August 27 Tax Policy Update: Treasury Issues More Guidance, Liberty Global Loss, More Personnel Turnover

Treasury and the IRS have been steadily issuing guidance as Congress nears the end of its August recess. In addition to implementing the One Big Beautiful Bill Act, Treasury is focusing on revising tax regulations that the Trump administration sees as unduly burdensome and posing unnecessary obstacles to economic growth. Consistent with the Trump administration’s broader approach, Treasury seems very skeptical of tax regulations from the Biden administration, and especially those issued after the November 2024 elections. Recent guidance also revisits rules that have been in place for decades.

Taxpayers with constructive suggestions as to how and why existing tax guidance should be revised or new guidance issued may have a unique opportunity to find a sympathetic and actively interested audience in the Trump administration’s Treasury Department.

• Notice 2025-45: FIRPTA, USRPIs and F reorganizations
• Notice 2025-44: DCLs, DPLs
• FAQs on energy credits terminated by OBBBA before July 2026
• Liberty Global loses in Tenth Circuit
• Tax policy personnel

On Tuesday, August 19, Treasury and the IRS issued Notice 2025-45, Application of Sections 897(d) and (e) to Certain Inbound Asset Reorganizations under Section 368(a)(1)(F); Stock Ownership Requirement under Section 368(a)(1)(F). The notice announces the intention to issue proposed regulations updating a portion of the tax rules relating to foreign ownership of U.S. real property that have not been changed in decades. Notice 2025-45 specifically addresses publicly traded foreign corporations holding such property reorganizing into the United States and clarifies the “identity of stock ownership” requirement for F reorganizations under Treasury Regulations Section 1.368-2(m). Taxpayers may rely on the guidance for transactions occurring on or after August 19, 2025 through the date final regulations are issued.

Background on Section 897

Under the Foreign Investment in Real Property Tax Act (FIRPTA), a disposition of a U.S. real property interest (USRPI)[1] by a non-resident alien or foreign corporation results in gain or loss effectively connected with the conduct of a U.S. trade or business, and thus subject to U.S. taxation.

The notice specifically addresses the application of Sections 897(d) and (e), which deny nonrecognition treatment (unless additional requirements are satisfied) to a foreign person’s distribution or transfer of a USRPI that would otherwise qualify for tax-free treatment. Treasury issued temporary regulations under Sections 897(d) and (e) in 1988 (Treas. Reg. Sec. 1.897-5T and Treas. Reg. Sec. 1.897-6T) that have never been finalized, and Notice 89-85, further revised by Notice 2006-46, replaced an exception to gain recognition in the temporary regulations. The temporary regulations and the notices set forth a complex set of substantive and procedural requirements that a foreign person would need to satisfy for such person’s distribution or transfer of a USRPI to qualify for nonrecognition treatment.

In the case of an inbound F reorganization, the foreign corporation would qualify for nonrecognition (i) to the extent stock of the domestic corporation is a USRPI and the foreign corporation would be subject to U.S. tax on a disposition of such stock, (ii) the shareholders of the foreign corporation receiving such stock would be subject to U.S. tax on a subsequent disposition of such stock, (iii) the foreign corporation pays a tax commonly referred to as the “FIRPTA toll charge,” which determination requires the foreign corporation to track whether any foreign shareholder disposed of the stock in the foreign corporation in the past ten years, and (iv) certain filing requirements are satisfied.

Relief under Notice 2025-45

Notice 2025-45 states Treasury and the IRS “understand” the current rules set forth in the temporary regulations and notices described above “may serve as an impediment to publicly traded foreign corporations redomiciling into the United States” and acknowledge that certain inbound F reorganizations “do not give rise to policy concerns under Section 897 because they do not create a risk of inappropriate avoidance of Section 897.” Thus, the notice provides certain exceptions to the existing gain recognition rules under Section 897 for transfers or distributions that occur in newly defined “covered inbound F reorganizations.”

To qualify as a covered inbound F reorganization, (i) the principal class of stock of the foreign corporation must have been regularly traded on an established securities market at all times for the three years immediately preceding the F reorganization, (ii) the resulting domestic corporation’s principal class of stock must be regularly traded on an established securities market for one year following the completion of the F reorganization, and (iii) the fair market value of any property (other than money) transferred to shareholders with respect to the shareholder’s stock pursuant to a plan (or series of related transactions) must be less than one percent of the total fair market value of the foreign corporation at the time of the F reorganization. For this purpose, any property (other than money) transferred to shareholders with respect to their stock in the resulting domestic corporation within the one-year period beginning on the date of the F reorganization are presumed to have been transferred pursuant to a plan.

The proposed regulations will provide additional relief for inbound F reorganizations. The proposed regulations will adopt the small shareholder exception such that a distributee shareholder that owns five percent or less of the stock of the resulting domestic corporation will be deemed to satisfy the “subject to U.S. tax” requirement and a disposition by a foreign shareholder that owned five percent or less of the stock of the foreign corporation would not be taken into account in calculating the FIRPTA toll charge. Furthermore, the transfer of a USRPI by the foreign corporation to the domestic corporation pursuant to a covered inbound F reorganization would satisfy the USRPI-for-USRPI requirement even if the domestic corporation is not a U.S. real property holding corporation immediately after the reorganization.

The proposed regulations will also ease the filing requirements for covered inbound F reorganizations under the temporary regulations.

The scope of the exemption from triggering FIRPTA taxation and streamlined filing requirements are limited to covered inbound F reorganizations and the notice does not change the FIRPTA enforcement mechanisms for other transactions involving USRPIs.

Notice 2025-45 changes to F reorganizations

Under Section 368(a)(1)(F), an F reorganization is “a mere change in identity, form, or place of organization of one corporation, however effected. Under Treas. Reg. Sec. 1.368-2(m)(1), an F reorganization requires the corporation to meet an “identity of stock ownership” requirement, which means “[t]he same person or persons must own all of the stock of the transferor corporation, determined immediately before the potential F reorganization, and of the resulting corporation, determined immediately after the potential F reorganization, in identical proportions.”

With regards to F reorganizations more generally, the proposed regulations will revise the F reorganization rules to provide that the identity of stock ownership requirement will not be affected by a disposition of the transferor or resulting corporation that is not included in the plan of reorganization.

Given the more general focus of the notice on Section 897, it appears that in examining F reorganizations in the context of USRPIs, Treasury also decided that the F reorganization rules more broadly should be adjusted in the context of contemporaneous stock transfers that are not part of the plan of reorganization. But it is also possible that Treasury was independently studying both issues and decided to combine them in one notice.

The notice requests comments on its general contents with a deadline of October 20, 2025.

On Thursday, August 20, Treasury and the IRS issued Notice 2025-44, Proposed Removal of the Disregarded Payment Loss Rules and Certain Recent Changes to the Dual Consolidated Loss Rules; Extension of Transition Relief. The notice announces the intention to propose regulations to reverse the January 14, 2025 final regulations creating disregarded payment loss (DPL) rules and modifying the dual consolidated loss (DCL) rules, and to extend transition relief regarding the application of the DCL rules to certain foreign country taxes imposed under the OECD’s Pillar Two.

Background

The DCL rules in Tax Code Section 1503(d)(1) provide that a DCL of a domestic corporation cannot reduce the taxable income of a domestic affiliate. The DCL rules are generally designed to prevent taxpayers from using the same loss to reduce both foreign income and U.S. income. The exceptions from the DCL rules include a “domestic use election” by which a taxpayer certifies that it has not and will not use the loss for foreign purposes, and may use the loss in the U.S. An “all or nothing rule” provides that any use of even a portion of the loss for foreign purposes disqualifies the loss from being used for U.S. purposes.

The DPL rules generally address disregarded payments that produce a deduction in one country, but no inclusion in another country, referred to by Treasury as D/NI outcomes. The DPL rules generally require domestic corporations to include in gross income an amount equal to a net loss under foreign tax law composed of certain payments that are disregarded for U.S. tax purposes if there is a D/NI outcome.

Treasury and the IRS first provided transition relief for DCLs incurred before the effective date of the Pillar 2 GloBE Model rules in Notice 2023-80, released on December 11, 2023.

Treasury and the IRS issued proposed regulations on August 7, 2024, creating the DPL rules and providing an anti-avoidance rule that would apply to both DPLs and DCLs. The proposed regulations provided rules on the interaction of the DCL rules and the GloBE Model Rules. The proposed regulations also provided that the DCL rules would generally apply without taking into account foreign country QDMTTs or Top-Up taxes under a foreign country’s Pillar 2 IIR or UTPR with respect to losses incurred in taxable years beginning before August 6, 2024.

On January 14, 2025, Treasury and the IRS finalized the 2024 proposed regulations and also made two modifications to the deemed ordering rule in situations in which foreign law does not provide rules for determining which income is offset by the losses or deductions and concerning income or gain otherwise disregarded for U.S. tax purposes. Under these final regulations, the DPL rules apply for taxable years beginning after January 1, 2026. The anti-avoidance rule applies to DCLs incurred in taxable years ending on or after August 6, 2024, and to DPLs in taxable years beginning on or after January 1, 2026. The modifications to the deemed ordering rule apply to DCLs and DPLs incurred in taxable years beginning on or after January 1, 2026.

The final regulations did not include the proposed guidance on the interaction of the DCL rules and the GloBE Model rules. However, the final regulations extend the transition relief in the proposed regulations with respect to DCLs incurred in taxable years beginning before August 31, 2025.

The changes made by Notice 2055-44

Notice 2025-44 states that Treasury and the IRS share the concerns they have received on the complexity, uncertainty and costs of complying with the DPL rules, along with the impact on existing structures. Treasury and IRS also noted feedback questioning the authority for the DPL rules, along with being inconsistent with the statute and conflicting with congressional intent. The notice does not explicitly disclaim authority for the DPL rules, but states that, in response to this feedback, Treasury and the IRS have decided to issue proposed regulations to remove the DPL rules. The proposed regulations will also provide that the anti-avoidance rule does not apply to structures that would have been addressed by the DPL rules. Furthermore, the proposed regulations will remove the deemed order rule revisions in the 2025 final regulations.

The proposed regulations will further extend the relief with respect to the interaction of the DCL rules and the GloBE Model Rules with respect to DCLs incurred in taxable years beginning before January 1, 2028.

The proposed regulations removing the DPL rules would apply to taxable years beginning on or after January 1, 2026 (which is when those rules were supposed to come into effect). The proposed regulations removing the changes to the deemed ordering rule would apply to DCLs incurred in taxable years beginning on or after January 1, 2026 (which is when those rules were to come into effect). Taxpayers may rely on the rules in the notice until the date the proposed regulations are published.

The notice solicits comments by October 21 on the “all or nothing” rule for the domestic loss election, and whether, and, if so, how, disregarded items should be taken into account for purposes of the DCL rules.

The notice states that one of the reasons for the extension of the transition relief is “to allow for consideration of further developments at the OECD” but does not otherwise directly comment on the continued OECD negotiations regarding treatment of the United States under Pillar 2. It is, however, interesting that the notice’s first reference to the “GloBE Model Rules” prefaces the phrase with “the so-called.”

On August 21, the IRS issued FAQs on certain energy credits that were generally terminated by the OBBBA prior to July 2026. Those credits are:

• the Section 25C energy-efficient home improvement credit that expires for property placed in service after December 31, 2025;
• the Section 25D residential clean energy credit that expires for any expenditures made after December 31, 2025;
• the Section 25E previously owned clean vehicles credit that expires for any vehicle acquired after September 30, 2025;
• the Section 30C alternative fuel vehicle refueling property credit that expires for any property placed in service after June 30, 2026;
• the Section 30D new clean vehicle credit that expires for any vehicle acquired after September 30, 2025;
• the Section 45L new energy-efficient home credit that expires for any home acquired after June 30, 2026;
• the Section 45W qualified commercial clean vehicle credit that expires for any vehicle acquired after September 30, 2025; and
• the Section 179D energy-efficient commercial buildings deduction that expires for any property the construction of which begins after June 30, 2026.

There are seven questions and answers in the FAQs, covering topics such as the meaning of “acquired,” “placed in service,” and “installed,” credit transfers, the IRS Energy Credits Online portal, and periodic written reports.

As the guidance was only issued in the form of FAQs, taxpayers cannot generally rely on the guidance, except for avoiding penalties proving a reasonable cause standard for relief, including a negligence penalty or other accuracy related penalty.

Tenth Circuit Affirms Tax Court Ruling Against Liberty Global

The Tenth Circuit affirmed the Tax Court on Friday and ruled that Liberty Global Inc. is not eligible for a $240 million foreign tax credit stemming from the sale of its foreign subsidiary. The decision follows Liberty Global’s appeal from the U.S. Tax Court ruling that the gain cannot be characterized as foreign-source due to the recapture rules related to a company’s overall foreign loss (OFL). Instead, that gain must be recognized as U.S.-source income.

Liberty Global owned a controlling stake in Jupiter Telecommunications, a Japanese company. In February 2010, Liberty Global sold its entire interest for $3.9 billion, realizing $3.2 billion of gain. Its tax return provided that $2.3 billion of that was foreign-source and $474 million was U.S.-source to recapture an OFL. The $2.3 billion of foreign-source income led to a $240 million foreign tax credit. The IRS disagreed with that allocation and asserted that the $2.3 billion was instead U.S.-source. The Tax Court agreed with the IRS and held that Liberty Global did not have enough foreign-source income to claim the foreign tax credits.

When a U.S. corporation does business overseas, its activity is usually taxed both by the U.S. and the country in which it does business. To avoid double-taxation, the tax code provides for tax credits on foreign taxes paid on overseas income, which is generally considered to be foreign-source income. The amount of foreign tax credits is generally limited to no greater than a taxpayer’s foreign-source income multiplied by the U.S. tax rate. A U.S. corporation can deduct foreign losses. Such foreign loss deduction used in prior years must be recaptured when that corporation generates foreign income. The foreign loss deduction used by a corporation is recorded as an OFL.

Gain from a U.S. corporation’s sale of a foreign subsidiary’s stock will generally be U.S.-source. An exception under Section 904(f)(3) would source some of that gain abroad, but Section 904(f)(1) would re-source it back to the U.S. to recapture the OFL account. At issue is what to do with the excess gain—the gain above the OFL balance. The statute does not explicitly source the gain, but limits the foreign-source gain to the “lesser of [the gain from the sale] or the remaining amount of the [taxpayer’s OFL account].”

The Tenth Circuit first looked to the general background rule in Section 865, which provides that income from the sale of personal property by a U.S. resident is U.S.-source. Liberty Global argued that the background rules do not apply because the exception in Section 904(f)(3) applies “notwithstanding any other provision…” and a then-applicable Treasury regulation could be read to provide that gain recognized will be foreign-source. The court, however, held that the notwithstanding clause only displaces the background rules if they conflict and that the regulation must harmonize with the statute. Here, the court found that Section 904(f)(3) limited itself as to not conflict with the other provisions. As such, the court ruled that the background rules would govern and any exceptions or other regulations should not be broadly read to find a different answer.

Deputy Treasury Secretary Michael Faulkender, who also served earlier this year as acting IRS Commissioner, is stepping down. Faulkender had been confirmed by the Senate in March. Oddly, the move was first reported Thursday on X by Laura Loomer, a media personality whose accusations against various officials of opposition to President Trump and his agenda have appeared to be influential in some of President Trump’s personnel moves, with Treasury Secretary Bessent confirming the news on Friday.

Rep. Lloyd Doggett (D-TX), the dean of the Texas congressional delegation, first elected in 1994, and a member of the Committee on Ways & Means since 1999, announced that he would not seek reelection if the congressional redistricting in Texas recently approved by the Texas Legislature goes into effect. Rep. Doggett has the longest tenure on the Committee on Ways & Means after Ranking Member Neal (D-MA).

President Trump announced the nomination of Sergio Gor, head of the White House’s Presidential Personnel Office, to be Ambassador to India. Earlier in the week, Trent Morse, Gor’s deputy, announced his departure to the private sector. Also on Friday, Trish Turner, head of the IRS digital assets unit, announced that she is leaving the IRS.

Although there have been some rumors that the Trump administration is seeking further reductions to IRS staffing levels beyond the 25% cuts already put in place, Secretary Bessent, who is also serving as acting IRS Commissioner told IRS officials that he does not anticipate further cuts, Bloomberg reported on Thursday. There have also been recent press reports that the IRS is asking some of those previously laid off to return. Loomer responded by claiming: “Meanwhile the entire IRS is still loaded with Lois Lerner’s henchmen.” It is possible that there will be more significant IRS personnel changes in the coming weeks and months.