Summary
- Treasury and IRS propose rules for determining pro rata shares of subpart F income and net CFC tested income.
- Tax Court follows its own precedent on deficiency jurisdiction.
- Soroban Capital Partners responds to Fifth Circuit’s K Alain Opinion.
- Fifth Circuit affirms dismissal of tax penalty jury trial suit in conservation easement case.
The House is scheduled to return today for four days, while the Senate remains in August recess. The House is scheduled to take up the Senate-passed continuing resolution, H.R. 6500, which would fund the government through December 11, on the suspension calendar. This requires a two-thirds vote for passage but eliminates the need for the House to pass a rule to bring the bill to the House floor.
Enacting an appropriations bill this week might create space for Congress to consider a third reconciliation bill or legislation more broadly addressing the economy, which might include tax provisions, when the House and Senate return to D.C. for three weeks starting September 14 before leaving to campaign for the November elections. The House passed a budget resolution in July to serve as the procedural mechanism for Congress to consider a third reconciliation bill, but the Senate has yet to vote on that resolution.
On September 2, the Committee on Ways and Means will hold a hearing on “Strategic Partnerships to Secure Critical Resources and Supply Chains,” with “a particular focus on partnerships in Central Asia and Africa.” It is possible that the “United States-Taiwan Expedited Double-Tax Relief Act,” H.R. 33, which would address tax between the United States and Taiwan, and passed by the House 423-1 on January 15, 2025, will be discussed at the hearing.
There were two notable conservation easement developments this past week. The IRS announced that Daniel Huff will lead the IRS’s newly established Office of Conservation Easements, which will centralize technical expertise and coordinate conservation easement policy, enforcement and case-resolution strategy. And as detailed below, the Fifth Circuit affirmed the dismissal of Norcave Properties, L.L.C.’s pre-payment jury-trial suit challenging tax penalties.
Treasury and IRS Propose Rules for Determining Pro Rata Shares of Subpart F Income and Net CFC Tested Income
On August 26, the Treasury Department and IRS published proposed regulations implementing the changes made by the One Big Beautiful Bill Act (OBBBA) to the rules for determining a U.S. shareholder’s pro rata share of a controlled foreign corporation’s (CFC’s) subpart F income, tested income and tested loss. Under the OBBBA, a U.S. shareholder generally takes into account income attributable to CFC stock for the portion of the CFC’s taxable year during which the shareholder owns the stock and is a U.S. shareholder, and the foreign corporation is a CFC. The OBBBA rule replaced the prior rule that generally looked to ownership on the last day of the CFC’s taxable year. The proposed regulations generally implement this change through a daily proration approach, under which a CFC’s subpart F income, tested income and tested loss is allocated among U.S. shareholders based on their ownership during the year. The proposed regulations build on guidance announced in December 2025 and described in this prior S&C Tax Policy Update.
The proposed regulations would also provide special rules for changes in CFC ownership. A foreign corporation’s taxable year would be required to close for all U.S. federal income tax purposes when the corporation becomes or ceases to be a CFC. In addition, where specified transfers pursuant to the same plan result in a decrease of more than 50 percentage points in the ownership of a CFC by one or more section 958(a) U.S. shareholders, the affected U.S. shareholders generally could elect to close the CFC’s taxable year, subject to related-party limitations, shareholder-consent requirements and a consistency rule for multiple CFCs involved in the same plan or series of related transactions. For other changes in ownership, the daily proration rule generally would continue to apply rather than a closing-of-the-books approach.
The proposed regulations would also implement the OBBBA transition rule previously addressed in Notice 2025-75. As described in our December 2025 Tax Policy Update, the transition rule generally prevents certain dividends paid during the transition period from reducing a U.S. shareholder’s pro rata share under former section 951(a)(2)(B) unless the dividend increases the taxable income of a U.S. person. The proposed regulations generally incorporate the rules in Notice 2025-75, including rules for determining whether a dividend increases taxable income, rules for dividends received through partnerships and a substantiation requirement. The proposal would also phase out the section 245A extraordinary-reduction rules for taxable years of foreign corporations beginning after December 31, 2025, which Treasury and IRS concluded are no longer necessary in light of the OBBBA’s revised pro rata share rules.
The proposed regulations under sections 951, 951A and 6038 generally would apply to taxable years of foreign corporations beginning after December 31, 2025, and relevant taxable years of U.S. shareholders. Taxpayers may rely on the proposed regulations before they are finalized if the taxpayer and its related parties apply the rules in their entirety and consistently. Treasury and IRS have requested comments on all aspects of the proposed regulations, including whether the regulations under section 1248 should be revised to coordinate with the new pro rata share rules and whether certain early closings of a foreign corporation’s taxable year should trigger a corresponding closing of a partnership taxable year. Comments and requests for a public hearing are due October 26, 2026.
Tax Court Follows Its Own Precedent on Deficiency Jurisdiction
On August 25, Tax Court dismissed a late-filed petition related to a notice of deficiency for lack of jurisdiction, signaling its intent to follow its own precedent with respect to whether the filing deadline for petitions in deficiency cases is jurisdictional, and whether equitable tolling should apply. Five Circuits have ruled on section 6213(a)’s deficiency petition deadline, finding it not to be jurisdictional. Four have found equitable tolling to apply: the Second Circuit in Buller v. Commissioner, 160 F.4th 266 (2d Cir. 2025); the Third Circuit in Culp v. Commissioner, 75 F.4th 196 (3d Cir. 2023); the Sixth Circuit in Oquendo v. Commissioner, 148 F.4th 820 (6th Cir. 2025); and the Eighth Circuit in Maniktala v. Commissioner, No. 25-1366 (8th Cir. 2026); while one held it is nonjurisdictional yet mandatory and found that equitable tolling would not apply. Kyick Holdings LLC v. Commissioner, No. 25-1429 (1st Cir. 2026), as described in last week’s S&C Tax Policy Update.
The issue remains pending in the Fourth Circuit (Laurenzano v. Commissioner, No. 25-2020); the Seventh Circuit (Lewis v. Commissioner, No. 26-1173); the Ninth Circuit (O’Neill v. Commissioner, No. 25-5250, and Dorondo v. Commissioner, No. 26-944); the Tenth Circuit (Dugan v. Commissioner, No. 26-9002); and the Eleventh Circuit, which recently ordered full briefing in Reddick v. Commissioner, No. 26-10999.
H.R. 5349, the Tax Court Improvement Act, which the House passed by voice vote on December 1, 2025, would authorize the Tax Court to equitably toll the section 6213(a) deficiency-petition deadline and would permit taxpayers whose petitions are dismissed after equitable tolling is denied to sue for a refund after paying the tax. The Senate received the bill, read it twice and referred it to the Senate Finance Committee on December 2, 2025. S. 3931, the Taxpayer Assistance and Service Act, which the Senate Finance Committee reported by a 26-1 vote on July 30, 2026, contains a similar provision. Section 307 of S. 3931 would treat the deadlines under sections 6015(e)(1)(A), 6213(a) and 6330(d)(1)(A) as nonjurisdictional claims-processing rules subject to waiver, forfeiture, estoppel and equitable tolling.
Soroban Capital Partners Responds to Fifth Circuit’s K Alain Opinion
On August 24, Soroban Capital Partners filed a response to the government’s August 18 letter to the Second Circuit, addressing the Fifth Circuit’s holding in K Alain, LLLP (formerly Sirius Solutions LLLP). Soroban is appealing the Tax Court’s ruling that Soroban’s partners were not “limited partners” under Tax Code section 1402(a)(13). The government highlighted the Fifth Circuit’s holding that a limited partner under that statute includes a partner who does not play a significant role in managing or running the business and asserted that the Tax Court found that Soroban’s principals “undisputedly controlled every aspect of Soroban and undisputedly were critical to the investment-management activities that generated Soroban’s income” and thus are not limited partners under K Alain.
Soroban made three arguments. First, K Alain does not address the “fatal jurisdictional problem” that Soroban’s case currently suffers. Soroban contends that the IRS lacks the authority to determine, and the Tax Court lacks jurisdiction to decide, net earnings from self-employment within TEFRA partnership proceedings because NESE is not a partnership item. Second, the Fifth Circuit fails to explain why it “departed from its earlier (correct) understanding.” Third, K Alain rejects the “passive investor” standard the Tax Court applied, and if the case were remanded to the Tax Court on the management-focused standard, the taxpayers would prevail.
Fifth Circuit Affirms Dismissal of Tax Penalty Jury Trial Suit in Conservation Easement Case
On August 21, the Fifth Circuit held in Norcave Properties, L.L.C. v. IRS, No. 25-30542 (5th Cir., August 21, 2026), that the District Court’s dismissal of the petitioner’s pre-payment suit challenging certain penalties asserted in connection with the IRS challenge of its claim to a noncash charitable contribution deduction was correct. The petitioner/appellant, Norcave Properties, LLC, claimed a tax deduction after donating a conservation easement on roughly 320 acres of land. The IRS disallowed the deduction and sought to impose a civil fraud penalty, as well as valuation penalties for negligence, substantial understatement of income tax, and gross-valuation misstatements. Norcave filed suit in federal district court, demanding a pre-payment jury trial to contest the assessed penalties and requesting declaratory and injunctive relief. Norcave also filed a petition in Tax Court, seeking relief from the proposed deficiency. The District Court found that both the civil fraud and accuracy-related penalties constituted “tax” for purposes of § 6665(a)(2), and thus its jurisdiction over the matter was precluded by the Anti-Injunction Act (“no suit for the purpose of restraining the assessment or collection of any tax shall be maintained in any court by any person” § 7421(a)).
With respect to the civil fraud penalty, the partnership asserted that it had a right to a jury trial pursuant to the Supreme Court’s recent holding in SEC v. Jarkesy, 603 U.S. 109 (2024). Since filing, however, the IRS is no longer pursuing civil fraud penalties. The determination on appeal, therefore, was limited to whether the assessment of accuracy-related tax penalties count as part of a tax liability for purposes of the Anti-Injunction Act or the Declaratory Judgment Act. The Court concluded that accuracy-related penalties fit into the assessed tax, also citing section 6665(a)(2).