Summary
- Senate puts budget resolution on hold, stalling progress on Reconciliation 3.0.
- Proposed regulations address OBBBA provisions repealing one-month taxable year deferral election and disallowance of some foreign tax credits for distributions of previously taxed earnings and profits.
- Senate Finance Committee holds July 30 mark-up on Taxpayer Assistance and Service Act.
- Tax Court applies SRLY rules to prevent predecessor’s NOLs from offsetting consolidated group’s income.
- Treasury personnel developments.
Senate Puts Budget Resolution on Hold, Stalling Progress on Reconciliation 3.0
With government appropriations set to expire at the end of the 2026 fiscal year on September 30, this week the Senate is scheduled to consider a continuing resolution (CR) to fund the government from October 1 through December 11, but the bill is different than the House-passed CR. However, Senate Majority Leader Thune (R-SD) continues to maintain that the budget resolution passed by the House in July does not currently have majority support in the Senate. Thus, the Senate is very unlikely to take up the budget resolution before leaving at the end of the week for August recess.
Senate Republicans would like to significantly increase the funding levels envisioned by the House-passed budget resolution for defense, intelligence and agriculture. Senator Thune has also continued to stress that the Senate does not have the votes to provide for SAVE America Act election procedure provisions in a budget resolution, and that it is questionable whether such provisions would meet the Senate rules for inclusion in a budget reconciliation bill. President Trump continues to emphasize that election procedure provisions, some of which are structured for inclusion in Reconciliation 3.0 by the House-passed budget resolution, are a top priority prior to the November midterm elections.
After leaving this week, the Senate is not scheduled to return to D.C. until September 14. The House is scheduled to return on August 31. In September, the Senate and House will attempt to negotiate the differences between the House-passed CR and the Senate bill to be considered this week. Besides containing different dates, the bills have different funding anomalies, which are selected items with different treatment than the preceding year. There are also other important differences in the CRs, including that the Senate bill would amend the Tax Code to extend certain expiring provisions of the Highway Trust Fund, and Senate language that would effectively limit political appointee control over federal grantmaking.
Both chambers are scheduled to again leave D.C. by October 2 until after the November midterms, which does not leave a lot of time to enact a reconciliation bill before the midterms. Until a budget resolution is enacted, the House cannot proceed on a reconciliation bill. Even though the resolution is not subject to presidential approval, the resolution must contain both House and Senate committee instructions. As the House-passed resolution does not contain Senate instructions, the House will have to take up and pass a potential budget resolution passed by the Senate, which appears very unlikely before the Senate’s return on September 14, or conduct even further negotiations.
It thus remains to be seen whether Congress will enact provisions addressing election procedures in September, which seems quite unlikely in the Senate outside a budget reconciliation bill. Failure to do so may prompt a significant reaction from President Trump, such as vetoing any funding bill, which would lead to a government shutdown.
There have been some reports that the Senate has made significant progress on an appropriations bill for fiscal year 2027, but the Senate Appropriations Committee has yet to take up any of the 12 annual appropriations bills for fiscal year 2027 and has given no indication it will do so this week.
Treasury and IRS Issue Proposed Regulations Addressing OBBBA Provisions Repealing One-Month Taxable Year Deferral Election and Disallowance of Foreign Tax Credits on Certain Distributions of Previously Taxed Earnings and Profits
On Friday, Treasury and the IRS released proposed regulations addressing two cross-border provisions enacted in the OBBBA. Section 70352 of the OBBBA strikes Tax Code section 898(c)(2), thereby removing the option for a specified foreign corporation to have a taxable year that is one month different than its majority U.S. shareholder. OBBBA Section 70312 adds new Tax Code section 960(d)(4) disallowing 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 (PTEP) under section 959(a) because it is “tested income” under section 951A (Net CFC Tested Income).
OBBBA contains a transition rule requiring specified foreign corporations with a taxable year different than their U.S. parent to close their first taxable year beginning after November 20, 2025, with their majority U.S. shareholder’s taxable year, thus resulting in a short taxable year.
The proposed regulations generally contain the rules in Notice 2025-72 (issued on November 25, 2025, and described in this S&C memo) with several modifications, but do not include the rules relating to pretransition section 987 gain or loss, which the government said will be the subject of additional forthcoming proposed regulations. The modifications are:
- If a partnership is required to change its taxable year because a corporation (affected corporation) owning an interest in the partnership is required to change its taxable year under OBBBA section 70352, the proposed regulations provide an election to treat all of the corporation’s distributive shares of certain creditable foreign tax expenditures of the partnership as specified foreign income taxes that are allocated between taxable years under the proposed regulations.
- Where an affected corporation’s foreign taxable year does not align with its succeeding taxable year (under OBBBA), the proposed regulations provide an election to allocate the affected corporation’s succeeding year taxes between the corporation’s first required year and its succeeding taxable year.
- Notice 2025-72 requires use of a single allocation percentage for allocating foreign taxes between the short year and the succeeding year. The proposed regulations allow an election to apply different allocation percentages to foreign taxes assigned to different income groups of an affected corporation.
- The proposed regulations also provide an election not to allocate an affected corporation’s specified foreign income taxes, instead taking them into account in the affected corporation’s first required year.
The section 898 proposed regulations are proposed to apply to taxable years of specified foreign corporations beginning after November 30, 2025. Taxpayers may rely on the section 898(c) proposed regulations for foreign taxes paid or accrued before the final regulations are issued, provided that taxpayers do so in their entirety and in a consistent manner.
With respect to Section 960(d)(4), the proposed regulations contain the rules in Notice 2025-77 (issued on December 4, 2025, and described in this S&C memo). The government intends to modify the December 2, 2024, PTEP proposed regulations to be consistent with these proposed regulations.
The 960 proposed regulations are proposed to apply to foreign income taxes paid or accrued with respect to an amount excluded from gross income under section 959(a) because 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 PTEP updates 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. Taxpayers may rely on the 960 proposed regulations for taxable years of U.S. shareholders beginning before the date final regulations are issued, provided the taxpayers do so in their entirety and in a consistent manner.
Comments and requests for a public hearing are due by September 17, 2026. Treasury and the IRS expect to finalize the proposed regulations by January 4, 2027.
Senate Finance Committee Holds July 30 Mark-Up on Taxpayer Assistance and Service Act
On July 30, the Senate Finance Committee voted to favorably report S. 3931, the Taxpayer Assistance and Service Act, as amended by the Modification of the Chairman’s Mark. The bill was introduced by Chairman Crapo (R-ID) and Ranking Member Wyden (D-OR) on February 26. The vote was 26-1, with Senator Warren (D-MA) the only negative vote.
The bill contains over 60 provisions addressing tax administration and customer service, American citizens abroad, judicial review, the Office of the Taxpayer Advocate, tax return preparers, appeals, whistleblowers, hostages and small businesses. The Modification of the Chairman’s Mark modifies the bill’s provisions on penalties for failure to provide valid preparer identification numbers and the right of tax-exempt organizations to appeal IRS denial or revocation of tax-exempt status. The Modification also contains additional provisions addressing estimated taxes for farmers and fishermen; requiring the IRS to report on duplicative requests to taxpayers; changing the due date for certain information returns to enable the IRS to verify income and withholding before issuing refunds, increasing criminal and civil penalties for unauthorized disclosures of taxpayer information; modifying certain foreign information return requirements and associated penalties; and requiring the IRS to appoint a Business Child Care Liaison.
An amendment by Senator Wyden to nullify the arrangement regarding the audit of President Trump’s taxes was defeated along partisan lines.
Tax Court Applies SRLY Rules to Prevent Predecessor’s NOLs from Offsetting Consolidated Group’s Income
On July 27, the Tax Court held in HBM Holdings v. Commissioner that consolidated group members can’t use approximately $29.6M in NOL carryovers inherited from a liquidated predecessor.
Delavau Holdings LLC, a subsidiary of HBM Holdings Co, transferred net operating losses (NOLs) to its parent in a section 332 liquidation. The Tax Court held the “lonely parent” exception to the separate return limitation year (SRLY) rules applies only to losses arising in the common parent’s own separate return years and thus did not apply to losses inherited from a predecessor (even though Delavau liquidated immediately before the consolidated group formed).
The court emphasized that section 381 succession prior to the formation of the consolidated return did not make Delavau’s NOL carryovers indistinguishable from HBM’s own tax attributes. As HBM had no separate-entity taxable income during the years at issue, the SRLY limitation prevented the losses from offsetting income earned by other group members. The court also rejected an alternative argument, that HBM and its subsidiaries should be treated under a SRLY subgroup. Given that HBM was previously an S corporation and the subsidiaries were qualified subchapter S subsidiaries, they had not previously belonged to the same affiliated group. In effect, common ownership was insufficient because “continuous affiliation is a key requirement.”
Treasury Personnel Developments
On Thursday, the Senate voted 50-47 on a procedural motion to proceed to vote on the nominations of Francis Brooke to be Deputy Secretary of the Treasury, Erin Browne to be Under Secretary of the Treasury for International Affairs, Sriprakash Kothari to be Assistant Secretary of the Treasury for Economic Affairs, and George McMaster to be Assistant Secretary of the Treasury for Financial Markets. The Senate will likely vote on the nominations next week.
The Senate Finance Committee hearing on the nomination of Jim Gadwood to be IRS Chief Counsel will not take place before the Senate’s August recess.