- No progress in negotiations over health insurance tax credits, while government funding bills run into typical tensions over spending levels and policy riders
- Guidance on OBBBA FTC, DEI, pro rata CFC, and Trump Account provisions: Notices 2025-68, 2025-75, 2025-77, and 2025-78
- House passes Tax Court deficiency jurisdiction and IRS penalty bills, President Trump signs math error bill into law and Justice Department terminates its tax division
- Status of G7 side-by-side unclear as W&M holds hearing on “Promoting Global Competitiveness for American Workers and Businesses,” Chairman Smith vows legislation unless satisfactory progress made, and Estonia questions Pillar 2
Congress Resumes Appropriations and Health Care Tax Negotiations
There are no signs of progress on negotiations over government funding or the increased tax credits for Affordable Care Act (ACA) health insurance premiums enacted in the 2021 American Rescue Plan Act. As part of the government funding deal, Senate Majority Leader Thune (R-SD) promised Democrats a Senate floor vote in December on a bill addressing the tax credits. It now appears that this vote will occur next week and the bill will contain a three-year extension of the increased tax credits. This lines up with what House Democrats are advocating, but even if the Senate passes the bill, Speaker Johnson (R-LA) is very unlikely to put the bill on the House floor.
It appears most Republicans oppose any extension, at least without very significant reforms. Speaker Johnson (R-LA) said that he hopes to achieve consensus amongst House Republicans on a health care package next week for the House to vote upon later this month.
House and Senate appropriators continue negotiations over the remaining government funding categories, aiming to reach agreement well in advance of the January 30 expiration of the current continuing resolution funding most of the government. But there continue to be tensions over policy riders and overall funding levels. It remains unlikely, although still possible, that tax provisions would hitch a ride to the appropriations bill.
Tax Court Deficiency Jurisdiction and IRS Penalty Bills Pass the House
On December 1, the House passed two tax bills addressing Tax Court procedure and IRS penalty approval. The bills were on the House suspension calendar and passed by voice vote. The bills now go to the Senate for consideration.
The first bill, the Tax Court Improvement Act (H.R. 5349), would make four changes to the Tax Court’s procedures. First, it would allow the Tax Court to issue third-party subpoenas before hearings and pretrial conferences. Currently, the Tax Court only signs such subpoenas at scheduled hearings or depositions. The rule expands the window during which the Tax Court can issue third-party subpoenas, potentially leading to expedited pretrial proceedings.
Second, the bill resolves an ongoing question on the possible jurisdictional nature of the petition filing deadline in deficiency cases. Under current law (with the exception of cases appealable to the Second, Third, and Sixth Circuits), the Tax Court has held that the filing deadline for petitions in deficiency cases is jurisdictional and, thus, the Court is not able to equitably toll the filing deadline. Currently, a late-filed case is dismissed without prejudice. Therefore, a litigant may pay the tax and sue for a refund. However, in the case of Circuits that have held the Tax Court may equitably toll the filing deadline, a late-filed petition that does not qualify for equitable tolling is dismissed with prejudice, leaving the litigant with no ability to sue for a refund after paying the tax. The bill would both enable the Tax Court to apply equitable tolling to late-filed deficiency petitions and preserve the taxpayer’s ability to sue for a refund in the event their case does not qualify for equitable tolling.
Third, the bill would expand the ability of special trial judges, a form of magistrate judge at the Tax Court, to hear a wider variety of cases and order punishment for contempt of court. Fourth, the bill would require Tax Court judges to recuse themselves in the same situations in which U.S. district and appellate judges are required to recuse themselves.
The second bill, the Fair and Accountable IRS Reviews Act (H.R. 5346), changes who at the IRS must approve a penalty and when. The bill would require an IRS employee’s immediate supervisor to review and approve any penalty prior to any written communication to the taxpayer with respect to the penalty.
Both bills were voted, without any opposing votes, to be favorably reported at a Ways & Means Committee mark-up on September 17 as described in this S&C Tax Policy Update. H.R. 5349 was reported on October 3 in H. Rept. 119-335. H.R. 5346 was reported on September 30 in H. Rept. 119-318.
President Trump Signs into Law the Internal Revenue Service Math and Taxpayer Help Act
President Trump has signed into law a rule that requires the IRS to explain any math or clerical errors made in assessing federal tax returns and to notify taxpayers of the opportunity to abate wrongly assessed taxes. The Internal Revenue Service Math and Taxpayer Help Act (H.R. 998) requires the IRS to provide to the taxpayer a description of any errors in plain English, including the specific type of error and the area of the return where it was made. The notification must also include an itemized computation of adjustments required to correct the error, a phone number for the automated transcript service; and a deadline for requesting an abatement of any tax assessed as a result of the error. The IRS will launch a pilot program to send error notices by mail and submit a report to Congress. The House passed the bill by voice vote on March 27, 2025, while the Senate passed the bill by unanimous consent on October 20, as described in this S&C Tax Policy Update.
Justice Department Shutters Tax Division
The Justice Department has dissolved the Tax Division. The civil tax litigation function has been transferred to the newly created Tax Litigation Branch of the Civil Division. Some former Justice Department employees commented that the Justice Department’s tax caseload remains consistent but that, with the lost personnel at the department, the new tax units will need to manage their workloads carefully.
W&M Hearing: “Promoting Global Competitiveness for American Workers and Businesses”
On December 3, the Tax Policy Subcommittee of the Committee on Ways and Means held a hearing on “Promoting Global Competitiveness for American Workers and Businesses.” The witnesses at the hearing were:
- The Honorable Kevin Brady, 66th Chairman, House Committee on Ways & Means, Senior Consultant, Akin
- Professor Bret Wells, John Mixon Chair and Professor of Law, University of Houston Law Center
- Ms. Agnes Webb, Vice President of Tax, Sylvamo
- Professor Kimberly Clausing, Eric M. Zolt Chair in Tax Law and Policy, University of California, Los Angeles
Former Chairman Brady testified that the 2017 Tax Cuts and Jobs Act generated economic growth and investment in the United States, created jobs and increased wages. He also pointed to the TCJA reforms as stopping corporate inversions. He praised the international tax provisions in the OBBBA as making permanent and improving upon the TCJA.
Professor Wells advocated that Congress further limit earnings stripping by foreign-parented companies, including by several expansions of the BEAT. He also called for some relaxation of the subpart F rules, in part by more narrowly focusing some of those rules on so-called round-dripping.
Ms. Webb testified in favor of the TCJA and OBBBA and said that the provisions in those laws led to increased investments in the United States by Sylvamo.
Professor Clausing criticized President Trump’s tariffs, which she said have significantly increased prices for consumers, lowered economic growth, and harmed the foreign demand for products and services from American companies.
OECD Tax Pillars
Negotiations are continuing at the OECD on the details of the side-by-side agreement by the G-7 with regards to the treatment of the United States under Pillar 2. The safe harbor largely exempting American-parented companies from the UTPR ends at the end of 2025.
Chairman Smith warned that if the OECD does not soon make satisfactory progress on these issues, Congress will enact retaliatory measures against countries imposing the UTPR against American companies.
Estonia’s Finance Minister, Jurgen Ligi, wrote a letter to the European Commission expressing concerns with a side-by-side agreement arguing that countries allowed to have separate rules would be at a competitive advantage. The letter also said that policy changes by the OECD should not automatically become binding EU law, as this harms the sovereignty of EU member countries. The letter also said that the costs of implementing Pillar 2 were excessive compared to the revenue that would be collected, especially for small countries.
Notice 2025-68: Notice of Intent to Issue Regulations with Respect to Section 530A Trump Accounts
On December 2, the Department of Treasury and the IRS issued IRS Notice 2025-68, outlining the forthcoming regulatory framework for Trump Accounts created under the One Big Beautiful Bill Act (OBBBA). The notice states the government’s intent to issue proposed regulations under new Tax Code section 530A, which governs the establishment, funding, and tax treatment of these custodial IRA-style accounts for minors. During the “growth period” — from account opening until the beneficiary turns 18 — Trump Accounts are subject to special contribution, investment, withdrawal, and reporting rules that differ from traditional IRAs.
The statute allows five different types of contributions, including the federal government’s one-time $1,000 pilot contribution for eligible children, qualified general contributions from certain public and nonprofit entities, employer contributions under a new Tax Code section 128 program, parent/guardian contributions, and trustee-to-trustee rollover contributions. Investments during the growth period are limited to certain low-fee, broad-based U.S. mutual funds and ETFs.
Treasury and the Department of Labor anticipate issuing guidance on how to structure employer contributions “to ensure that they are not subject to the ERISA coverage framework.”
The notice provides information in the form of 42 questions and answers on account, establishment, different types of contributions, eligible investments, distributions, reporting, and coordination with IRAs,
Contributions to Trump Accounts are not allowed prior to July 4, 2026. In the interim, the government has set up www.trumpaccounts.gov to facilitate use of the accounts.
Comments are due by February 20, 2026.
Notice 2025-75: Transition Rule for Applying Section 951(a)(2)(B)
On December 4, the Department of Treasury and the IRS issued Notice 2025-75 addressing the transition rule for the application of Tax Code section 951(a)(2)(B) to certain dividends paid by controlled foreign corporations (CFCs). Under the OBBBA, a U.S. shareholder’s pro rata share of a CFC’s subpart F income and tested income and loss is generally the portion attributable to the stock owned by the U.S. shareholder attributable to any period of the CFC’s taxable year during which the shareholder owns the stock, the shareholder is a U.S. shareholder, and the corporation is a CFC. The provision is applicable to taxable years of foreign corporations beginning after December 31, 2025, but a transition rule provides that certain dividends are not treated as dividends for purposes of section 951(a)(2)(B) except as provided by Treasury.
Under the transition rule, dividends (or deemed dividends) paid on or before June 28, 2025, or dividends paid in a CFC taxable year that includes that date, as well as dividends paid before the first CFC taxable year beginning after December 31, 2025, will not be treated as dividends for purposes of section 951(a)(2)(B) unless they increase the taxable income of the U.S. recipient. This generally reduces the ability of taxpayers to offset taxable inclusions through mid-year distributions. The government intends to issue proposed regulations containing the rules set out in the notice.
Under the notice, any amount treated as a distribution received by any other person as a dividend under section 951(a)(2)(B), including dividends under section 1248, as in effect prior to the OBBBA would be a dividend paid (or deemed paid) under the transition rule. The notice explains the operation of the transition rule in detail, including its application to lower-tier CFCs, tiered ownership structures, partnerships and S corporations, RICs, and REITs. These clarifications are intended to ensure consistency in how taxpayers determine whether a dividend “increases taxable income,” a key threshold that determines whether section 951(a)(2)(B)’s reduction applies. By suspending the traditional treatment of certain CFC dividends, the rule may increase the amount of subpart F, tested income, or other inclusions allocable to U.S. shareholders during the transition period.
The forthcoming proposed regulations would apply to a CFC’s taxable years that either (i) include June 28, 2025, or (ii) begin after June 28, 2025, but before such CFC’s first taxable year beginning after December 31, 2025. Taxpayers may rely on the notice for dividends paid before the forthcoming proposed regulations are issued, provided the taxpayer and its related parties (within the meaning of sections 267(b) and 707(b)(1)) follow the rules in their entirety and in a consistent manner for all dividends paid before such issuance.
Written comments are due February 2, 2026.
Notice 2025-77: Effective Date and Application of Section 960(d)(4)
On December 4, the Department of Treasury and the IRS issued Notice 2025-77 addressing Tax Code section 960(d)(4), which was added by the OBBBA. Section 960(d)(4) disallows a foreign tax credit for 10% of foreign taxes paid on amounts a U.S. shareholder excluded from income as Previously Taxed Earnings and Profits under section 959(a) (“PTEP”) due to being “tested income” under section 951A (Global Intangible Low Tax Income, changed to Net CFC Tested Income by the OBBBA). The provisions are effective for the 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.
Before OBBBA, U.S. shareholders of CFCs were eligible for the foreign tax credit on 80% of foreign taxes paid by their foreign subsidiaries on income that fell under 951A. OBBBA raises that amount to 90%. However, OBBBA excludes from FTC eligibility 10% of taxes imposed on distributions from the foreign subsidiaries to the US corporations of PTEP that had previously fallen under 951A.
Proposed regulations on PTEP were issued in December 2024. The government intends to issue proposed regulations containing the provisions in the notice and modify the December 2024 proposed regulations to be consistent with the notice.
The notice provides an example illustrating that the effective date keys off the taxable year of the U.S. shareholder, not the CFC. The notice also provides for the division of PTET groups under Treas. Reg. Sec. 1.960-3 and the application of Reg. Sec. 1.861-20 to apportioning foreign tax credits to take into account the OBBBA provision and contains an example illustrating these rules.
The forthcoming proposed regulations would have the same effective date as the OBBBA provision. Taxpayers may rely on the notice before the proposed regulations are issued, provided they follow it in its entirety in a consistent manner for all taxable years. The notice does not contain a request for comments.
Notice 2025-78: Application of Section 250(b)(3)(A)(i)(VII) to Sales or Other Dispositions of Property
On December 4, the Department of Treasury and the IRS issued Notice 2025-78, addressing the OBBBA change of the Foreign-Derivied Deduction Intangible Income deduction to the Foreign Deduction Eligible Income (“FDEI”). The OBBBA changes the deduction to exclude any income or gain from the sale or disposition of intangible property and other property subject to depreciation, amortization, or depletion by the seller. The exclusion applies to sales or dispositions occurring after June 16, 2025. The government intends to issue proposed regulations consistent with the notice.
Under the notice, a “sale or other disposition” includes transactions treated as sales under general tax principles. This includes deemed sales, deemed dispositions, and transactions governed by section 367(d), but not leases or licenses. The notice contains a related-party anti-abuse rule to prevent taxpayers from avoiding the exclusion by transferring property to a related party before a sale.
The notice contains examples illustrating the sale of intangible property, fully depreciated property, inventory and other excluded property used in a trade or business, sales involving consolidated group members, and the related-party anti-abuse rule.
The forthcoming proposed regulations would apply, when finalized, to sales or other dispositions (including pursuant to deemed sales, deemed dispositions, or transactions subject to section 367(d)) occurring after June 16, 2025. Taxpayers may rule on the notice for sales or other dispositions occurring before the forthcoming proposed regulations are issued, provided the taxpayer applies the rules in their entirety and in a consistent manner for all applicable taxable years. Comments are due by February 2, 2026.