
QBU described in § 1.987-10(f)(1), if the
election is made for any taxable year).
(2) Computation of pre-election section
987 gain or loss—(i) In general. Except
as provided in paragraph (e)(2)(ii) or (iii)
of this section, an exempt CFC’s pre-elec-
tion section 987 gain or loss with respect
to a section 987 QBU, successor deferral
QBU, or successor suspended loss QBU
is equal to—
(A) The exempt CFC’s net unrecog-
nized section 987 gain or loss (as deter-
mined under § 1.987-4) with respect to
a section 987 QBU for the taxable year
immediately preceding the first taxable
year in which the CFC exemption election
applies, reduced by the amount of the net
unrecognized section 987 gain or loss that
is recognized, suspended, or deferred in
the preceding taxable year;
(B) The exempt CFC’s outstanding
deferred section 987 gain or loss (as deter-
mined under § 1.987-12) with respect to
a successor deferral QBU for the taxable
year immediately preceding the first tax-
able year in which the election applies,
reduced by the amount of the outstanding
deferred section 987 gain or loss that is
recognized, suspended, or attributed to a
different successor deferral QBU in the
preceding taxable year; and
(C) The exempt CFC’s cumulative sus-
pended section 987 loss (as determined
under § 1.987-11) with respect to a sec-
tion 987 QBU or successor suspended loss
QBU for the taxable year immediately pre-
ceding the first taxable year in which the
election applies, reduced by the amount
of the suspended section 987 loss that is
recognized, eliminated, or attributed to a
different successor suspended loss QBU
in the preceding taxable year. Suspended
section 987 loss described in § 1.987-13(e)
is not taken into account in determining
pre-election section 987 gain or loss.
(ii) Adjustments required if a current
rate election is not in effect for the pre-
ceding taxable year. Except as provided
in paragraph (e)(2)(iii) of this section, if
a current rate election is not in effect for
the taxable year immediately preceding
the first taxable year in which the CFC
exemption election applies, pre-election
section 987 gain or loss with respect to a
section 987 QBU is adjusted to account
for any change to the owner functional
currency net value of the section 987
QBU attributable to the CFC exemption
election. The amount of the adjustment is
equal to—
(A) The owner functional currency net
value of the section 987 QBU, determined
under § 1.987-4(e) on the last day of the
preceding taxable year as though a current
rate election was in effect; minus
(B) The owner functional currency net
value of the section 987 QBU, determined
under § 1.987-4(e) on the last day of the
preceding taxable year based on the elec-
tions in effect for the preceding taxable
year.
(iii) Pre-election section 987 gain or
loss with respect to QBUs that hold assets
of less than $50 million—(A) In general.
An exempt CFC is treated as having no
pre-election section 987 gain or loss with
respect to a section 987 QBU, successor
deferral QBU, or successor suspended
loss QBU described in paragraph (e)(2)
(iii)(B) of this section.
(B) QBUs that hold assets of less than
$50 million—(1) In general. A QBU is
described in this paragraph (e)(2)(iii)(B)
if the average amount of the QBU’s assets
for the last three taxable years before the
first taxable year in which the CFC exemp-
tion election applies is less than $50 mil-
lion. Any taxable year in which a QBU did
not exist is not taken into account in com-
puting the average amount of the QBU’s
assets for purposes of this paragraph (e)
(2)(iii)(B).
(2) Amount of assets. For purposes of
this paragraph (e)(2)(iii)(B), the amount of
a QBU’s assets for a taxable year is equal
to the amount of total assets reflected on
the QBU’s balance sheet in accordance
with generally accepted accounting prin-
ciples on the last day of the taxable year
(without regard to whether the assets are
properly attributable to the QBU under §
1.987-2 and without adjustment to con-
form to federal income tax principles).
(3) Aggregation rule. All section 987
QBUs, successor deferral QBUs, and suc-
cessor suspended loss QBUs of an exempt
CFC that have the same country of resi-
dence (as defined in section 988(a)(3)(B))
are treated as a single QBU for purposes
of this paragraph (e)(2)(iii).
(3) Recognition of pre-election sec-
tion 987 gain or loss—(i) In general. An
exempt CFC’s pre-election section 987
gain or loss is recognized ratably over a
period of 120 months under the rules of
§ 1.987-10(e)(5)(ii) (treating pre-election
section 987 gain or loss in the same man-
ner as pretransition gain or loss), subject
to the modifications described in this para-
graph (e)(3).
(ii) Transition date. In applying
§ 1.987-10(e)(5)(ii) with respect to
pre-election section 987 gain or loss, the
first taxable year in which a CFC exemp-
tion election applies is treated as the tax-
able year beginning on the transition date
described in § 1.987-10(c)(1). Thus, in
general, pre-election section 987 gain or
loss is recognized ratably over a period of
120 months beginning with the first month
of the first taxable year in which the CFC
exemption election applies.
(iii) Source and character—(A) Net
unrecognized section 987 gain or loss.
The source and character of net unrecog-
nized section 987 gain or loss that is rec-
ognized as pre-election section 987 gain
or loss under this paragraph (e)(3) is deter-
mined under § 1.987-6. See § 1.987-6(b)
(1)(v).
(B) Deferred section 987 gain or loss
and suspended section 987 loss. The
source and character of deferred section
987 gain or loss or suspended section 987
loss that is recognized as pre-election sec-
tion 987 gain or loss under this paragraph
(e)(3) is the same as the source and char-
acter determined under § 1.987-6 in the
taxable year of deferral or suspension. See
§ 1.987-6(b)(1)(ii) and (iii).
(iv) QBU ceases to be owned by a
member of the exempt CFC’s controlled
group—(A) Scope. This paragraph (e)
(3)(iv) applies if pre-election section
987 loss of an exempt CFC is computed
under paragraph (e)(2) of this section with
respect to a section 987 QBU, successor
deferral QBU, or successor suspended loss
QBU, and, as result of a direct or indirect
transfer, or an issuance or redemption, of
an ownership interest in the exempt CFC
during the 120-month period described
in paragraph (e)(3)(i) of this section, the
exempt CFC ceases to be a member of

Bulletin No. 2026–37 295 September 8, 2026
the same controlled group as the direct
owner of the QBU (or the QBU’s succes-
sor, determined under the principles of §
1.987-13(b) and (c)). For example, this
paragraph (e)(3)(iv) applies if an exempt
CFC is sold to an unrelated party, and the
exempt CFC has unrecognized pre-elec-
tion section 987 gain or loss with respect
to a QBU that had previously been trans-
ferred by the exempt CFC to a member of
its controlled group (either before or after
the CFC exemption election took effect).
(B) Pre-election section 987 loss
suspended. In the case of a transaction
described in paragraph (e)(3)(iv)(A) of
this section, the exempt CFC does not rec-
ognize any pre-election section 987 loss
with respect to the QBU in the taxable year
of the transaction and subsequent taxable
years under this paragraph (e)(3). How-
ever, the exempt CFC continues to rec-
ognize pre-election section 987 gain with
respect to the QBU under this paragraph
(e)(3). Any pre-election section 987 loss
that is not recognized under this paragraph
(e)(3)(iv) is treated as suspended section
987 loss of the exempt CFC described in
§ 1.987-13(e).
(f) First taxable year in which the
election ceases to apply—(1) In general.
In the first taxable year in which a CFC
exemption election ceases to apply to a
CFC, each section 987 QBU of the CFC
is deemed to be newly formed on the first
day of the taxable year, and the assets and
liabilities attributable to the section 987
QBU are deemed to be transferred from
the owner to the section 987 QBU on that
day.
(2) Unrecognized pre-election section
987 gain or loss—(i) In general. Except
as provided in paragraph (e)(3)(iv) or (f)
(2)(ii) of this section, if a CFC exemption
election ceases to apply to a CFC, the CFC
continues to recognize pre-election sec-
tion 987 gain or loss under paragraph (e)
(3) of this section.
(ii) Revocation within sixty months.
If a CFC exemption election ceases to
apply to a CFC within sixty months after
the first day of the first taxable year for
which the election applied to the CFC, any
pre-election section 987 loss of the CFC
that was not recognized under paragraph
(e)(3) of this section before the taxable
year in which the election ceases to apply
is treated as suspended section 987 loss
and is not recognized by the CFC under
paragraph (e)(3) of this section.
(g) Partnerships. This paragraph (g)
provides rules for applying this section
with respect to an exempt partnership
QBU.
(1) Taxable year beginning on the tran-
sition date. An exempt CFC or exempt
partnership must compute and recognize
pre-election section 987 gain or loss with
respect to an exempt partnership QBU
under paragraph (e) of this section regard-
less of whether the CFC exemption elec-
tion is made for the taxable year beginning
on the transition date described in § 1.987-
10(c)(1) or a later taxable year.
(2) Pre-election section 987 gain
or loss. For purposes of determining
pre-election section 987 gain or loss under
paragraph (e)(2)(i) of this section, net
unrecognized section 987 gain or loss with
respect to an exempt partnership QBU is
equal to the amount of gain or loss that
the owner would recognize under section
987(3) if the exempt partnership QBU ter-
minated on the last day of the preceding
taxable year and no section 987 gain or
loss was deferred or suspended.
(3) Exempt partnership—(i) In gen-
eral. An exempt partnership that is treated
as the owner of a section 987 QBU (or
is treated as an original deferral QBU
owner or an original suspended loss QBU
owner) must compute pre-election section
987 gain or loss in the same manner as an
exempt CFC.
(ii) Recognition of pre-election sec-
tion 987 gain or loss—(A) In general. An
exempt partnership does not recognize
pre-election section 987 gain or loss under
paragraph (e)(3) of this section. Instead,
each partner in the exempt partnership
(other than a partner that is itself a partner-
ship) treats its share of the exempt partner-
ship’s pre-election section 987 gain or loss
as pre-election section 987 gain or loss of
the partner that is recognized by the part-
ner in accordance with paragraph (e)(3) of
this section. See § 1.987-7(b)(2)(ii) (treat-
ing an indirect partner as a partner for pur-
poses of the section 987 regulations).
(B) Partner’s share of pre-election sec-
tion 987 gain or loss. A partner’s share of
an exempt partnership’s pre-election sec-
tion 987 gain or loss with respect to a QBU
is determined based on the amount of sec-
tion 987 gain or loss with respect to the
QBU that would be included in the part-
ner’s distributive share of profits or losses
if the exempt partnership recognized the
entire amount of pre-election section
987 gain or loss in the first taxable year
for which the CFC exemption election
applies. The principles of section 706(d)
apply in making this determination.
(iii) Partnership becomes an exempt
partnership. In a taxable year in which a
partnership becomes an exempt partner-
ship (for example, because 80 percent of
the capital or profits interests in the part-
nership are acquired by an exempt CFC),
the rules of this section are applied with
respect to the exempt partnership by treat-
ing that taxable year as the first taxable
year in which the CFC exemption election
applies.
(iv) Partnership ceases to be an exempt
partnership. In a taxable year in which a
partnership ceases to be an exempt part-
nership, the rules of this section are applied
with respect to the partnership by treating
that taxable year as the first taxable year in
which the CFC exemption ceases to apply.
(h) Examples. The following examples
illustrate the rules of this section. The
examples are not intended to illustrate the
appropriate determination of any QBU’s
functional currency.
(1) Example 1: CFC exemption election—(i)
Facts. U.S. Corp is a domestic corporation that uses
the calendar year as its taxable year and has the U.S.
dollar as its functional currency. U.S. Corp owns 100
percent of the stock of CFC 1, a controlled foreign
corporation within the meaning of section 957(a),
which has the U.S. dollar as its functional currency.
CFC 1 operates Branch, a section 987 QBU which
has the euro as its functional currency. Branch held
assets of at least $50 million within the meaning of
paragraph (e)(2)(iii)(B) of this section for each of
the three taxable years preceding Year 1. In Year 1
(a taxable year beginning after the transition date
described in § 1.987-10(c)(1)), a current rate elec-
tion is in effect. As of December 31, Year 1, CFC
1 has net unrecognized section 987 gain of $1,200x
with respect to Branch; CFC 1 does not have any out-
standing deferred section 987 gain or loss or cumu-
lative suspended section 987 loss. For Year 2, U.S.
Corp makes a CFC exemption election with respect
to CFC 1. Branch does not make a remittance to U.S.
Corp in Year 1. On July 1, Year 2, Branch transfers
an asset with a basis of €400x to CFC 1. CFC 1 does
not make any transfers to Branch in Year 2. The spot
rate on July 1, Year 2, is €1 = $1.10.
(ii) Analysis—(A) Pre-election section 987 gain
or loss. Under paragraph (e)(2) of this section, CFC
1’s pre-election section 987 gain or loss with respect
to Branch equals a gain of $1,200x (the amount of net
unrecognized section 987 gain or loss at the end of
Year 1). Under paragraph (e)(3) of this section, CFC

September 8, 2026 296 Bulletin No. 2026–37
1 must recognize the $1,200x of pre-election section
987 gain ratably over 120 months ($10x per month),
beginning on January 1, Year 2. Accordingly, CFC 1
recognizes $120x of pre-election section 987 gain in
Year 2 ($10x per month x 12 months).
(B) Effect of election. Under paragraph (b) of
this section, CFC 1 does not compute or recognize
any section 987 gain or loss under § 1.987-5 for
Year 2, notwithstanding the transfer of the asset
from Branch to CFC 1 on July 1, Year 2. Under
paragraph (b)(3)(i) of this section, the applicable
rules of the section 987 regulations are applied as if
a current rate election was in effect. As a result, the
asset transferred from Branch to CFC 1 is treated
as a marked item under § 1.987-1(d)(2). Under §
1.987-5(f)(2), CFC 1’s basis in the transferred asset
is determined by translating its basis (€400x) into
dollars at the spot rate applicable on the date of the
transfer (€1 = $1.10). Therefore, CFC 1’s basis in
the asset equals $440x.
(2) Example 2: Consistency rule—(i) Facts.
FP is a foreign partnership which directly owns
100 percent of the stock of US 1 and US 2, each of
which is a domestic corporation that uses the calen-
dar year as its taxable year and has the U.S. dollar
as its functional currency. US 1 and US 2 are not
affiliates within the meaning of § 1.904(i)-1(b). US
1 directly owns 100 percent of the stock of CFC 1,
and US 2 directly owns 100 percent of the stock of
CFC 2. CFC 1 and CFC 2 are controlled foreign
corporations within the meaning of section 957(a).
In Year 1, a CFC exemption election is in effect
with respect to CFC 1 but not CFC 2. On July 1,
Year 1, US 1 sells all of the stock of CFC 1 to US 2
with a principal purpose of causing a deemed revo-
cation of the CFC exemption election with respect
to CFC 1.
(ii) Analysis—(A) Application of the general
consistency requirement. Before July 1, Year 1, US
1 and CFC 1 are members of a section 987 electing
group within the meaning of § 1.987-1(g)(2) because
US 1 owns more than 50 percent of the stock of
CFC1. Similarly, because US 2 owns more than 50
percent of the stock of CFC2, US 2 and CFC 2 are
members of a section 987 electing group. US 1 and
US 2 are not members of the same section 987 elect-
ing group because they are not affiliates within the
meaning of § 1.904(i)-1(b). However, US 1 and US 2
are members of the same controlled group as defined
in § 1.987-1(h). As a result of US 2’s acquisition of
the stock of CFC 1, CFC 1 becomes a member of the
US 2 section 987 electing group. Therefore, unless
the anti-avoidance rule in paragraph (c)(3) of this
section applies, the CFC exemption election would
be deemed to be revoked with respect to CFC 1 as of
January 1, Year 1. See § 1.987-1(g)(2).
(B) Anti-avoidance rule. US 2 acquired the
stock of CFC 1 from US 1 with a principal purpose
of causing a deemed revocation of the CFC exemp-
tion election with respect to CFC 1. Accordingly,
under paragraph (c)(3)(i)(A) of this section, the CFC
exemption election with respect to CFC 1 remains in
effect for Year 1. In addition, under paragraph (c)(3)
(ii) of this section, US 2 is deemed to make a CFC
exemption election with respect to CFC 2 beginning
in Year 1.
Par. 8. Section 1.987-16 is added to
read as follows:
§ 1.987-16 Special rules for inbound
nonrecognition transactions.
(a) Overview. This section provides
rules relating to inbound nonrecognition
transactions. Paragraph (b) of this sec-
tion describes the scope of this section’s
application. Paragraphs (c) and (d) of this
section provide rules for, respectively,
computing and recognizing the amount of
a transferor CFC’s section 987 asset basis
with respect to an inbound nonrecognition
transaction. Paragraph (e) of this section
provides a de minimis rule. Paragraph (f)
of this section provides an example that
illustrates the application of the rules of
this section.
(b) Scope—(1) In general. This sec-
tion applies if a domestic corporation (the
domestic acquiring corporation) acquires
the assets of a CFC (the transferor CFC)
in either a liquidation described in section
332 or an asset acquisition described in
section 368(a)(1) (an inbound nonrecogni-
tion transaction), and the transferor CFC
was subject to a CFC exemption election
for any taxable year ending during the
pre-transaction period described in para-
graph (b)(2) of this section. For purposes
of this section, references to the transferor
CFC include any CFC that transferred its
assets to the transferor CFC in a transac-
tion described in section 381(a) during the
pre-transaction period.
(2) Pre-transaction period. For pur-
poses of this section, the pre-transaction
period is the period beginning 72 months
before the inbound nonrecognition trans-
action and ending on the date of the
inbound nonrecognition transaction.
(c) Computation of section 987 asset
basis—(1) Choice of methodology. A
transferor CFC is required to compute
the amount of its section 987 asset basis
under either the lookback methodology
described in paragraph (c)(2) of this sec-
tion or the excess asset basis methodol-
ogy described in paragraph (c)(3) of this
section. The same methodology must be
applied with respect to all inbound non-
recognition transactions entered into as
part of the same plan or arrangement. The
amount of section 987 asset basis com-
puted under this paragraph (c) cannot be
less than zero.
(2) Lookback methodology—(i) In
general. If a taxpayer uses the methodol-
ogy described in this paragraph (c)(2), a
transferor CFC’s section 987 asset basis
is equal to the sum of the transferor CFC’s
annual unrecognized section 987 gain or
loss determined under § 1.987-10(e)(3)(iii)
(or, if applicable, under paragraph (c)(2)
(iv) of this section) for each pre-transaction
taxable year described in paragraph (c)(2)
(ii) of this section with respect to each sec-
tion 987 QBU described in paragraph (c)
(2)(iii) of this section. Paragraph (c)(2)(v)
of this section provides rules for computing
a transferor CFC’s section 987 asset basis
with respect to an exempt partnership.
(ii) Pre-transaction taxable year. A
pre-transaction taxable year is a taxable
year ending during the pre-transaction
period, if a CFC exemption election was
in effect for the taxable year.
(iii) Section 987 QBUs. Annual unrec-
ognized section 987 gain or loss must be
computed with respect to each section 987
QBU (including each exempt partnership
QBU) owned by the transferor CFC in
a pre-transaction taxable year. Thus, for
example, if the transferor CFC owned a
section 987 QBU during a pre-transaction
taxable year, and the section 987 QBU was
terminated or the CFC exemption election
was revoked before the inbound nonrecog-
nition transaction occurred, annual unrec-
ognized section 987 gain or loss must nev-
ertheless be computed with respect to the
section 987 QBU for the taxable years pre-
ceding the termination or revocation.
(iv) Annual unrecognized section 987
gain or loss with respect to an exempt part-
nership QBU. In the case of an exempt
partnership QBU, annual unrecognized
section 987 gain or loss for a taxable year
is equal to the amount of gain or loss that
the owner would have recognized under
section 987(3) if the QBU was formed on
the first day of the taxable year (or, if later,
the date on which the QBU was actually
formed) and terminated on the last day of
the taxable year (or, if earlier, the date on
which the QBU was actually terminated).
This amount must be determined without
regard to the CFC exemption election (and
without regard to the rules of §§ 1.987-7(d)
and 1.987-11 through 1.987-13) using a
reasonable method that is applied consis-
tently with respect to all partnerships in
which the transferor CFC is a partner.
(v) Exempt partnerships—(A) In gen-
eral. If the transferor CFC is a partner in

Bulletin No. 2026–37 297 September 8, 2026
an exempt partnership in a pre-transaction
taxable year, the transferor CFC’s section
987 asset basis must be determined by
taking into account the transferor CFC’s
share of the exempt partnership’s annual
unrecognized section 987 gain or loss
(determined under paragraph (c)(2)(iv) of
this section) with respect to each section
987 QBU owned by the exempt partner-
ship for each pre-transaction taxable year
in which the partnership was an exempt
partnership. This amount is translated, if
necessary, into the transferor CFC’s func-
tional currency at the spot rate on the date
of the inbound nonrecognition transaction.
(B) Transferor CFC’s share of an
exempt partnership’s annual unrecognized
section 987 gain or loss. The transferor
CFC’s share of an exempt partnership’s
annual unrecognized section 987 gain or
loss with respect to a section 987 QBU
for a taxable year is equal to the amount
of section 987 gain or loss that would be
included in the transferor CFC’s distribu-
tive share of profits or losses with respect
to the section 987 QBU for the taxable
year if the exempt partnership recognized
the annual unrecognized section 987 gain
or loss in the taxable year. The principles
of section 706(d) apply in making this
determination.
(3) Excess asset basis methodology. If a
taxpayer uses the excess asset basis meth-
odology described in this paragraph (c)
(3), a transferor CFC’s section 987 asset
basis with respect to an inbound nonrec-
ognition transaction is equal to the amount
of excess asset basis determined under §
1.367(b)-3(g)(2)(i) with respect to the
transferor CFC. This amount is translated
(if necessary) into the transferor CFC’s
functional currency at the spot rate on the
date of the inbound nonrecognition trans-
action. Notwithstanding § 1.367(b)-3(g)
(2)(i), for purposes of this paragraph (c)
(3), excess asset basis is determined with-
out regard to the application of paragraph
(d) of this section.
(d) Recognition of section 987 gain
equal to the amount of section 987 asset
basis—(1) In general. Immediately before
an inbound nonrecognition transaction,
the transferor CFC is required to recog-
nize section 987 gain equal to the amount
of its section 987 asset basis.
(2) Source and character—(i) In gen-
eral. The source and character of section
987 gain recognized under paragraph (d)
(1) of this section are determined under
the rules of § 1.987-6, subject to the
modifications described in paragraph (d)
(2)(ii) of this section. See § 1.987-6(b)(1)
(vi).
(ii) Initial assignment is made by ref-
erence to all of the transferor CFC’s
assets. Notwithstanding § 1.987-6(b)(2)
(i)(A), for purposes of the initial assign-
ment, section 987 gain recognized under
paragraph (d)(1) of this section is assigned
to the statutory and residual groupings in
the same proportions as the proportions
in which the tax book value of the assets
of the transferor CFC (other than stock
described in § 1.987-2(b)(2)(i)(A)) are
assigned to the groupings under the asset
method in §§ 1.861-9(g) and 1.861-9T(g)
in the taxable year of the initial assign-
ment.
(e) De minimis rule—(1) In general.
The rules of paragraphs (c) and (d) of this
section do not apply to an inbound non-
recognition transaction if the transferor
CFC’s inside asset basis is less than $25
million. If multiple inbound nonrecogni-
tion transactions occur as part of the same
plan or arrangement, all transferor CFCs’
assets are aggregated for this purpose.
(2) Inside asset basis. In general, for
purposes of paragraph (e)(1) of this sec-
tion, a transferor CFC’s inside asset basis
is determined under § 1.367(b)-3(g)(2)
(iv). However, the basis of stock of a cor-
poration owned by the transferor CFC that
is described in § 1.987-2(b)(2)(i)(A) is
taken into account only to the extent of the
transferor CFC’s aggregate adjusted basis
in assets (other than stock described in §
1.987-2(b)(2)(i)(A)) or the amount of the
transferor CFC’s functional currency that
was exchanged for stock of the CFC (for
example, in a transaction to which section
351 applies) during the pre-transaction
period.
(f) Example: Computation of section
987 asset basis. The following example
illustrates the rules of this section. For
purposes of this example, except as oth-
erwise indicated, no section 987 elections
are in effect. This example is not intended
to illustrate the appropriate determination
of any QBU’s functional currency.
(1) Facts—(i) In general. U.S. Corp is a domes-
tic corporation that uses the calendar year as its tax-
able year and has the U.S. dollar as its functional
currency. U.S. Corp owns 100 percent of the stock of
CFC 1 (a controlled foreign corporation within the
meaning of section 957(a)), which also uses the cal-
endar year as its taxable year and has the U.S. dollar
as its functional currency. CFC 1 forms Business A,
a section 987 QBU with the euro as its functional
currency, at the beginning of Year 1. At the beginning
of Year 1, U.S. Corp’s adjusted basis in the stock of
CFC 1 is zero, and no assets or liabilities of CFC
1 are attributable to Business A. A CFC exemption
election is in effect with respect to CFC 1 beginning
in Year 1.
(ii) Exchange rates. The spot rate on Decem-
ber 31, Year 1, is €1 = $1.15. The yearly average
exchange rate for Year 1 is €1 = $1.10. The spot rate
on June 30, Year 2 is €1 = $1.25.
(iii) Year 1 income and activities. In Year 1, Busi-
ness A earns income of €100x, which is subpart F
income. Business A purchases Property X, a nonde-
preciable asset, for €100x. Under § 1.987-3(c), Busi-
ness A’s income of €100x is translated into CFC 1’s
functional currency at the yearly average exchange
rate of €1 = $1.10. Therefore, CFC 1 has $110x of
subpart F income (€100x x ($1.10 / €1)). Under sec-
tion 961(a), U.S. Corp’s adjusted basis in the stock of
CFC 1 is increased by $110x.
(iv) Liquidation of CFC 1. On June 30, Year 2,
CFC 1 distributes Property X to U.S. Corp in a liq-
uidation to which section 332 applies. Immediately
before the liquidation, CFC 1 and Business A have
no liabilities and no assets other than Property X.
CFC1 has inside asset basis of at least $25 million.
(2) Analysis—(i) Termination of Business A
QBU. Under § 1.987-8(b)(4) and (c)(1)(ii), the Busi-
ness A QBU terminates as a result of the liquidation
of CFC 1. Therefore, under § 1.987-8(e), Business A
is deemed to transfer Property X to CFC 1 immedi-
ately before the termination, on June 30, Year 2. As
a result, immediately before the liquidation, CFC 1’s
basis in Property X is $125x (equal to Business A’s
basis of €100x, translated at the June 30, Year 2, spot
rate of €1 = $1.25). See § 1.987-5(f)(2).
(ii) Computation of section 987 asset basis—(A)
In general. CFC 1 was subject to a CFC exemption
election during the pre-transaction period described
in paragraph (b)(2) of this section. Thus, under
paragraph (d) of this section, CFC 1 is required to
recognize section 987 gain immediately before the
liquidation in an amount equal to its section 987
asset basis. Under paragraph (c) of this section, CFC
1 may compute the amount of section 987 asset basis
using either the lookback methodology or the excess
asset basis methodology.
(B) Lookback methodology—(1) In general.
Under the lookback methodology provided in para-
graph (c)(2) of this section, CFC 1’s section 987
asset basis is equal to the sum of its annual unrecog-
nized section 987 gain or loss with respect to Busi-
ness A determined under § 1.987-10(e)(3)(iii) for
each pre-transaction taxable year. For each taxable
year, CFC 1’s annual unrecognized section 987 gain
or loss with respect to Business A is calculated by
applying only Steps 1 and 10 of the ten-step determi-
nation under § 1.987-4(d). CFC 1’s pre-transaction
taxable years are the full taxable year beginning Jan-
uary 1, Year 1, and the short taxable year beginning
January 1, Year 2, and ending June 30, Year 2. As
explained in paragraph (f)(2)(ii)(B)(2) of this sec-
tion, CFC 1 has annual unrecognized section 987

September 8, 2026 298 Bulletin No. 2026–37
gain of $5x in Year 1, and CFC 1 has annual unrec-
ognized section 987 gain of $10x in Year 2. Thus,
under the lookback methodology, CFC 1’s section
987 asset basis equals $15x ($5x + $10x), and CFC 1
recognizes $15x of section 987 gain under paragraph
(d)(1) of this section.
(2) Annual unrecognized section 987 gain or
loss—(i) Year 1. For Year 1, CFC 1’s annual unrec-
ognized section 987 gain equals $5. The change in
owner functional currency net value (Step 1) equals
$115x (€100x x ($1.15 / €1) – 0). Step 10 reduces
this amount by the residual increase to net assets
determined in Business A’s functional currency (the
€100x basis in Property X), translated into CFC 1’s
functional currency at the yearly average exchange
rate (€1 = $1.10). Thus, the reduction in Step 10
equals $110x, and CFC 1 has annual unrecognized
gain of $5x ($115x - $110x).
(ii) Year 2. For short Year 2, CFC 1’s annual
unrecognized section 987 gain equals $10x. This
is equal to the amount determined in Step 1. The
Step 1 amount is $10x, equal to the difference in
Business A’s €100x balance sheet translated into
CFC 1’s functional currency at the spot rate on the
last day of Year 2 (€1 = $1.25) and the spot rate
on the last day of Year 1 (€1 = $1.15). The Step
10 amount for Year 2 is zero because there is no
residual increase or decrease to Business A’s net
assets as determined in Business A’s functional cur-
rency; throughout Year 2, Business A had net assets
of €100x.
(C) Excess asset basis methodology. Under the
excess asset basis methodology provided in para-
graph (c)(3) of this section, CFC 1’s section 987
asset basis is equal to the amount of excess asset
basis determined under § 1.367(b)-3(g)(2)(i). Under
§ 1.367(b)-3(g)(2)(i) (applied without regard to para-
graph (d) of this section), the excess asset basis is
equal to CFC 1’s inside asset basis (determined in
the hands of U.S. Corp immediately after the liqui-
dation of CFC 1) minus the sum of CFC 1’s earnings
and profits (excluding previously taxed earnings and
profits); U.S. Corp’s aggregate basis in the stock of
CFC 1 immediately before the liquidation of CFC 1;
and the aggregate amount of any liabilities assumed
by U.S. Corp as a result of the liquidation of CFC 1.
CFC 1’s inside asset basis equals $125x, as explained
in paragraph (f)(2)(iii) of this section. CFC 1 has no
earnings and profits (other than previously taxed
earnings and profits), and no liabilities. U.S. Corp’s
aggregate basis in the stock of CFC 1 is $110x.
Accordingly, the excess asset basis with respect to
CFC 1 is $15x ($125x minus $110x). Thus, under
the excess asset basis methodology, CFC 1’s section
987 asset basis equals $15x, and CFC 1 recognizes
$15x of section 987 gain under paragraph (d)(1) of
this section.
(iii) Liquidation of CFC 1. For purposes of sec-
tion 334(b), section 987 gain recognized under para-
graph (d) of this section is not treated as gain rec-
ognized with respect to property distributed by CFC
1 in the liquidation, because the gain is recognized
immediately before the liquidation. Therefore, under
section 334(b), U.S. Corp receives Property X with
a basis of $125x.
Par. 9. Newly redesignated § 1.987-17
is amended by adding paragraphs (e) and
(f) to read as follows:
§ 1.987-17 Applicability date.
* * * * *
(e) Applicability date of 120-month
amortization rule. Section 1.987-10(e)
(5)(ii) applies to taxable years beginning
after December 31, 2024, and ending on
or after November 25, 2025. See § 1.987-
15, as contained in 26 CFR in part 1 in
effect on April 1, 2025, for a prior applica-
bility date for § 1.987-10(e)(5)(ii).
(f) Applicability date of rules relating
to the CFC exemption election. Sections
1.987-1(g)(2)(iv) and (g)(3)(ii)(D), 1.987-
6(b)(1)(v) and (vi), 1.987-7(b)(2), (c)(2)
(iv), and (d)(2)(iv), and 1.987-15 apply
to taxable years ending on or after [date
of filing of final regulations with the Fed-
eral Register]. Section 1.987-16 applies
to transactions completed within taxable
years of a domestic acquiring corporation
ending on or after [date of filing of final
regulations with the Federal Register].
See § 1.987-15, as contained in 26 CFR in
part 1 in effect on April 1, 2025, for a prior
applicability date for § 1.987-7(b).
Frank J. Bisignano,
Chief Executive Officer.
(Filed by the Office of the Federal Register August
13, 2026, 8:45 a.m., and published in the issue of the
Federal Register for August 14, 2026, 91 FR 52553)
Notice of Proposed
Rulemaking
Section 898(c) Transition
Rule for Allocating Foreign
Taxes and Section 960(d)
(4) Foreign Tax Credit
Disallowance
REG-115145-25
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations that relate to allocat-
ing foreign taxes of foreign corporations
affected by the repeal of the one-month
deferral election and to the disallowance
of foreign tax credits on certain distribu-
tions of previously taxed earnings and
profits. The proposed regulations would
affect taxpayers that operate in foreign
countries through certain foreign corpora-
tions and taxpayers that claim the foreign
tax credit.
DATES: Written or electronic comments
and requests for a public hearing must be
received by September 17, 2026.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemak-
ing Portal at https://www.regulations.gov
(indicate IRS and REG-115145-25) by
following the online instructions for sub-
mitting comments. Requests for a public
hearing must be submitted as prescribed
in the “Comments and Requests for a
Public Hearing” section. Once submitted
to the Federal eRulemaking Portal, com-
ments cannot be edited or withdrawn. The
Department of the Treasury (Treasury
Department) and the IRS will publish for
public availability any comment submit-
ted to the IRS’s public docket. Send paper
submissions to: CC:PA:01:PR (REG-
115145-25), Room 5503, Internal Reve-
nue Service, PO Box 7604, Ben Franklin
Station, Washington, D.C. 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations related to section 898(c), Hay-
ley Rassuchine at (202) 317-6936; con-
cerning the proposed regulations related
to section 960(d)(4), Le Chen at (202)
317-6936; and concerning submissions of
comments and requests for a public hear-
ing, Publications and Regulations at (202)
317-6901 (not toll-free numbers) or by
sending an email to publichearings@irs.
gov (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed
additions and amendments to 26 CFR
part 1 (proposed regulations) under
sections 898(c) and 960(d)(4) and cer-

Bulletin No. 2026–37 299 September 8, 2026
tain other provisions of the Internal
Revenue Code (Code). The proposed
regulations are issued pursuant to the
express delegation of authority under
section 70352(c) of Public Law 119-21,
139 Stat. 72 (July 4, 2025), commonly
known as the One, Big, Beautiful Bill
Act (OBBBA), which provides that the
Secretary of the Treasury or the Secre-
tary’s delegate (Secretary) shall issue
regulations providing for the allocation
of foreign taxes of foreign corporations
affected by the repeal of section 898(c)
(2). The proposed regulations are also
issued pursuant to the express delegation
of authority under section 960(f), which
provides the Secretary with authority
to prescribe such regulations as may be
necessary or appropriate to carry out the
provisions of section 960. Additionally,
the proposed regulations are issued pur-
suant to the express delegation of author-
ity under section 7805(a).
Background
I. Repeal of Section 898(c)(2)
Section 898 provides rules for deter-
mining the required taxable year of any
specified foreign corporation. A foreign
corporation is a specified foreign corpora-
tion if it is treated as a controlled foreign
corporation (CFC) for any purpose under
subpart F of subchapter N of chapter 1 of
subtitle A of the Code, and if any United
States shareholder (as defined in section
951(b)) (U.S. shareholder) owns (deter-
mined by applying the ownership rules of
section 958) more than 50 percent of the
stock of the CFC by vote or value on each
testing day
1
(majority U.S. shareholder).
Section 898(c)(1) generally requires a
specified foreign corporation to have the
same taxable year as the taxable year of
its majority U.S. shareholder (the major-
ity U.S. shareholder year). However, prior
to the enactment of the OBBBA, section
898(c)(2) generally permitted a speci-
fied foreign corporation to elect a taxable
year beginning one month earlier than
the majority U.S. shareholder year (one-
month deferral election), subject to the
consent of the Secretary. Section 70352
of the OBBBA repealed the one-month
deferral election for taxable years of spec-
ified foreign corporations beginning after
November 30, 2025. Section 70352(c) of
the OBBBA provides that if a corporation
is a specified foreign corporation as of
November 30, 2025, its first taxable year
beginning after November 30, 2025, will
end at the same time as the first required
year (within the meaning of section 898(c)
(1)) ending after such date (first required
year). Thus, a specified foreign corpora-
tion with a one-month deferral election in
place will have a one-month taxable year
as its first required year.
Section 70352(c) of the OBBBA pro-
vides a transition rule for specified foreign
corporations required to change their tax-
able years due to the repeal of the one-
month deferral election (the transition
rule). Under the transition rule, the change
to the specified foreign corporation’s tax-
able year will be treated as initiated by the
corporation and as having been made with
the consent of the Secretary. The transi-
tion rule also directs the Secretary to issue
regulations or other guidance allocating
foreign taxes paid or accrued in the spec-
ified foreign corporation’s first required
year and its succeeding taxable year
among those taxable years in the manner
the Secretary determines appropriate to
carry out the purposes of section 70352 of
the OBBBA.
On November 25, 2025, the Treasury
Department and the IRS issued Notice
2025-72, 2025-51 I.R.B. 840, describing
rules expected to be included in forthcom-
ing proposed regulations under: (1) sec-
tion 70352 of the OBBBA regarding the
transition rule, and (2) section 987 regard-
ing the election to recognize pretransition
section 987 gain or loss ratably over a
transition period. The proposed regula-
tions would contain the rules described
in Notice 2025-72 related to the transition
rule, with certain modifications discussed
in this preamble, and other guidance but
would not include the rules related to pre-
transition section 987 gain or loss. The
Treasury Department and the IRS intend
to issue a separate notice of proposed
rulemaking in the near future relating to
section 987 that includes proposed rules
relating to the recognition of pretransition
section 987 gain or loss.
II. Section 960(d)(4)
Section 901 generally provides that
a taxpayer choosing to credit foreign
income taxes is allowed a credit for cer-
tain foreign income taxes paid or accrued
by the taxpayer plus, in the case of a
domestic corporation, the taxes deemed
to have been paid by the domestic corpo-
ration under section 960. Section 960(d)
provides that, if any amount is includible
in the gross income of a domestic corpo-
ration under section 951A (section 951A
inclusion), the domestic corporation is
deemed to have paid foreign income taxes
with respect to the section 951A inclusion.
Prior to the OBBBA, section 960(d)(1)
provided that a domestic corporation that
is a U.S. shareholder is deemed to have
paid foreign income taxes in an amount
equal to 80 percent of the product of the
U.S. shareholder’s inclusion percentage
and the aggregate of the tested foreign
income taxes paid or accrued by its CFCs.
Thus, section 960(d)(1) (prior to the
OBBBA) effectively reduced the amount
of foreign income taxes deemed paid with
respect to a section 951A inclusion by 20
percent.
Section 70312(a)(1) of the OBBBA
increased the percentage in section
960(d)(1) from 80 percent to 90 percent,
thereby decreasing the reduction in for-
eign income taxes deemed paid from 20
percent to 10 percent. Section 70312(b)
of the OBBBA added section 960(d)(4)
to the Code, which correspondingly disal-
lows a foreign tax credit for 10 percent of
the foreign income taxes paid or accrued
(or deemed paid under section 960(b)
(1)) with respect to a distribution of pre-
viously taxed earnings and profits (PTEP)
resulting from a section 951A inclusion.
Section 70312(c)(2) of the OBBBA pro-
vides that section 960(d)(4) applies to
foreign income 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 rea-
son of a section 951A inclusion after June
28, 2025.
1
Section 898(c)(3)(B) (redesignated by section 70352(a) of the OBBBA as section 898(c)(2)(B)) defines the testing days as the first day of the corporation’s taxable year, or the days during
a representative period that the Secretary may prescribe. No final regulations have been issued that prescribe such a representative period.

September 8, 2026 300 Bulletin No. 2026–37
On December 4, 2025, the Treasury
Department and the IRS issued Notice
2025-77, 2025-52 I.R.B. 872, announcing
the intent to issue proposed regulations
regarding section 960(d)(4), including the
application of the effective date of sec-
tion 960(d)(4). Notice 2025-77 provides
guidance for determining the amount of
foreign income taxes paid or accrued (or
deemed paid) with respect to PTEP dis-
tributions resulting from a section 951A
inclusion that are subject to the foreign tax
credit disallowance under section 960(d)
(4). The proposed regulations contain the
rules described in Notice 2025-77.
Explanation of Provisions
I. Proposed Regulations Implementing
the Section 898(c) Transition Rule
A. Relevant foreign tax credit framework
In general, under section 951(a)(1),
2
a
U.S. shareholder of a CFC must include
in gross income its pro rata share of the
CFC’s subpart F income for the year.
Similarly, a U.S. shareholder’s section
951A inclusion is based, in part, on its
pro rata share of its CFC’s tested income
or tested loss for the taxable year. See §
1.951A-1(c). In computing a CFC’s items
of subpart F income and its tested income
or tested loss, deductions (including
taxes) properly allocable to such income
are taken into account. See, e.g., sections
954(b)(5) and 951A(b)(2)(A)(ii). A CFC’s
items of subpart F income and its tested
income or tested loss are computed in
the functional currency of the CFC and
translated into U.S. dollars as net amounts
using the average exchange rate for the
CFC’s taxable year. See sections 986(b)
and 989(b)(3) and § 1.951A-1(d)(1).
Generally, an income item of a CFC
that would otherwise be subpart F income
may be excluded, pursuant to an election,
under the high-tax exception from foreign
base company income (high-tax excep-
tion) if the item is subject to an effective
rate of foreign tax that is greater than 90
percent of the maximum rate of tax speci-
fied in section 11. See § 1.954-1(d). A sim-
ilar election excludes from tested income
an item that would otherwise be tested
income (high-tax exclusion) if the item is
subject to an effective rate of foreign tax
greater than 90 percent of the maximum
rate of tax specified in section 11. See §
1.951A-2(c)(7).
Section 960(a) provides that when a
domestic corporation includes in gross
income any item of income under sec-
tion 951(a)(1) with respect to a CFC,
the domestic corporation is deemed to
have paid so much of the CFC’s foreign
income taxes as are properly attributable
to the item of income. Section 960(d)(1)
provides that when a domestic corporation
has a section 951A inclusion, the domestic
corporation is deemed to have paid 90 per-
cent of the product of such domestic cor-
poration’s inclusion percentage multiplied
by the aggregate tested foreign income
taxes paid or accrued by its CFCs. Section
960(d)(3) defines tested foreign income
taxes as the foreign income taxes paid
or accrued by a CFC which are properly
attributable to the tested income of the
CFC taken into account by the domestic
corporation under section 951A. There-
fore, in order for foreign income taxes
paid or accrued by a CFC in a taxable year
to be deemed paid by a U.S. shareholder,
the related subpart F income of the CFC
must be included in gross income by the
U.S. shareholder under section 951(a)(1),
or the related tested income of the CFC
must be taken into account in the U.S.
shareholder’s section 951A inclusion.
Section 960(b)(1) provides that a U.S.
shareholder of a CFC is deemed to have
paid the CFC’s foreign income taxes that
the U.S. shareholder has not been previ-
ously deemed to pay and that are properly
attributable to a distribution from the CFC
that the U.S. shareholder excludes from its
gross income under section 959(a) (a sec-
tion 959(a) distribution).
Section 1.861-20 provides rules for
allocating and apportioning foreign
income taxes to statutory and residual
groupings for an operative Code section,
except as modified under the rules for
the operative section. See also § 1.861-
8(f). These rules apply to attribute for-
eign income taxes paid or accrued by a
CFC to items of income of the CFC in
order to determine a CFC’s net items of
subpart F income and tested income, the
effective rate of foreign tax for purposes
of the high-tax exception and the high-tax
exclusion, and the taxes attributable to the
CFC’s income groups and PTEP groups
(as defined in § 1.960-1(b)). See §§ 1.960-
1(d), 1.960-2(b)(2) and (c)(4), and 1.960-
3(d).
The foreign income taxes taken into
account by a CFC in a taxable year are
determined under the CFC’s method of
accounting. For CFCs that use an accrual
method of accounting, foreign income
taxes accrue in the taxable year in which
all the events have occurred that establish
the fact of the liability and the amount of
the liability can be determined with rea-
sonable accuracy. See §§ 1.446-1(c)(1)
(ii)(A) and 1.461-4(g)(6)(iii)(B). A for-
eign income tax determined on the basis
of items of income, gain, deduction, and
loss that arise in a foreign taxable year (a
foreign net income tax) becomes fixed and
determinable at the close of the foreign
taxable year. See § 1.905-1(d)(1)(i). For
CFCs that use the cash method of account-
ing, foreign income taxes are taken into
account when paid. See §§ 1.905-1(c)
(1) and 1.446-1(c)(1)(i). Foreign income
taxes are generally considered paid in the
taxable year in which the taxes are remit-
ted to the foreign country.
Section 1.901-2(f) provides rules for
determining the person considered to have
paid or accrued a foreign income tax for
foreign tax credit purposes (the section
901 taxpayer). For instance, a partnership
is considered the section 901 taxpayer of
a foreign income tax imposed at the entity
level on the income of the partnership. See
§ 1.901-2(f)(4)(i). Additionally, the per-
son who is treated as owning the assets
of a disregarded entity (as described in §
301.7701-2(c)(2)(i)) for Federal income
tax purposes is considered the section
901 taxpayer of any foreign income tax
imposed at the entity level on the income
of the disregarded entity. See § 1.901-2(f)
(4)(ii). If a partnership, disregarded entity,
or corporation undergoes one or more cov-
2
The statutory citations in part I of this Explanation of Provisions section are to the Code as in effect following the amendments made by the OBBBA. While some of these amendments may
not be applicable to a specified foreign corporation’s first required year (depending on when that first required year begins), the amendments generally do not affect the proposed regulations
implementing the section 898(c) transition rule.

Bulletin No. 2026–37 301 September 8, 2026
ered events during its foreign taxable year
that do not close the foreign taxable year,
a foreign income tax, other than a with-
holding tax described in section 901(k)(1)
(B), imposed with respect to that continu-
ing foreign taxable year is allocated to and
among the predecessor entities or prior
owners under § 1.901-2(f)(5). Section
1.901-2(f)(5)(ii) defines a covered event
as a partnership termination under sec-
tion 708(b)(1), a transfer of a disregarded
entity, or a change in entity classification
of a disregarded entity or a corporation.
For purposes of determining the
amount of the foreign tax credit, foreign
income taxes are translated at the rate pro-
vided under section 986(a). If the section
901 taxpayer of the foreign income tax
takes foreign income taxes into account
when accrued, taxes are generally trans-
lated using the average exchange rate for
the taxable year to which the taxes relate.
See section 986(a)(1)(A). Section 986(a)
provides certain exceptions to the general
rule, including for foreign income taxes
that are not paid within two years of the
close of the U.S. taxable year to which
they relate. See section 986(a)(1)(B). Sec-
tion 905(c) provides that, among other
things, a change in the amount of foreign
income tax accrued and claimed as a credit
requires a redetermination of the U.S. tax
liability for the year or years affected.
B. Foreign taxes subject to allocation
1. Specified Foreign Income Taxes
Section 3.03 of Notice 2025-72 pro-
vides that only specified foreign income
taxes would be allocated between the
first required year and the succeeding tax-
able year of a specified foreign corpora-
tion. Section 3.02(4) of Notice 2025-72
defines a “specified foreign income tax”
as a foreign net income tax accrued by an
affected corporation in its first required
year for which the affected corporation
is the section 901 taxpayer. Section 3.02
of Notice 2025-72 defines an affected
corporation as a specified foreign corpo-
ration (as defined in section 898(b)) that
takes into account foreign income taxes
under an accrual method of accounting
and that, pursuant to section 70352(c) of
the OBBBA, is required to change its first
taxable year beginning after November
30, 2025. No comments were received on
these definitions, and, except as discussed
in this part I.B of this Explanation of Pro-
visions section, the proposed regulations
would apply to specified foreign income
taxes and would define a “specified for-
eign income tax” and an “affected corpo-
ration” consistently with Notice 2025-72.
See proposed § 1.898(c)-1(b) (clarifying
the definition of an affected corporation
to require that the specified foreign cor-
poration’s first required year end pursuant
to section 70352(c)(1) of the OBBBA on
the date prescribed by that section) and §
1.898(c)-1(c) (expanding the definition of
a specified foreign income tax to include
specified distributive shares of creditable
foreign tax expenditures if an election is
made). Thus, except as discussed in this
part I.B of this Explanation of Provisions
section, any other foreign tax that is taken
into account by a specified foreign corpo-
ration in its first required year or its suc-
ceeding taxable year would continue to be
taken into account in that respective tax-
able year.
The proposed regulations would
allocate specified foreign income taxes
between an affected corporation’s first
required year and its succeeding taxable
year to carry out the purposes of section
70352 of the OBBBA. Specified foreign
income taxes would generally include for-
eign net income taxes, which accrue on
the last day of a foreign taxable year. As a
result of section 70352(c) of the OBBBA,
a specified foreign corporation’s foreign
taxable year may close with or within
the specified foreign corporation’s first
required year. In that case, the foreign net
income tax, likely imposed with respect to
a full taxable year of foreign law income,
accrues in the first required year while
only one month of income accrues in that
year for Federal income tax purposes.
Depending on the amount of the foreign
net income tax imposed, this could result
in the specified foreign corporation having
a loss with respect to a particular income
group for the first required year, resulting
in foreign income taxes not being deemed
paid by the affected corporation’s U.S.
shareholders under section 960(a) or (d).
See part I.A of this Explanation of Provi-
sions section.
As under Notice 2025-72, the defini-
tion of specified foreign income tax would
exclude taxes that are likely to accrue
close in time to the related income since
any allocation of such tax between the first
required year and the succeeding taxable
year would create a needless separation
of income and tax. For instance, a speci-
fied foreign income tax would not include
a foreign withholding tax because such a
tax accrues close in time to the income to
which it relates. Similarly, a specified for-
eign corporation that uses the cash method
of accounting would not be an affected
corporation, and foreign net income taxes
taken into account by such a specified for-
eign corporation would not be specified
foreign income taxes. A cash-basis spec-
ified foreign corporation will generally
be required to make monthly or quarterly
estimated payments of its foreign income
tax liability and, therefore, is unlikely to
make a single payment of foreign income
tax in its first required year that would
result in a loss with respect to a particular
income group.
2. Specified Distributive Shares of
Creditable Foreign Tax Expenditures
Section 3.03(1) of Notice 2025-72
provides that an affected corporation’s
distributive share of foreign income taxes
paid or accrued by a partnership (credit-
able foreign tax expenditures or CFTEs,
as defined in § 1.704-1(b)(4)(viii)) are not
specified foreign income taxes, and there-
fore, would not be allocated between the
affected corporation’s first required year
and its succeeding taxable year. Section 6
of Notice 2025-72 requested comments on
whether an affected corporation’s distrib-
utive share of CFTEs should be allocated
between its first required year and suc-
ceeding taxable year when an affected cor-
poration owns an interest in a partnership
that is required to change its taxable year
because the affected corporation changes
its taxable year pursuant to section 70352
of the OBBBA. See section 706(b) and
§ 1.706-1(b). Several comments recom-
mended that distributive shares of CFTEs
of such partnerships be allocated between
the affected corporation’s first required
year and succeeding taxable year.
As under Notice 2025-72, the proposed
regulations would generally define a spec-
ified foreign income tax to exclude an
affected corporation’s distributive share

September 8, 2026 302 Bulletin No. 2026–37
of CFTEs. This exclusion prevents the
separation of income and foreign income
tax because the affected corporation will
take into account its distributive share
of other partnership items based on the
partnership’s full taxable year at the same
time it takes into account its distributive
share of CFTEs. See section 706(a) and
§ 1.706-1(a). However, when a partner-
ship is required to change its taxable year
because an affected corporation owning
an interest in the partnership changes its
taxable year pursuant to section 70352 of
the OBBBA, the partnership would have
a one-month taxable year with outcomes
similar to those described in part I.B.1 of
this Explanation of Provisions section.
Accordingly, the proposed regulations
would provide an election to treat all of an
affected corporation’s distributive shares
of certain CFTEs of affected partnerships
(specified distributive shares of CFTEs)
as specified foreign income taxes. See
proposed § 1.898(c)-1(c)(2); see also part
I.E.2 of this Explanation of Provisions
section regarding the procedural require-
ments for making the election.
3. Relevant Succeeding Year Taxes
Section 3.03(1) of Notice 2025-72 pro-
vides that foreign income taxes accrued
by an affected corporation in its succeed-
ing taxable year are not specified foreign
income taxes and, therefore, would not
be allocated between the affected corpo-
ration’s first required year and its suc-
ceeding taxable year. Notice 2025-72
explains that while a foreign net income
tax accrued in the succeeding taxable year
may relate to income accrued in the first
required year, the Treasury Department
and the IRS expect that the administrative
and compliance burdens of allocating a
portion of the succeeding year tax to the
first required year would exceed the bene-
fits of allocation.
A comment noted that the repeal of sec-
tion 898(c)(2) could result in a loss of for-
eign tax credits if the income accrued by
an affected corporation in its first required
year is different in type than the income
accrued by the affected corporation in
its succeeding taxable year. For instance,
an affected corporation may have a first
required year that ends December 31,
2025, and be subject to a foreign income
tax with respect to a foreign taxable year
that ends on March 31, 2026. The for-
eign income tax that accrues on March
31, 2026, could be imposed in part on the
income that accrued for Federal income
tax purposes in the affected corporation’s
first required year. If the affected corpora-
tion does not earn the same type of income
in the succeeding taxable year, then a
portion of the foreign income tax would
not be deemed paid because the affected
corporation will not have income in the
relevant income group in the succeeding
taxable year. The comment also noted
that, in some cases, a taxpayer may have
the necessary information to allocate the
succeeding year taxes before the extended
due date of the majority U.S. sharehold-
er’s Federal income tax return for the tax-
able year with which the affected corpora-
tion’s first required year ends.
The Treasury Department and the IRS
continue to be of the view that, in general,
the administrative and compliance burdens
of allocating a portion of the succeeding
year tax to the first required year would
exceed the benefits of allocation. Further,
maintaining the full amount of foreign
income taxes in the succeeding taxable
year is appropriate because a full year’s
worth of foreign income taxes accrue
with a full year of income. Accordingly,
the proposed regulations would generally
provide that foreign income taxes accrued
by an affected corporation in its succeed-
ing taxable year are not specified foreign
income taxes.
However, the Treasury Department
and the IRS agree with the comment that,
in some cases, when an affected corpora-
tion’s foreign taxable year (for example,
a March 31 year end) does not align with
its succeeding taxable year (for example,
a December 31 year end), an allocation of
an affected corporation’s foreign income
taxes accrued in the succeeding taxable
year between its first required year and its
succeeding taxable year is appropriate to
address the concerns described in this part
I.B.3 of this Explanation of Provisions
section. Accordingly, to address these
circumstances, the proposed regulations
would provide an irrevocable election to
allocate the affected corporation’s rele-
vant succeeding year taxes between the
affected corporation’s first required year
and its succeeding taxable year. See pro-
posed § 1.898(c)-1(f); see also part I.E.2
of this Explanation of Provisions section
regarding the procedural requirements for
making the election.
C. Ordering rules
Section 3.04 of Notice 2025-72 pro-
vides that a specified foreign income tax
would be allocated between the affected
corporation’s first required year and its
succeeding taxable year and then taken
into account in each respective taxable
year under certain ordering rules. These
ordering rules would coordinate statutory
and regulatory provisions related to the
computation of an affected corporation’s
income items under sections 951(a) and
951A and the computation of the for-
eign taxes deemed paid under section
960(a) and (d) with the allocation of for-
eign income taxes between the affected
corporation’s first required year and
succeeding taxable year. No comments
were received on these ordering rules,
and the rules, therefore, are included in
the proposed regulations. See proposed §
1.898(c)-1(d).
D. Allocation method
1. Allocation Percentage
Section 3.05 of Notice 2025-72 pro-
vides that a specified foreign income tax
would be allocated between an affected
corporation’s first required year and its
succeeding taxable year by determining
an allocation percentage for each spec-
ified foreign income tax. The allocation
percentage would be equal to the por-
tion of an affected corporation’s taxable
income, as determined under foreign law,
that is attributable under the principles of
§ 1.1502-76(b) to the first required year,
divided by the total taxable income, as
determined under foreign law, for the for-
eign taxable year with respect to which the
specified foreign income tax is imposed.
A comment requested that the proposed
regulations allow taxpayers to use any
reasonable allocation method that aligns
foreign taxes with the income to which
those taxes relate, including an alloca-
tion of an affected corporation’s foreign
taxes to its taxable year preceding its first
required year.

Bulletin No. 2026–37 303 September 8, 2026
For the reasons described below, the
proposed regulations would require the
use of a single prescriptive allocation
method to implement the transition rule.
See proposed § 1.898(c)-1(e). The alloca-
tion method would reduce the likelihood
that foreign income taxes of a specified
foreign corporation in the first required
year would not be deemed paid as a conse-
quence of the repeal of section 898(c)(2).
Additionally, the allocation method would
leverage an existing methodology that is
familiar to taxpayers for allocating for-
eign income taxes, see, e.g., §§ 1.245A-
5(e)(3)(i), 1.336-2(g)(3)(ii), 1.338-9(d),
and 1.901-2(f)(5), and would use taxable
income as determined under foreign law,
which is an amount that taxpayers are
already required to consider in applying §
1.861-20. Further, the allocation method
would better accommodate affected corpo-
rations that may earn uneven amounts of
income in the first required year, as com-
pared to an allocation method that is based
on a set ratio such as months or days. The
allocation method would provide flexibil-
ity to taxpayers because the principles of
§ 1.1502-76(b) allow for either a closing
of the books method or a ratable alloca-
tion method for purposes of determining
the portion of taxable income attribut-
able to the first required year. Finally, the
method suggested by the comment would
not comply with the requirement in sec-
tion 70352(c) of the OBBBA to allocate
foreign taxes between a specified foreign
corporation’s first taxable year and its suc-
ceeding taxable year, and not to an earlier
taxable year.
2. Income Group Specific Allocation
Percentage
Section 3.05 of Notice 2025-72 pro-
vides that a single allocation percentage
based on an affected corporation’s total
taxable income, as determined under for-
eign law, for the foreign taxable year with
respect to which the specified foreign
income tax is imposed would apply to
the amount of a specified foreign income
tax assigned to each income group of the
affected corporation. A comment stated
that taxpayers generally have the infor-
mation needed to compute a different allo-
cation percentage for each income group,
which may better match the tax allocated
to the first required year to the income
accrued in that year. By way of exam-
ple, the comment described a situation in
which an affected corporation (AC) with
its first required year ending on December
31, 2025, and a foreign taxable year that
ends on December 31, 2026, recognizes
gain from the sale of stock on December
15, 2025. The gain is foreign personal
holding company income described in
section 954(c)(1)(B) within the passive
category. Under § 1.861-20, as applied
in the first required year, the Country X
income tax attributable to the stock gain is
allocated and apportioned to AC’s relevant
subpart F income group within the passive
category. In its succeeding taxable year,
however, AC does not recognize subpart
F income in the relevant subpart F income
group within the passive category. Any
portion of Country X income tax assigned
to that income group allocated to the suc-
ceeding taxable year under a single alloca-
tion percentage would not be deemed paid
under section 960(a).
The Treasury Department and the IRS
are of the view that, in most cases, deter-
mining a different allocation percentage for
each income group would require taxpay-
ers to undertake potentially burdensome
analyses without providing benefits, and
therefore, the proposed regulations would
provide, as a general rule, a single alloca-
tion percentage that is used for all income
groups. However, the Treasury Depart-
ment and the IRS agree with the comment
that in some cases a different allocation
percentage for each income group may
be appropriate. Accordingly, the proposed
regulations would provide an election to
apply a specific allocation percentage to
the amount of a specified foreign income
tax assigned to each income group of
an affected corporation. See proposed §
1.898(c)-1(e)(3); see also part I.E.2 of
this Explanation of Provisions section
regarding the procedural requirements
of the election. The proposed regulations
would also provide that the income group
specific allocation method is required for
allocating a relevant succeeding year tax
between an affected corporation’s first
required year and its succeeding taxable
year. See proposed § 1.898(c)-1(f)(3). An
income group specific allocation percent-
age is computed by applying the principles
of § 1.1502-76(b), using the closing of the
books method, separately for each income
group to which foreign law income is
assigned under § 1.861-20.
3. Election to Not Allocate
Section 3.04 of Notice 2025-72 pro-
vides that a specified foreign income tax
would be allocated between an affected
corporation’s first required year and its
succeeding taxable year and then would be
taken into account in each respective tax-
able year. A comment requested an elec-
tion to forgo the allocation rule set forth
in the notice and instead apply current
accrual rules to specified foreign income
taxes in order to allow an affected corpo-
ration’s controlling domestic shareholders
to determine whether these existing rules
better serve their interests.
The proposed regulations adopt this
comment because the Treasury Depart-
ment and the IRS believe it would reduce
compliance burdens. The proposed regu-
lations would provide an election to not
allocate an affected corporation’s speci-
fied foreign income taxes. If the election
is made, the specified foreign income
taxes would be taken into account in the
affected corporation’s first required year.
See proposed § 1.898(c)-1(e)(4); see also
part I.E of this Explanation of Provisions
section regarding other procedural require-
ments for making the election. This elec-
tion would apply to all specified foreign
income taxes of an affected corporation. If
the election is made, the affected corpora-
tion’s relevant succeeding year taxes may
not be allocated between its first required
year and its succeeding taxable year.
E. Other issues
1. Sections 905(c) and 986(a)
Section 3.06 of Notice 2025-72 pro-
vides that, for purposes of sections 905(c)
and 986(a), a specified foreign income
tax would accrue in the first required
year, regardless of whether a portion of
the specified foreign income tax is allo-
cated to the succeeding taxable year. No
comments were received on the appli-
cation of these provisions to specified
foreign income taxes, and the proposed
regulations would provide that, for pur-
poses of sections 905(c) and 986(a), the

September 8, 2026 304 Bulletin No. 2026–37
first required year is the year to which a
specified foreign income tax relates. The
proposed regulations would provide sim-
ilar treatment to relevant succeeding year
taxes for purposes of sections 905(c) and
986(a). See proposed § 1.898(c)-1(g).
2. Election Procedures
In general, the proposed regulations
would provide that the elections described
in parts I.B.2 (specified distributive shares
of CFTEs), I.B.3 (relevant succeeding
year taxes), I.D.2 (income group spe-
cific allocation percentage), and I.D.3
(election to not allocate) of this Expla-
nation of Provisions section would be
made by an affected corporation’s con-
trolling domestic shareholders for its first
required year by attaching a statement to
their timely filed (including extensions)
Federal income tax returns for the years
in which or with which the first required
year and the succeeding taxable year end.
See proposed § 1.898(c)-1(h). The elec-
tion to allocate relevant succeeding year
taxes would be irrevocable. See proposed
§ 1.898(c)-1(h)(1).
The proposed regulations would pro-
vide that the elections to treat specified
distributive shares as specified foreign
income taxes and to use the income
group specific allocation percentage may
be made on an amended Federal income
tax return, and except for the election for
allocating relevant succeeding year taxes,
all of the elections may be revoked on an
amended Federal income tax return. An
amended Federal income tax return con-
taining an election or revocation must be
duly filed within 24 months of the due
date (without regard to extensions) of
the original Federal income tax return for
the year in which or with which the first
required year ends. An amended Federal
income tax return for the taxable year in
which or with which the affected corpo-
ration’s succeeding taxable year ends
must also be filed if needed to reflect a
change in election. Permitting a change
in election outside of this period could
result in changes in amounts of tax due for
taxable years that are no longer open for
assessment under section 6501 and would
increase the administrative burden of the
elections. The Treasury Department and
the IRS request comments on these elec-
tion procedures, including the application
of this 24-month limitation.
3. Covered Events
Section 3.05(3) of Notice 2025-72 pro-
vides rules that would coordinate the allo-
cation of a specified foreign income tax
with the covered event rules in § 1.901-
2(f)(5) when an affected corporation is the
section 901 taxpayer of a portion of the tax
due to the application of those rules. See
part I.A of this Explanation of Provisions
section for a description of the covered
event rules. A comment requested addi-
tional guidance coordinating the covered
event rules with the allocation of specified
foreign income taxes. Specifically, the
comment recommended that the portion
of a specified foreign income tax allocated
to the succeeding taxable year be further
allocated among persons based on the
principles of the covered event rules. The
comment suggested that the principles of
the covered event rules would apply by
treating the income earned in the succeed-
ing taxable year as the income to which
the specified foreign income tax relates.
The comment described cases with respect
to which its recommendation would apply.
The Treasury Department and the IRS
are of the view that some of the cases
discussed in the comment do not involve
specified foreign corporations subject to
the transition rule and therefore would
exceed the authority granted under sec-
tion 70352(c) of the OBBBA. In other
cases, the mismatch of income and foreign
income tax was not caused by the repeal
of section 898(c)(2) and would likewise
be beyond the scope of the transition rule.
Finally, the Treasury Department and
the IRS do not consider it appropriate to
allocate a section 901 taxpayer’s foreign
income tax to another person. Thus, the
proposed regulations do not adopt this
comment and would clarify that a speci-
fied foreign corporation is an affected cor-
poration if its first taxable year beginning
after November 30, 2025, ends pursuant
to section 70352(c) of the OBBBA on
the date prescribed by that section, which
is the last day of the first required year
(within the meaning of section 898(c)(1))
ending after November 30, 2025. See pro-
posed § 1.898(c)-1(b) (defining affected
corporation).
4. Conforming Amendments
The proposed regulations would
include conforming amendments to Trea-
sury regulations that refer to the availabil-
ity of the one-month deferral election or
provide special rules when the one-month
deferral election is in effect. See proposed
§§ 1.163(j)-7(k)(29)(i)(B), 1.441-1(b)(2)
(ii)(C), 1.441-2(b)(1)(i), and 1.987-11(c)
(3)(ii).
II. Proposed Regulations Implementing
the Section 960(d)(4) Foreign Tax Credit
Disallowance
Section 3.01(2) of Notice 2025-77 pro-
vides that section 960(d)(4) would apply
to foreign income taxes paid or accrued (or
deemed paid under section 960(b)(1)) with
respect to a section 959(a) distribution to
the extent the PTEP results from a section
951A inclusion of a U.S. shareholder in a
taxable year ending after June 28, 2025.
Section 3.01(3) of Notice 2025-77 pro-
vides that the “section 951A PTEP” group
set forth in § 1.960-3(c)(2)(viii) would be
divided into two groups: (1) PTEP result-
ing from section 951A inclusions in tax-
able years of a U.S. shareholder ending
on or before June 28, 2025 (pre-06/29/25
section 951A PTEP), and (2) PTEP result-
ing from section 951A inclusions in tax-
able years of a U.S. shareholder ending
after June 28, 2025 (post-06/28/25 section
951A PTEP). Section 3.01(4) of Notice
2025-77 provides that no credit under
section 901 would be allowed for 10 per-
cent of any foreign income taxes paid or
accrued (or deemed paid under section
960(b)(1)) with respect to a section 959(a)
distribution of post-06/28/25 section 951A
PTEP, and those taxes would be allocated
and apportioned to post-06/28/25 section
951A PTEP under § 1.861-20. Section
3.01(5) of Notice 2025-77 provides that
similar rules would apply to the “reclas-
sified section 951A PTEP” group set forth
in § 1.960-3(c)(2)(iv).
No comments were received on Notice
2025-77, and accordingly, the proposed
regulations would include these rules. See
proposed § 1.960-3(b)(6), (c)(2)(iv) and
(v), and (c)(2)(ix) and (x). The Treasury
Department and the IRS intend to modify
the proposed regulations related to PTEP
that were published in the Federal Regis-

Bulletin No. 2026–37 305 September 8, 2026
ter on December 2, 2024, (89 FR 95362)
to be consistent with these proposed reg-
ulations.
III. Applicability Dates and Reliance
The Treasury Department and the IRS
expect to finalize the proposed regulations
by January 4, 2027. Under section 7805(b)
(2), proposed § 1.898(c)-1 is proposed to
apply to taxable years of specified foreign
corporations beginning after November
30, 2025. See proposed § 1.898(c)-1(j). A
taxpayer may rely on the proposed regu-
lations regarding section 898(c) for for-
eign taxes paid or accrued before the date
the proposed regulations are published
as final regulations in the Federal Reg-
ister, provided the taxpayer applies the
proposed regulations regarding section
898(c) in their entirety and in a consistent
manner to the first required year and suc-
ceeding taxable year of a specified foreign
corporation.
Under section 7805(b)(2), proposed
§ 1.960-3(b)(6) is proposed to apply to
foreign income taxes paid or accrued (or
deemed paid under section 960(b)(1)) with
respect to an amount excluded from gross
income under section 959(a) by reason
of a section 951A inclusion, to the extent
the inclusion occurs in a taxable year of
a U.S. shareholder ending after June 28,
2025. The corresponding updates to PTEP
groups made by proposed § 1.960-3(c)(2)
are proposed to apply to taxable years of
foreign corporations ending with or within
taxable years of U.S. shareholders ending
after June 28, 2025. See proposed § 1.960-
7(c). A taxpayer may rely on the proposed
regulations regarding section 960(d)(4)
for taxable years of U.S. shareholders
beginning before the date the proposed
regulations are published as final regula-
tions in the Federal Register, provided
the taxpayer follows the proposed regula-
tions regarding section 960(d)(4) in their
entirety and in a consistent manner for all
applicable taxable years.
Special Analyses
I. Regulatory Planning and Review —
Economic Analysis
The Office of Management and Bud-
get’s Office of Information and Regula-
tory Analysis has determined that this
proposed regulation is not significant
and is not subject to review under section
6(b) of Executive Order 12866. There-
fore, a regulatory impact assessment is
not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995,
44 U.S.C. 3501-3520 (PRA), generally
requires that a Federal agency obtain the
approval of the OMB before collecting
information from the public, whether such
collection of information is mandatory,
voluntary, or required to obtain or retain
a benefit. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the OMB.
The collections of information in the
proposed regulations include reporting,
third-party disclosures, and recordkeeping
requirements that are necessary for certain
individuals and corporations to determine
their foreign tax credit under section 901
and related provisions. These collections
will be used by IRS for tax compliance
purposes.
With respect to section 898(c), the
collections in proposed § 1.898(c)-1(h)
would provide procedures for making the
elections described in parts I.B.2 (speci-
fied distributive shares of CFTEs), I.B.3
(relevant succeeding year taxes), I.D.2
(income group specific allocation percent-
age), and I.D.3 (election to not allocate)
of this Explanation of Provisions section.
The respondents would be persons who
are controlling domestic shareholders
of an affected corporation. Pursuant to
proposed § 1.898(c)-1(h), respondents
would be required to: (1) attach an elec-
tion statement to an original or amended
Federal income tax return (a reporting
requirement), and (2) provide any notices
required under § 1.964-1(c)(3)(iii) to the
persons known to be domestic sharehold-
ers of the affected corporation in its first
required year and succeeding taxable year
(third-party disclosure and recordkeeping
requirements).
For purposes of the PRA, the report-
ing burden associated with proposed
§ 1.898(c)-1(h) collection requirements
will be reflected in the instructions for
Form 5471, “Information Return of U.S.
Persons With Respect to Certain For-
eign Corporations.” This revision will be
included within the OMB Control Num-
ber 1545-0123 for business filers and
will be approved by OMB in accordance
with the PRA procedures under 5 CFR
1320.10.
III. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) (RFA), it is
hereby certified that the proposed regula-
tions will not have a significant economic
impact on a substantial number of small
entities. In general, the proposed regula-
tions would affect U.S. shareholders of
foreign corporations, and with respect to
proposed § 1.898(c)-1, would affect only
U.S. shareholders of foreign corporations
that have made the one-month deferral
election. The Treasury Department and
the IRS do not have adequate data read-
ily available to assess the number of small
entities potentially affected by the pro-
posed regulations.
The Treasury Department and the IRS
have determined that the proposed reg-
ulations will not have a significant eco-
nomic impact on domestic small business
entities. Proposed § 1.898(c)-1 would
allow taxpayers to not allocate taxes (see
part I.D.3 of this Explanation of Provi-
sions section), and therefore, generally
would impose neither new requirements
nor additional costs on small entities.
The only additional costs imposed on a
small business entity making an election
under proposed § 1.898(c)-1(e)(4) are
those associated with the collection of
information requirements imposed under
proposed § 1.898(c)-1(h). The Treasury
Department and the IRS have estimated
that the average burden of this collection
of information is 1.5 hours per response.
The IRS’s Research, Applied Analytics,
and Statistics division estimates that the
appropriate wage rate for taxpayers with
less than $25,000,000 in total positive
income is between $113.16 and $58.60.
Thus, the annual burden from each col-
lection of information requirement for
small business entities is at most $169.74,
which is a de minimis amount. The pro-
posed regulations regarding section
960(d)(4) would not impose new require-

September 8, 2026 306 Bulletin No. 2026–37
ments on small entities but rather would
implement the statute by specifying the
foreign income taxes with respect to
which the foreign tax credit disallowance
applies. Accordingly, the proposed regu-
lations are not expected to have a signif-
icant economic impact on a substantial
number of small entities, and a regulatory
flexibility analysis is not required. Not-
withstanding this certification, the Trea-
sury Department and the IRS welcome
comments on the impact of the proposed
regulations on small entities, including
the number of small entities that may be
impacted and whether that impact would
be economically significant.
IV. Submission to the Small Business
Administration
Pursuant to section 7805(f), the pro-
posed regulations have been submitted
to the Chief Counsel for Advocacy of
the Small Business Administration for
comment on their impact on small busi-
nesses.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a State, local, or Tribal gov-
ernment, in the aggregate, or by the pri-
vate sector, of $100 million in 1995 dol-
lars, updated annually for inflation. The
proposed regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Execu-
tive order. The proposed regulations do
not have federalism implications, do not
impose substantial direct compliance
costs on State and local governments, and
do not preempt State law within the mean-
ing of the Executive order.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to comments that are sub-
mitted timely to the IRS as prescribed in
the preamble under the ADDRESSES
heading. In addition to the comments spe-
cifically requested in the Explanation of
Provisions section, the Treasury Depart-
ment and the IRS request comments on
all aspects of the proposed regulations.
Any comments submitted will be made
available at https://www.regulations.gov
or upon request.
A public hearing will be scheduled if
requested in writing by any person who
submits electronic or written comments.
Requests for a public hearing are encour-
aged to be made electronically. If a public
hearing is scheduled, notice of the date
and time for the public hearing will be
published in the Federal Register.
Statement of Availability of IRS
Documents
Any IRS Revenue Procedures, Reve-
nue Rulings, Notices, or other guidance
cited in this document are published in
the Internal Revenue Bulletin (or Cumu-
lative Bulletin) and are available from the
Superintendent of Documents, U.S. Gov-
ernment Publishing Office, Washington,
DC 20402, or by visiting the IRS website
at https://www.irs.gov.
Drafting Information
The principal authors of these regula-
tions are Le Chen and Hayley Rassuchine,
Office of Associate Chief Counsel (Inter-
national). However, other personnel from
the IRS and the Treasury Department par-
ticipated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry
for § 1.898(c)-1 in numerical order to read
as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.898(c)-1 also issued under
Sec. 70352(c), Pub. L. 119-21, 139 Stat.
72.
* * * * *
Par. 2. Section 1.163(j)-7 is amended
by revising paragraph (k)(29)(i)(B) to
read as follows:
§ 1.163(j)-7 Application of the
section 163(j) limitation to foreign
corporations and United States
shareholders.
* * * * *
(k) * * *
(29) * * *
(i) * * *
(B) If the specified group parent is an
applicable CFC, the period ending on the
last day of the specified group parent’s
required year described in section 898(c)
(1) and beginning on the first day after the
last day of the specified group’s immedi-
ately preceding specified period.
* * * * *
Par. 3. Section 1.441-1 is amended by
revising paragraph (b)(2)(ii)(C) to read as
follows:
§ 1.441-1 Period for computation of
taxable income.
* * * * *
(b) * * *
(2) * * *
(ii) * * *
(C) Specified foreign corporations. A
specified foreign corporation (as defined
in section 898(b)) may use a taxable year
other than its required taxable year if it
elects a 52–53–week taxable year that
ends with reference to its required taxable

Bulletin No. 2026–37 307 September 8, 2026
year as provided in paragraph (b)(2)(ii)
(A) of this section.
* * * * *
Par. 4. Section 1.441-2 is amended by
revising the fourth sentence of paragraph
(b)(1)(i) to read as follows:
§ 1.441-2 Election of taxable year
consisting of 52–53 weeks.
* * * * *
(b) * * *
(1) * * *
(i) * * * Similarly, a newly-formed
specified foreign corporation (as defined
in section 898(b)) may adopt a 52–53–
week taxable year if such year ends with
reference to the taxpayer’s required tax-
able year. * * *
* * * * *
Par. 5. Add § 1.898(c)-1 under the
undesignated center heading “Miscella-
neous Provisions” to read as follows:
§ 1.898(c)-1 Allocation of foreign
income taxes of specified foreign
corporations affected by the repeal of
section 898(c)(2).
(a) Overview. This section provides
rules for allocating certain foreign taxes
paid or accrued by a specified foreign
corporation that is required to change
its first taxable year beginning after
November 30, 2025, pursuant to section
70352(c)(1)(C) of Public Law 119-21,
139 Stat. 72 (July 4, 2025), commonly
known as the One, Big, Beautiful Bill
Act (OBBBA). Paragraph (b) of this
section provides definitions for pur-
poses of this section. Paragraph (c) of
this section generally identifies which
foreign taxes of an affected corporation
are allocated between the affected cor-
poration’s first required year and its suc-
ceeding taxable year. Paragraph (d) of
this section provides ordering rules for
allocating a specified foreign income tax
under this section. Paragraph (e) of this
section provides allocation methods for
purposes of determining the amount of a
specified foreign income tax allocated to
the first required year and the succeed-
ing taxable year and an election to not
allocate specified foreign income taxes.
Paragraph (f) of this section provides an
election to allocate relevant succeeding
year taxes between an affected corpora-
tion’s first required year and its succeed-
ing taxable year. Paragraph (g) of this
section provides rules for the treatment
of specified foreign income taxes and
relevant succeeding year taxes under
sections 905(c) and 986(a). Paragraph
(h) of this section provides procedures
for making the elections provided under
paragraphs (c)(2), (e)(3) and (4), and (f)
of this section. Paragraph (i) of this sec-
tion provides examples illustrating the
application of this section. Paragraph (j)
of this section provides the applicability
date.
(b) Definitions. The following defini-
tions apply for purposes of this section.
Affected corporation means a specified
foreign corporation (as defined in section
898(b)) that takes into account foreign
income taxes under an accrual method
of accounting and whose first taxable
year beginning after November 30, 2025,
ends pursuant to section 70352(c) of the
OBBBA on the date prescribed by that
section.
Affected partnership means a part-
nership that takes into account foreign
income taxes under an accrual method of
accounting and whose first taxable year
beginning after November 30, 2025, is
required to change due to one or more of
its partners changing their first taxable
year as required by section 70352(c) of
the OBBBA.
Allocation percentage has the meaning
set forth in paragraph (e)(1) of this section.
Creditable foreign tax expenditure
(CFTE) has the meaning set forth in §
1.704-1(b)(4)(viii).
First required year means, with respect
to an affected corporation or affected part-
nership, the first taxable year beginning
after November 30, 2025.
Foreign net income tax means a for-
eign income tax (as defined in § 1.901-
2(a)) that is computed based on items of
income, gain, deduction, and loss that
arise in a foreign taxable year.
Income group specific allocation per-
centage has the meaning set forth in para-
graph (e)(3) of this section.
Relevant succeeding year tax has the
meaning set forth in paragraph (f)(1) of
this section.
Section 901 taxpayer means the tax-
payer described in § 1.901-2(f).
Specified distributive share of a CFTE
has the meaning set forth in paragraph (c)
(2) of this section.
Specified foreign income tax has the
meaning set forth in paragraph (c)(1) of
this section.
Succeeding taxable year means, with
respect to an affected corporation or
affected partnership, the taxable year
immediately following the first required
year.
United States shareholder has the
meaning provided in section 951(b).
(c) Specified foreign income taxes—(1)
In general. Except as provided in para-
graph (e)(4) of this section, specified for-
eign income taxes are allocated between
an affected corporation’s first required year
and its succeeding taxable year under this
section. A specified foreign income tax is
a foreign net income tax accrued without
regard to this section by an affected cor-
poration in its first required year for which
the affected corporation is the section 901
taxpayer.
(2) Election to allocate specified dis-
tributive shares of CFTEs. An election
may be made under this paragraph (c)
(2) pursuant to the procedures of para-
graph (h) of this section. If an election is
in effect under this paragraph (c)(2), all
specified distributive shares of CFTEs of
an affected corporation are treated as spec-
ified foreign income taxes. A specified
distributive share of a CFTE is an affected
corporation’s distributive share of a CFTE
of an affected partnership if—
(i) The affected corporation takes into
account its distributive share of the CFTE
in its first required year;
(ii) The CFTE is a foreign net income
tax; and
(iii) The affected partnership’s first
required year ends at the same time as the
affected corporation’s first required year.
(d) Ordering rules. The following
ordering rules apply for allocating an
affected corporation’s specified foreign
income taxes between the affected corpo-
ration’s first required year and its succeed-
ing taxable year.
(1) First, specified foreign income
taxes are determined.
(2) Second, each specified foreign
income tax is allocated and apportioned
to income groups pursuant to the rules
in this paragraph (d)(2). Section 1.861-

September 8, 2026 308 Bulletin No. 2026–37
20, as modified by § 1.960-1(d)(3)(ii)
(B), is applied in the first required year
to allocate and apportion the specified
foreign income tax to the income groups
described in § 1.960-1(d)(2) and the PTEP
groups treated as income groups under §
1.960-1(d)(3)(ii)(B) in that year, except
that the tentative gross tested income
items described in § 1.951A-2(c)(7)(ii)
are treated as income groups described in
§ 1.960-1(d)(2)(ii)(C). Whether any item
meets the high-tax exception to foreign
base company income in § 1.954-1(d)
(high-tax exception) or the high-tax exclu-
sion from tested income in § 1.951A-2(c)
(7) (high-tax exclusion) in either the first
required year or the succeeding taxable
year is determined under paragraph (d)(4)
of this section.
(3) Third, the allocation method pro-
vided in paragraph (e) of this section is
applied to determine the amount of spec-
ified foreign income tax in each income
group that is allocated to the first required
year and the succeeding taxable year.
(4) Fourth, for all purposes of the
Internal Revenue Code, except for sec-
tions 905(c) and 986(a), the amounts of a
specified foreign income tax (assigned to
the income groups determined under para-
graph (d)(2) of this section) that are allo-
cated to the first required year and the suc-
ceeding taxable year under paragraph (d)
(3) of this section are treated as accruing
in each respective year. Thus, for example,
the amounts of a specified foreign income
tax allocated to the first required year and
the succeeding taxable year accrue in each
respective year for purposes of computing
the affected corporation’s items of subpart
F income and tested income under sec-
tions 952 and 951A (including whether
any item meets the high-tax exception
or the high-tax exclusion), earnings and
profits, and taxes deemed paid under sec-
tion 960(a), (b), or (d). The amount of a
specified foreign income tax allocated to
the succeeding taxable year is treated as
accruing on the first day of the succeeding
taxable year and is not allocated among,
and considered paid by, two or more
persons under § 1.901-2(f) by reason of
events that occur in the succeeding tax-
able year.
(e) Allocation method—(1) In general.
Subject to the special rules provided in
paragraph (e)(2) of this section and the
elections described in paragraphs (e)(3)
and (4) of this section, the amount of a
specified foreign income tax assigned to
each income group allocated to the first
required year is the specified foreign
income tax assigned to that income group
multiplied by a fraction (the allocation
percentage), the numerator of which is
the portion of taxable income, as deter-
mined under foreign law, that is attrib-
utable to the first required year under
the principles of § 1.1502-76(b), and the
denominator of which is the total taxable
income, as determined under foreign law,
for the foreign taxable year with respect to
which the specified foreign income tax is
imposed. The amount of a specified for-
eign income tax assigned to each income
group remaining after the application of
the preceding sentence is allocated to the
succeeding taxable year.
(2) Special rules—(i) Allocation
method for PTEP groups. The amount of a
specified foreign income tax assigned to a
PTEP group under paragraph (d)(2) of this
section is allocated to the first required
year. The numerator and the denominator
of the allocation percentage are adjusted
to exclude the foreign law taxable income
on which that amount of specified foreign
income tax is imposed.
(ii) Allocation method in the case of
certain covered events. If an affected cor-
poration is the section 901 taxpayer of a
portion of a specified foreign income tax
by reason of the application of § 1.901-
2(f)(5), then the allocation percentage is
adjusted as follows—
(A) In the case of an affected corpora-
tion whose period of existence or owner-
ship (as determined under § 1.901-2(f)(5))
begins on or before the start of the first
required year, the denominator of the allo-
cation percentage is the total foreign law
taxable income attributable to the affected
corporation’s period of existence or own-
ership (as determined under § 1.901-2(f)
(5)).
(B) In the case of an affected corpo-
ration whose period of ownership (as
determined under § 1.901-2(f)(5)) begins
after the start of the first required year, the
allocation percentage is deemed to be 100
percent.
(3) Election to apply income group
specific allocation method. An election
may be made under this paragraph (e)(3)
pursuant to the procedures of paragraph
(h) of this section. If an election is in effect
under this paragraph (e)(3), the amount of
a specified foreign income tax assigned
to each income group allocated to the
affected corporation’s first required year
is the amount of specified foreign income
tax assigned to that income group multi-
plied by a fraction (the income group spe-
cific allocation percentage), the numerator
of which is the portion of foreign taxable
income assigned under § 1.861-20 to the
income group that is attributable to the
first required year under the principles of
§ 1.1502-76(b) (using the closing of the
books method described in § 1.1502-76(b)
(2)(i)), and the denominator of which is
the total foreign taxable income assigned
under § 1.861-20 to the income group.
Adjustments similar to the adjustments
provided by paragraph (e)(2) of this sec-
tion are made in the computation of the
income group specific allocation per-
centage. The amount of specified foreign
income tax assigned to each income group
remaining after the application of the pre-
ceding sentences is allocated to the suc-
ceeding taxable year.
(4) Election to not allocate specified
foreign income taxes. An election may be
made under this paragraph (e)(4) pursuant
to the procedures of paragraph (h) of this
section. If an election is in effect under
this paragraph (e)(4), the specified for-
eign income taxes of an affected corpora-
tion are taken into account in the affected
corporation’s first required year, and the
affected corporation’s relevant succeeding
year taxes cannot be allocated under para-
graph (f) of this section.
(f) Election to allocate relevant suc-
ceeding year taxes—(1) In general. An
election may be made under this para-
graph (f) pursuant to the procedures of
paragraph (h) of this section. If an elec-
tion is in effect under this paragraph (f),
the relevant succeeding year taxes of an
affected corporation are allocated between
the affected corporation’s first required
year and its succeeding taxable year under
this paragraph (f). A relevant succeed-
ing year tax is a foreign net income tax
accrued without regard to this section by
the affected corporation in its succeeding
taxable year for which the affected corpo-
ration is the section 901 taxpayer but only
if the foreign taxable year with respect to

Bulletin No. 2026–37 309 September 8, 2026
which the tax is imposed begins before
the first day of the affected corporation’s
succeeding taxable year. If the affected
corporation is the section 901 taxpayer
of a portion of a foreign net income tax
by reason of the application of § 1.901-
2(f)(5), then the foreign net income tax
is a relevant succeeding year tax only if
the affected corporation’s period of own-
ership begins before the beginning of its
succeeding taxable year. A relevant suc-
ceeding year tax includes an affected cor-
poration’s distributive share of a CFTE
from an affected partnership that the
affected corporation takes into account in
its succeeding taxable year if the require-
ments of paragraphs (c)(2)(ii) and (iii) of
this section are met and the foreign tax-
able year with respect to which the CFTE
is imposed begins before the first day of
the partnership’s succeeding taxable year.
(2) Ordering rules. The ordering rules
described in paragraph (d) of this section
apply for allocating a relevant succeed-
ing year tax between an affected corpora-
tion’s first required year and its succeed-
ing taxable year, except that in applying
paragraph (d)(2) of this section, a relevant
succeeding year tax is allocated and appor-
tioned to income groups in the succeeding
taxable year. A relevant succeeding year
tax assigned to a PTEP group under para-
graph (d)(2) of this section is allocated to
the succeeding taxable year. The amount
of a relevant succeeding year tax allo-
cated to the first required year is treated
as accruing on the last day of the affected
corporation’s first required year and is not
allocated to and among, and therefore, not
considered paid by, two or more persons
under § 1.901-2(f) by reason of events that
occur in the first required year.
(3) Allocation method. The income
group specific allocation method
described in paragraph (e)(3) of this sec-
tion applies to determine the amount of a
relevant succeeding year tax assigned to
each income group allocated between an
affected corporation’s first required year
and its succeeding taxable year.
(g) Application of sections 905(c) and
986(a). For purposes of sections 905(c)
and 986(a), a specified foreign income
tax accrues in the first required year, and
a relevant succeeding year tax accrues in
the succeeding taxable year, regardless of
the allocation of the tax under this sec-
tion. Therefore, for purposes of sections
905(c) and 986(a), the first required year
is the year to which a specified foreign
income tax relates, and the succeeding
taxable year is the year to which a rele-
vant succeeding year tax relates. Thus, for
example, any change in the liability for a
specified foreign income tax results in the
following. First, the amount of the speci-
fied foreign income tax accrued (without
regard to the application of this section) in
the first required year is adjusted to reflect
the change in liability. Second, the order-
ing rules of paragraphs (d)(1) through (3)
of this section are applied based upon the
adjusted amount of the specified foreign
income tax. Third, paragraph (d)(4) of this
section applies to the adjusted amounts
of specified foreign income tax that are
treated as accruing in the first required
year and the succeeding taxable year by
reason of the reapplication of paragraphs
(d)(1) through (3) of this section.
(h) Election procedures. This para-
graph (h) provides rules for making and
revoking the elections described in para-
graphs (c)(2), (e)(3) and (4), and (f) of this
section.
(1) Persons making the election. An
election is made by the controlling domes-
tic shareholders (as defined in § 1.964-
1(c)(5)) of the affected corporation for its
first required year. An election made under
paragraph (f) of this section is irrevocable.
(2) Consistency requirement. If an elec-
tion is made with respect to an affected
corporation, then the election applies to all
United States shareholders of the affected
corporation for its first required year and
its succeeding taxable year.
(3) Manner—(i) In general. An election
under paragraph (c)(2), (e)(3) or (4), or (f)
of this section must be made in accordance
with this paragraph (h)(3), and as the Sec-
retary of the Treasury or the Secretary’s
delegate may provide in forms, instruc-
tions, publications, or other guidance.
(A) Election statement requirement.
The controlling domestic shareholders
must file the statement required under §
1.964-1(c)(3)(ii) with their timely filed
(including extensions) original Federal
income tax returns, or in the case of an
election under paragraph (c)(2) or (e)(3)
of this section, with their amended Fed-
eral income tax returns in accordance with
paragraph (h)(3)(ii) of this section, for the
taxable years of the controlling domestic
shareholders in which or with which the
affected corporation’s first required year
and succeeding taxable year end. The
statement must be attached to the Form
5471, Information Return of U.S. Persons
With Respect To Certain Foreign Corpo-
rations, filed with respect to the affected
corporation and titled as follows:
(1) “Section 898 Specified Distributive
Shares of CFTEs Election Statement” for
an election under paragraph (c)(2) of this
section;
(2) “Section 898 Income Group Spe-
cific Election Statement” for an election
under paragraph (e)(3) of this section;
(3) “Section 898 Non-Allocation Elec-
tion Statement” for an election under
paragraph (e)(4) of this section; and
(4) “Section 898 Relevant Succeed-
ing Year Tax Election Statement” for an
election made under paragraph (f) of this
section.
(B) Notice requirement. The controlling
domestic shareholders making an election
must provide any notices required under
§ 1.964-1(c)(3)(iii). For this purpose, a
domestic shareholder under § 1.964-1(c)
(3)(iii) includes any person known to be
a domestic shareholder in the succeeding
taxable year.
(ii) Election (or revocation) with an
amended Federal income tax return. In
the case of an election under paragraph (c)
(2) or (e)(3) of this section, or a revoca-
tion of an election under paragraph (c)(2),
(e)(3) or (4) of this section, made with an
amended Federal income tax return—
(A) The election (or revocation) must
be made on an amended Federal income
tax return duly filed within 24 months
of the due date (without regard to exten-
sions) of the original Federal income tax
return for the taxable year of each con-
trolling domestic shareholder with or
within which the affected corporation’s
first required year ends; and
(B) If a Federal income tax return for
the taxable year of any controlling domes-
tic shareholder with or within which the
affected corporation’s succeeding tax-
able year ends has already been filed, an
amended Federal income tax return for
that year must be filed consistent with the
election or revocation of the election.
(i) Examples. The following examples
illustrate the application of this section.

September 8, 2026 310 Bulletin No. 2026–37
(1) Assumed facts. For purposes of the
examples in this paragraph (i), unless oth-
erwise indicated, the following facts are
assumed:
(i) CFCX is a specified foreign corpo-
ration.
(ii) CFCX’s first required year is from
December 1, 2025, to December 31, 2025.
(iii) CFCX’s succeeding taxable year
is from January 1, 2026, to December 31,
2026.
(iv) CFCX takes into account foreign
income taxes under an accrual method of
accounting.
(v) The functional currency of all qual-
ified business units is the u, and all foreign
income taxes are denominated in the u.
(2) Example 1: Specified foreign income taxes—
(i) Facts. CFCX is subject to tax in Country X on
the basis of its items of income, gain, deduction, and
loss for its Country X taxable year, and the Coun-
try X tax is a foreign income tax within the meaning
of § 1.901-2(a). CFCX’s Country X taxable year is
the calendar year. CFCX accrues Country X tax of
7,200u in its first required year. An election under
paragraph (e)(4) of this section is not in effect.
(ii) Analysis. The 7,200u of Country X tax is a
specified foreign income tax under paragraph (c)(1)
of this section because it is a foreign net income tax
that is accrued by CFCX, an affected corporation, in
CFCX’s first required year, and CFCX is the section
901 taxpayer of the tax. Accordingly, the 7,200u of
Country X tax is allocated between CFCX’s first
required year and its succeeding taxable year under
this section.
(3) Example 2: Specified distributive share of
CFTEs—(i) Facts—(A) Partnership W and Partner-
ship Y. CFCX owns 40 percent and 60 percent inter-
ests, respectively, in the profits and capital of two
foreign business entities: Partnership W, an entity clas-
sified as a partnership for Federal income tax purposes
that is organized and operates in Country W, and Part-
nership Y, an entity classified as a partnership for Fed-
eral income tax purposes that is organized and operates
in Country Y. The remaining interests (60 percent and
40 percent, respectively) in the profits and capital of
Partnership W and Partnership Y are owned by persons
unrelated to CFCX. Partnership W and Partnership Y
each take into account foreign income taxes under
an accrual method of accounting. Partnership W and
Partnership Y are subject to tax in their countries on
the basis of their items of income, gain, deduction, and
loss for their foreign taxable year. The Country W tax
and the Country Y tax are foreign income taxes within
the meaning of § 1.901-2(a). Each partnership’s for-
eign taxable year is the calendar year. Partnership W’s
U.S. taxable year has always been the calendar year.
(B) Distributive shares of CFTEs. For its U.S. tax-
able year beginning on January 1, 2025, and ending on
December 31, 2025, Partnership W accrues Country
W tax of 10,000u. For its first required year ending
on December 31, 2025, CFCX’s distributive share
of the Country W tax is 4,000u. For its taxable years
beginning before November 30, 2025, Partnership
Y’s U.S. taxable year ended on November 30. Under
section 706(b), Partnership Y is required to change its
first taxable year beginning after November 30, 2025,
due to CFCX changing its first taxable year beginning
after November 30, 2025, by reason of the repeal of
section 898(c)(2). For its U.S. taxable year ending on
December 31, 2025, Partnership Y accrues Country Y
tax of 10,000u. For its first required year ending on
December 31, 2025, CFCX’s distributive share of the
Country Y tax is 6,000u. An election under paragraph
(c)(2) of this section is in effect.
(ii) Analysis—(A) Country W tax. CFCX’s 4,000u
distributive share of Country W tax is not allocated
between CFCX’s first required year and its succeed-
ing taxable year under this section. CFCX’s 4,000u
distributive share of Country W tax is not a specified
distributive share of a CFTE because Partnership W
is not an affected partnership as defined in paragraph
(b) of this section. Partnership W is not an affected
partnership because Partnership W was not required
to change its taxable year under section 706(b) due to
one or more of its partners changing their first taxable
year beginning after November 30, 2025, by reason
of the repeal of section 898(c)(2). Accordingly, even
though an election is in effect under paragraph (c)(2)
of this section, CFCX’s 4,000u distributive share of
the Country W tax is not treated as a specified for-
eign income tax. Therefore, CFCX’s 4,000u distribu-
tive share of the Country W tax is not allocated under
this section and continues to be taken into account in
CFCX’s first required year.
(B) Country Y tax. CFCX’s 6,000u distributive
share of Country Y tax is allocated between CFCX’s
first required year and its succeeding taxable year
under the rules of this section because it is a specified
distributive share of a CFTE, and an election is in
effect under paragraph (c)(2) of this section. Partner-
ship Y is an affected partnership under paragraph (b)
of this section because it takes into account foreign
income taxes under an accrual method of account-
ing and is required to change its taxable year under
section 706(b) due to its partners changing their first
taxable year beginning after November 30, 2025, by
reason of the repeal of section 898(c)(2). Further, the
Country Y tax is a foreign net income tax, CFCX
takes into account its distributive share of the Coun-
try Y tax in its first required year, and Partnership Y’s
first required year ends at the same time (December
31, 2025) as CFCX’s first required year.
(4) Example 3: Allocation of relevant succeeding
year taxes—(i) Facts. The facts are the same as in
paragraph (i)(2)(i) of this section (Example 1), except
as follows. CFCX accrues 6,000u of Country X tax
in its Country X taxable year beginning on January 1,
2026, and ending on December 31, 2026. CFCX also
wholly owns DEZ, a disregarded entity that is orga-
nized and operated in Country Z. DEZ is subject to
tax in Country Z on the basis of its items of income,
gain, deduction, and loss for its Country Z taxable
year, and the Country Z tax is a foreign income tax
within the meaning of § 1.901-2(a). DEZ’s Country
Z taxable year begins on April 1, 2025, and ends on
March 31, 2026. CFCX accrues 5,000u of Country Z
tax in its succeeding taxable year. An election is in
effect under paragraph (f) of this section.
(ii) Analysis. Because an election is in effect
under paragraph (f) of this section, the relevant suc-
ceeding year taxes of CFCX are allocated between
its first required year and its succeeding taxable
year. The 6,000u of Country X tax is not a relevant
succeeding year tax under paragraph (f)(1) of this
section because the Country X taxable year with
respect to which the tax is imposed did not begin
before January 1, 2026. The 5,000u of Country Z tax
is a relevant succeeding year tax under paragraph (f)
(1) of this section because it is a foreign net income
tax accrued in CFCX’s succeeding taxable year, for
which CFCX is the section 901 taxpayer, and the
Country Z taxable year with respect to which the
5,000u of Country Z tax is imposed began before
January 1, 2026. Accordingly, the 5,000u of Country
Z tax is allocated between CFCX’s first required year
and its succeeding taxable year under paragraph (f)
of this section.
(5) Example 4: § 1.901-2(f)(5) and relevant
succeeding year taxes—(i) Facts. The facts are
the same as in paragraph (i)(4)(i) of this section
(Example 3) except as follows. CFCX acquires the
interests in DEZ on February 1, 2026. Applying
the principles of § 1.1502-76(b), and using the
ratable allocation method under § 1.1502-76(b),
CFCX is allocated and is treated as paying under
§ 1.901-2(f)(5), 833u (5,000u x (2 months of for-
eign law taxable income over 12 months of for-
eign law taxable income)) of the Country Z tax
that accrues on March 31, 2026.
(ii) Analysis. The 833u of Country Z tax is not a
relevant succeeding year tax. While the Country Z
taxable year began before January 1, 2026, CFCX’s
period of ownership of DEZ did not begin before
January 1, 2026. Therefore, no portion of the 833u of
Country Z tax is allocated to CFCX’s first required
year.
(6) Example 5: Application of § 1.861-20 and
allocation of specified foreign income tax—(i) Facts.
The facts are the same as in paragraph (i)(2)(i) of
this section (Example 1). In addition, CFCX’s total
taxable income under Country X law for the Coun-
try X taxable year ending on December 31, 2025, is
45,000u. Applying the principles of § 1.1502-76(b),
3,750u of this income is attributable to CFCX’s first
required year. Under § 1.861-20, the 7,200u of Coun-
try X tax is allocated and apportioned to the income
groups under paragraph (d)(2) of this section as
follows: 5,400u to general category tentative gross
tested income attributable to the CFC tested unit
(CFC income group) and 1,800u to the general cat-
egory foreign base company services income group
(FBCServ income group).
(ii) Analysis. Pursuant to the ordering rules in
paragraph (d) of this section, the 7,200u of Coun-
try X tax is allocated and apportioned to the income
groups under paragraph (d)(2) of this section before
applying the allocation method under paragraph
(e)(1) of this section to determine the amount of
the Country X tax that is allocated to CFCX’s first
required year and succeeding taxable year under
paragraph (d)(3) of this section. The allocation
method applies as follows. The amount of CFCX’s
taxable income under Country X law that is attrib-
utable to the first required year (3,750u) is divided
by the total taxable income for the Country X tax-
able year (45,000u), which results in an allocation
percentage of 8.33 percent. The amount of Country
X tax in each income group that is allocated to the
first required year is determined by applying the
allocation percentage to the amount of the specified

Bulletin No. 2026–37 311 September 8, 2026
foreign income tax in each income group. There-
fore, the following amounts of the Country X tax are
allocated to the first required year: 450u, which is
assigned to the CFC income group (8.33 percent of
5,400u); and 150u, which is assigned to the FBCServ
income group (8.33 percent of 1,800u). The remain-
ing amount of Country X tax in each income group
is allocated to CFCX’s succeeding taxable year as
follows: 4,950u, assigned to the CFC income group
(5,400u-450u) and 1,650u, assigned to the FBCServ
income group (1,800u-150u).
(7) Example 6: Income group specific allocation
method—(i) Facts. The facts are the same as in para-
graph (i)(6)(i) of this section (Example 5), except
as follows. An election is made under paragraph (e)
(3) of this section to use the income group specific
allocation method. In applying § 1.861-20 under
paragraph (d)(2) of this section, 33,750u of CFCX’s
taxable income under Country X law is assigned
to the CFC income group, and 11,250u of CFCX’s
taxable income under Country X law is assigned to
the FBCServ income group. Applying the principles
of § 1.1502-76(b) and using a closing of the books
method under § 1.1502-76(b) to the items of Coun-
try X income, gain, deduction, and loss assigned to
each income group, 2,250u of CFCX’s Country X
taxable income assigned to the CFC income group
is attributable to the first required year, and 1,125u
of CFCX’s Country X taxable income assigned to
the FBCServ income group is attributable to the first
required year.
(ii) Analysis—(A) Tax assigned to the CFC
income group. The income group specific alloca-
tion method applies as follows. Under § 1.861-20,
5,400u of the Country X tax is assigned to the
CFC income group. The amount of CFCX’s Coun-
try X taxable income assigned to the CFC income
group that is attributable to the first required year
(2,250u) is divided by CFCX’s total Country X
taxable income assigned to that income group
for the Country X taxable year (33,750u), which
results in an income group specific allocation
percentage of 6.66 percent. Therefore, 360u of
Country X tax assigned to the CFC income group
is allocated to the first required year. The remain-
ing amount of Country X tax assigned to the CFC
income group (5,040u) is allocated to the succeed-
ing taxable year.
(B) Tax assigned to the FBCServ income group.
Under § 1.861-20, 1,800u of Country X tax is
assigned to the FBCServ income group. The amount
of CFCX’s Country X taxable income assigned
to this income group that is attributed to the first
required year (1,125u) is divided by CFCX’s total
Country X taxable income assigned to that income
group for the Country X taxable year (11,250u),
which results in an income group specific allocation
percentage of 10 percent. Therefore, 180u of Coun-
try X tax assigned to the FBCServ income group is
allocated to the first required year. The remaining
amount of Country X tax assigned to the FBCServ
income group (1,620u) is allocated to the succeed-
ing taxable year.
(8) Example 7: Application of the high-tax
exclusion—(i) Facts. The facts are the same as
in paragraph (i)(7)(i) of this section (Example 6),
except as follows. An election under § 1.951A-
2(c)(7)(viii) is in effect with respect to CFCX for
the first required year. Under § 1.951A-2(c)(7)
(ii), CFCX has two tentative gross tested income
items: 3,000u in the CFC income group and 2,000u
of general category tentative gross tested income
attributable to the DEZ tested unit. CFCX accrues
no expenses in its first required year other than the
specified foreign income tax.
(ii) Analysis. Under paragraph (d)(4) of this
section, the portion of the Country X tax allocated
to the first required year is treated as the amount
of Country X tax accrued in that taxable year for
all purposes of the Code except sections 905(c)
and 986(a). Therefore, in determining whether
any of CFCX’s tentative gross tested income items
meet the high-tax exclusion, 360u of Country X
tax is treated as accrued in the first required year
and allocated and apportioned to the CFC income
group, the statutory grouping to which 3,000u of
gross income is assigned. If an election under §
1.951A-2(c)(7)(viii) is in effect with respect to
CFCX for the succeeding taxable year, the 5,040u
of Country X tax assigned to the CFC income
group would be taken into account in the same
manner in that year.
(j) Applicability date. This section
applies to taxable years of specified for-
eign corporations beginning after Novem-
ber 30, 2025.
Par. 6. Section 1.901-1 is amended by
revising paragraph (b) to read as follows:
§ 1.901-1 Allowance of credit for
foreign income taxes.
* * * * *
(b) Limitations. Certain Code sections,
including sections 245A(d) and (e)(3),
814, 901(e) through (m), 904, 906 through
909, 911, 960(d)(4), 965(g), 999, and
6038, reduce, defer, or otherwise limit the
credit against the tax imposed by chapter 1
of the Code for certain amounts of foreign
income taxes.
* * * * *
Par. 7. Section 1.960-3 is amended by:
1. Revising the section heading;
2. Revising the first sentence of para-
graph (a);
3. Revising the heading of paragraph
(b) and the second sentence of paragraph
(b)(1);
4. Adding paragraph (b)(6);
5. In paragraph (c)(2)(iii)(B), remov-
ing the language “paragraphs (c)(2)(vi)
through (ix)” and adding “paragraphs (c)
(2)(vii) through (xi)” in its place;
6. Revising paragraph (c)(2)(iv);
7. Redesignating paragraphs (c)(2)
(v), (c)(2)(vi), (c)(2)(vii), (c)(2)(viii), (c)
(2)(ix), and (c)(2)(x) as paragraphs (c)(2)
(vi), (c)(2)(vii), (c)(2)(viii), (c)(2)(ix), (c)
(2)(xi), and (c)(2)(xii), respectively, and
adding new paragraph (c)(2)(v);
8. In newly redesignated paragraph
(c)(2)(vi), removing the language “para-
graphs (c)(2)(v)(A)” and adding “para-
graphs (c)(2)(vi)(A)” in its place;
9. Revising newly redesignated para-
graph (c)(2)(ix);
10. Adding new paragraph (c)(2)(x);
11. In newly redesignated paragraph
(c)(2)(xi), removing the language “para-
graphs (c)(2)(ix)(A)” and adding “para-
graphs (c)(2)(xi)(A)” in its place;
12. In newly redesignated paragraph
(c)(2)(xii), removing the language “para-
graph (c)(2)(vi) through (ix)” and adding
“paragraph (c)(2)(vii) through (xi)” in its
place;
13. In paragraph (e)(2), removing the
language “section 951A PTEP” wherever
it appears and adding “pre-06/29/25 sec-
tion 951A PTEP” in its place; and
14. Adding paragraphs (e)(3) and (4).
The revisions and additions read as fol-
lows:
§ 1.960-3 Foreign income taxes deemed
paid under section 960(b) and foreign
tax credits disallowed under section
960(d)(4).
(a) * * * Paragraph (b) of this section
provides rules for computing the amount
of foreign income taxes deemed paid by
a domestic corporation that is a United
States shareholder of a controlled foreign
corporation, or by a controlled foreign
corporation, under section 960(b), and for
determining the foreign income taxes sub-
ject to the credit disallowance under sec-
tion 960(d)(4). * * *
(b) Foreign income taxes deemed paid
under section 960(b) and foreign tax
credits disallowed under section 960(d)
(4)—(1) * * * See paragraph (b)(6) of this
section for rules disallowing credits in
relation to a distribution of certain previ-
ously taxed earnings and profits resulting
from the application of section 960(d)(4),
and § 1.965-5(c)(1)(iii) for rules disal-
lowing credits in relation to a distribution
of certain previously taxed earnings and
profits resulting from the application of
section 965. * * *
* * * * *
(6) Foreign tax credits disallowed
under section 960(d)(4)—(i) In general.

September 8, 2026 312 Bulletin No. 2026–37
No credit under section 901 is allowed for
10 percent of—
(A) Foreign income taxes attributable
to a section 959(a) distribution of post-
06/28/25 section 951A PTEP (as defined
in paragraph (c)(2)(ix) of this section) or
reclassified post-06/28/25 section 951A
PTEP (as defined in paragraph (c)(2)(iv)
of this section); and
(B) Foreign income taxes deemed paid
under paragraph (b)(1) of this section with
respect to a section 959(a) distribution
of post-06/28/25 section 951A PTEP (as
defined in paragraph (c)(2)(ix) of this sec-
tion) or reclassified post-06/28/25 section
951A PTEP (as defined in paragraph (c)
(2)(iv) of this section).
(ii) Attribution of foreign income taxes.
For purposes of paragraph (b)(6)(i)(A)
of this section, foreign income taxes are
attributable to a section 959(a) distribu-
tion of post-06/28/25 section 951A PTEP
or reclassified post-06/28/25 section 951A
PTEP if those taxes would be allocated
and apportioned to a distribution of those
previously taxed earnings and profits
under the rules of § 1.861-20, applied by
treating the portion of the distribution that
is attributable to post-06/28/25 section
951A PTEP and reclassified post-06/28/25
section 951A PTEP as the statutory group-
ings, and the portion of the distribution
that is attributable to other earnings and
profits as the residual grouping.
(c) * * *
(2) * * *
(iv) Earnings and profits described in
section 959(c)(1)(A) that were initially
described in paragraph (c)(2)(ix) of this
section (“reclassified post-06/28/25 sec-
tion 951A PTEP”);
(v) Earnings and profits described in
section 959(c)(1)(A) that were initially
described in paragraph (c)(2)(x) of this
section (“reclassified pre-06/29/25 section
951A PTEP”);
* * * * *
(ix) Earnings and profits described in
section 959(c)(2) by reason of section
951A, to the extent that the inclusion
under section 951A occurs in a taxable
year of a United States shareholder ending
after June 28, 2025 (“post-06/28/25 sec-
tion 951A PTEP”);
(x) Earnings and profits described
in section 959(c)(2) by reason of sec-
tion 951A, to the extent not described in
paragraph (c)(2)(ix) of this section (“pre-
06/29/25 section 951A PTEP”);
* * * * *
(e) * * *
(3) Example 3: Foreign tax credits disallowed
under section 960(d)(4)—(i) Facts. USP, a domestic
corporation, owns all of the stock of a single foreign
corporation (FC1). FC1, a Country X entity that is
a controlled foreign corporation, has the U.S. dollar
as its functional currency. Both FC1 and USP use
the calendar year as their taxable year. FC1 does not
have any accumulated earnings and profits as of the
beginning of its 2024 taxable year. FC1 earns tested
income of $100x for each of its 2024 and 2025 taxable
years, and USP has an inclusion under section 951A
(section 951A inclusion) of $100x in each of its 2024
and 2025 taxable years. FC1 has no items of income,
gain, deduction, or loss in any of its subsequent tax-
able years. On January 1, 2026, FC1 distributes $150x
to USP, which is a section 959(a) distribution and is
treated as a distribution of property for both Coun-
try X law and Federal income tax purposes. Country
X imposes a withholding tax (as defined in section
901(k)(1)(B)) of $30x with respect to the section
959(a) distribution. For its 2026 taxable year, USP
claims the foreign tax credit under section 901.
(ii) Analysis—(A) PTEP groups. FC1 has earn-
ings and profits of $100x within the annual PTEP
account in the section 951A category for its 2024
taxable year. Under paragraph (c)(2)(x) of this sec-
tion, the $100x of previously taxed earnings and
profits, which results from a section 951A inclusion
of USP in a taxable year of USP ending on or before
June 28, 2025, constitutes pre-06/29/25 section 951A
PTEP. FC1 also has earnings and profits of $100x
within the annual PTEP account in the section 951A
category for its 2025 taxable year. Under paragraph
(c)(2)(ix) of this section, the $100x of previously
taxed earnings and profits, which results from a sec-
tion 951A inclusion of USP in a taxable year of USP
ending after June 28, 2025, constitutes post-06/28/25
section 951A PTEP.
(B) Attribution of foreign income taxes. Under
section 959(c) and § 1.959-3(b), FC1’s $150x dis-
tribution on January 1, 2026, constitutes a distribu-
tion of $100x of FC1’s previously taxed earnings
and profits for its 2025 taxable year and $50x of
FC1’s previously taxed earnings and profits for its
2024 taxable year. Under paragraph (b)(6)(ii) of this
section and § 1.861-20(d)(3)(i)(B), $100x of the for-
eign gross income related to the $150x distribution
is assigned to the statutory grouping for the portion
of the distribution attributable to post-06/28/25 sec-
tion 951A PTEP, and $50x is assigned to the residual
grouping for the portion of the distribution attribut-
able to other earnings and profits. Under paragraph
(b)(6)(ii) of this section and § 1.861-20(f), $20x
of the $30x of Country X withholding tax ($30x x
$100x/$150x) is allocated and apportioned to the
statutory grouping, and the remaining $10x ($30x
x $50x/$150x) is allocated and apportioned to the
residual grouping.
(C) Disallowance of foreign tax credits. Under
section 960(d)(4) and paragraph (b)(6)(i)(A) of this
section, $2x (that is, 10 percent) of the $20x of for-
eign tax credits otherwise allowable to USP under
section 901 with respect to the $20x of Country X
withholding tax allocated and apportioned to the
statutory grouping is disallowed.
(iii) Alternative facts—Distribution before June
28, 2025. The facts are the same as in paragraph (e)
(3)(i) of this section, except that the $150x distribu-
tion occurs on February 1, 2025. The result is the
same as in paragraph (e)(3)(ii) of this section.
(4) Example 4: Foreign tax credit disallowance
under section 960(d)(4) for foreign income taxes
deemed paid under section 960(b)—(i) Facts. The
facts are the same as in paragraph (e)(3)(i) of this
section (Example 3), except as follows. FC1 owns
all the stock of FC2, a Country Y entity that is a con-
trolled foreign corporation and uses the U.S. dollar
as its functional currency. FC2 uses the calendar year
as its taxable year. As of January 1, 2027, FC1 does
not have any accumulated earnings and profits and
FC2’s accumulated earnings and profits are entirely
comprised of $100x of post-06/28/25 section 951A
PTEP within the annual PTEP account in the section
951A category for its 2026 taxable year. On Janu-
ary 1, 2027, FC2 distributes $100x to FC1 (distri-
bution 1), which is treated as a distribution of prop-
erty for both Country Y law and Federal income tax
purposes. Country Y imposes a withholding tax (as
defined in section 901(k)(1)(B)) of $20x with respect
to distribution 1. FC1 subsequently distributes $80x
to USP (distribution 2), which is a section 959(a) dis-
tribution. Country X does not impose any withhold-
ing tax with respect to distribution 2. Neither FC1
nor FC2 has items of income, gain, deduction, or loss
for its 2027 taxable year. For its 2027 taxable year,
USP claims the foreign tax credit under section 901.
(ii) Analysis—(A) Distribution 1. Under section
959(c) and § 1.959-3(b), distribution 1 constitutes
a distribution of $100x of FC2’s previously taxed
earnings and profits. Under paragraph (c)(3) of this
section, FC1’s post-06/28/25 section 951A PTEP
within the annual PTEP account in the section 951A
category for its 2026 taxable year is increased by
$100x but reduced by the $20x of Country Y with-
holding tax that is allocated and apportioned to the
post-06/28/25 section 951A PTEP under § 1.960-
1(d)(3)(ii). FC1’s PTEP group taxes with respect
to its post-06/28/25 section 951A PTEP within the
annual PTEP account in the section 951A category
for its 2026 taxable year are increased by $20x under
paragraph (d) of this section.
(B) Distribution 2. Under section 959(c) and §
1.959-3(b), distribution 2 constitutes a distribution of
$80x of FC1’s previously taxed earnings and prof-
its. Under paragraph (b)(4) of this section, USP’s
proportionate share of FC1’s PTEP group taxes is
$20x. Under section 960(d)(4) and paragraph (b)(6)
(i)(B) of this section, $2x (that is, 10 percent) of the
$20x of foreign tax credits otherwise allowable to
USP under section 901 with respect to FC1’s $20x
of PTEP group taxes deemed paid by USP under sec-
tion 960(b)(1) is disallowed.
Par. 8. Section 1.960-7 is amended by:
1. In paragraph (a), removing the lan-
guage “paragraph (b)” and adding “para-
graphs (b) and (c)” in its place; and
2. Adding paragraph (c).

Bulletin No. 2026–37 313 September 8, 2026
The addition reads as follows:
§ 1.960-7 Applicability dates.
* * * * *
(c) Section 1.960-3(b)(6) applies to
foreign income taxes paid or accrued
(or deemed paid under section 960(b)
(1)) with respect to an amount excluded
from gross income under section 959(a)
by reason of an inclusion in gross income
under section 951A(a), to the extent
the inclusion occurs in a taxable year
of a United States shareholder ending
after June 28, 2025. Section 1.960-3(c)
(2) applies to taxable years of foreign
corporations ending with or within tax-
able years of United States shareholders
ending after June 28, 2025. For taxable
years of foreign corporations ending on
or after December 4, 2018, and beginning
before the taxable year described in the
preceding sentence, see § 1.960-3(c)(2)
as contained in 26 CFR part 1 revised as
of April 1, 2026.
Par. 9. Section 1.987-11 is amended
by revising paragraph (c)(3)(ii) to read as
follows:
§ 1.987-11 Suspended section 987 loss
relating to certain elections; loss-to-
the-extent-of-gain rule.
* * * * *
(c) * * *
(3) * * *
(ii) Owner is a CFC. For purposes of
applying paragraph (c)(2) of this section
with respect to an owner that is a CFC,
suspended section 987 loss and gross
income of a member of the owner’s con-
trolled group is determined by reference
to the member’s suspended section 987
loss and gross income for its taxable
year ending with or within the owner’s
required year described in section 898(c)
(1).
* * * * *
Frank J. Bisignano,
Chief Executive Officer.
(Filed by the Office of the Federal Register July 31,
2026, 8:45 a.m., and published in the issue of the
Federal Register for August 3, 2026, 91 FR 48794)

Bulletin No. 2026–37 i September 8, 2026
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.
—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

September 8, 2026 ii Bulletin No. 2026–37
Numerical Finding List
1
Bulletin 2026–37
Announcements:
2026-11, 2026-29 I.R.B. 49
2026-12, 2026-29 I.R.B. 50
2026-13, 2026-32 I.R.B. 173
2026-14, 2026-34 I.R.B. 180
2026-15, 2026-35 I.R.B. 214
Notices:
2026-39, 2026-27 I.R.B. 1
2026-38, 2026-28 I.R.B. 30
2026-40, 2026-28 I.R.B. 33
2026-41, 2026-29 I.R.B. 39
2026-42, 2026-29 I.R.B. 41
2026-43, 2026-29 I.R.B. 42
2026-21, 2026-30 I.R.B. 51
2026-44, 2026-32 I.R.B. 143
2026-28, 2026-34 I.R.B. 177
2026-46, 2026-35 I.R.B. 182
2026-48, 2026-35 I.R.B. 185
2026-49, 2026-35 I.R.B. 198
2026-50, 2026-36 I.R.B. 242
Proposed Regulations:
REG-101355-26, 2026-37 I.R.B. 249
REG-103844-26, 2026-37 I.R.B. 275
REG-115145-25, 2026-37 I.R.B. 298
Revenue Procedures:
2026-25, 2026-29 I.R.B. 45
2026-18, 2026-30 I.R.B. 53
2026-26, 2026-31 I.R.B. 131
2026-32, 2026-32 I.R.B. 146
2026-28, 2026-33 I.R.B. 175
2026-30, 2026-35 I.R.B. 212
Revenue Rulings:
2026-12, 2026-28 I.R.B. 27
2026-13, 2026-32 I.R.B. 132
2026-14, 2026-35 I.R.B. 181
2026-15, 2026-36 I.R.B. 216
2026-16, 2026-36 I.R.B. 237
2026-17, 2026-37 I.R.B. 247
Treasury Decisions:
10051, 2026-31 I.R.B. 118
10052, 2026-31 I.R.B. 121
10050, 2026-32 I.R.B. 134
10053, 2026-36 I.R.B. 237
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2026–27 through 2026–52 is in Internal Revenue Bulletin
2025–52, dated December 21, 2025.

Bulletin No. 2026–37 iii September 8, 2026
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2026–37
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2026–27 through 2026–52 is in Internal Revenue Bulletin
2025–52, dated December 21, 2025.

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