Summary
- House Budget Committee schedules Thursday mark-up of budget resolution as President Trump calls upon Congress to make Reconciliation 3.0 its number one priority, after letting housing bill become law.
- Court of Federal Claims invalidates GILTI disqualified basis rule.
- Treasury and IRS issue final regulations updating QDOT elections.
- Treasury and IRS issue final regulations designating certain CRATs as Listed Transactions.
- Treasury and IRS issue final regulations on section 1035 and transfer for value of insurance policies.
- Senate Finance Committee to hold July 16 hearing on Treasury nominations.
The 21st Century ROAD to Housing Act (H.R. 6644) became law as the clock struck midnight on Friday night after President Trump neither signed nor vetoed the bill.
Congress returns to Washington this week with the Senate scheduled to be in town for four weeks before the August recess and the House for two. The House left early the last two weeks it was in session in June because of an inability of the Republican majority to pass procedural rules by which bills are considered on the House floor.
On July 7, President Trump called on Congress to make “their Number One Priority” passing a budget reconciliation bill “with 350 Billion Dollars for Defense, plus THE SAVE AMERICA ACT!”
On Thursday, the House Budget Committee will meet to mark-up a budget resolution, which would allow for up to $95 billion of additional spending. The House plans to vote on the resolution next week. The committee instructions in the budget resolution line up with the June 24 White House request for supplemental funding for defense and agriculture, and would also provide up to $10 billion in funding related to the SAVE America Act (relating to election rules). The Committee on Ways and Means was not given instructions in the resolution, which means that tax provisions are not eligible to be included in the budget reconciliation bill.
The House budget resolution does not contain Senate instructions. Unless those are included before the resolution goes to the House floor, the House would have to take up the resolution again after it is passed by the Senate. Even assuming Congress enacts the budget resolution in July, Congress will not actually take up the budget reconciliation bill until it returns the week before Labor Day – unless it takes the very unusual step of returning during the August recess.
Senate Majority Leader Senator John Thune (R-SD) continues to discount the possibility of another reconciliation bill, saying this week that supplemental appropriations for defense could instead be included as part of a broader appropriations bill, likely a continuing resolution, in September. Appropriations for the Federal government are generally set to lapse at the end of fiscal year on September 30, which will likely be one area of focus for Congress when it returns after the August recess.
Senate Budget Committee Chairman Senator Lindsey Graham (R-SC) passed away suddenly on Saturday evening. Governor Henry McMaster (R-SC) selected Senator Graham’s sister, Darline Graham Nordone, to fill the seat, and she was sworn in to the Senate on Tuesday. Senator Ron Johnson (R-WI) is expected to become the next chairman of the Senate Budget Committee.
Court of Federal Claims Invalidates GILTI Disqualified Basis Rule
The Court of Federal Claims held in Keysight Technologies, Inc. & Subsidiaries v. United States, --- Fed. Cl. ‑‑‑‑, 2026 WL 1956959 (Fed. Cl. July 2, 2026), that Treasury lacked statutory authority to promulgate Treas. Reg. § 1.951A-2(c)(5), the GILTI “disqualified basis” rule. The rule addressed certain related-party asset transfers by fiscal-year CFCs during the transition period following enactment of the TCJA, when the income of such taxpayers could fall outside both section 965 (imposing a “deemed repatriation” transition tax on foreign earnings) and the newly enacted GILTI regime.
The timing gap created by the statute allowed a fiscal-year CFC to transfer appreciated property to a related CFC during the transition period, recognize gain not subject to section 965 or GILTI, and give the transferee a stepped-up basis. That basis could then generate future deductions, losses, or increased QBAI, thereby reducing future GILTI inclusions. Treasury viewed this as an unwarranted benefit and issued Treas. Reg. § 1.951A-2(c)(5) to neutralize deductions and losses attributable to “disqualified basis.”
Keysight claimed amortization deductions attributable to pre-GILTI transactions, which the Commissioner disallowed under the regulation. In the resulting refund suit, the government defended the regulation principally under section 7805(a). The court rejected that position, holding that section 7805(a), standing alone, did not authorize Treasury to alter the statutory computation of tested income under section 951A(c). The court also rejected the government’s argument that the disqualified basis rule was promulgated pursuant to grants of regulatory authority in section 951A, ruling that those grants applied by their terms only to other aspects of section 951A. Applying Loper Bright, the court independently interpreted the statute and concluded that section 951A(c) did not permit Treasury to disallow or reallocate deductions merely because they arose from transition-period transactions Congress may not have anticipated.
The court also declined to uphold the regulation under Skidmore, finding Treasury’s interpretation unpersuasive in light of the statutory text, structure, and legislative history. Although the court acknowledged the transition-period gap, it held that Treasury could not eliminate the resulting benefit without a statutory grant of authority. The decision invalidates a significant GILTI anti-abuse rule and may have broader implications for tax regulations that rely primarily on section 7805(a) or broad purposive reasoning rather than a specific delegation in the operative Code provision.
Treasury and IRS Issue Final Regulations Updating QDOT Elections
On July 10, Treasury and the IRS issued final regulations addressing the rules for qualified domestic trust (QDOT) elections under section 2056A. The rules apply where property passes to or for the benefit of a noncitizen surviving spouse and the executor seeks to preserve the marital deduction through a QDOT election. As a statutory matter, section 2056(d)(1) generally denies the marital deduction for property passing to a noncitizen spouse, while section 2056(d)(2)(A) provides an exception allowing the deduction if the property passes in a QDOT satisfying section 2056A. The final regulations do not materially change that framework. Rather, they update outdated references, procedures, IRS office titles, filing locations, and cross-references in Treas. Reg. §§ 20.2056A-2, -4, -11, and -13.
The regulations remove obsolete references to temporary regulations, update references to the Estate Tax Advisory Group and any successor office, and direct taxpayers to IRS Publication 4235, IRS forms or instructions, or IRS.gov for current addresses and procedures. They also revise the forms of QDOT security instruments, including bonds, letters of credit, and confirmations, to reflect current IRS contacts and procedures. In addition, the regulations revise the definition of “finally determined” for purposes of valuing QDOT assets, replacing the prior closing-letter-based formulation with rules keyed to the expiration of the limitations period, a binding written agreement with the IRS, or a final court determination.
The final regulations are effective upon publication in the Federal Register and, notably, apply on and after that publication date rather than only to estates of decedents dying on or after that date. Treasury and the IRS explained that this broader applicability date is appropriate because the changes correct outdated references and procedures and should be available immediately to reduce taxpayer confusion.
Treasury and IRS Issue Final Regulations Making Certain CRATs into Listed Transactions
On July 9, Treasury and the IRS issued final regulations identifying certain Charitable Remainder Annuity Trust (CRAT) transactions as “listed transactions,” which triggers reporting requirements for participants and material advisors.
CRATs are irrevocable “split-interest” trusts. Donors transfer assets to a trust and retain (or designate another noncharitable beneficiary to receive) a fixed annuity payment annually, while the trust’s remainder interest is designated for one or more charities. In general, CRATs are exempt from income tax, assets transferred to the CRAT have the donor’s carryover basis, gain on the sale of appreciated assets by the CRAT is taxed to the beneficiary when it is distributed to the beneficiary as an annuity payment (and not to the CRAT), and the donor may claim a charitable deduction upon funding the CRAT based on the present value of the amount expected to pass to charity.
The final rule creates a new section in the regulations, § 1.6011-15, identifying as a listed transaction circumstances in which taxpayers attempt to use CRATs to transform taxable gain from appreciated property into more favorably taxed annuity payments. In the targeted structure, a grantor funds a CRAT with appreciated property, and the trustee sells that property to purchase an annuity contract. The taxpayer then reports the CRAT’s annual payments to the taxpayer as if they were commercial annuity payments (including a tax-free component), rather than as CRAT distributions taxable as ordinary income and capital gain under section 664(b).
The IRS identified such transactions as misapplying the rules under Tax Code sections 72 and 664 in its 2023 “Dirty Dozen” list. The final regulations adopt without change proposed regulations promulgated on March 25, 2024.
Failure to disclose participation in a listed transaction can result in significant penalties, including penalties of up to $100,000 for an individual participant. A charity named as a remainder beneficiary will not be treated as a participant in the listed transaction solely because of that status. The regulation is effective on July 9, 2026.
Treasury and IRS Issue Final Regulations on Section 1035 and Transfer for Value of Insurance Policies.
On July 9, 2026, Treasury and the IRS released final regulations addressing concerns raised about 2019 regulations implementing sections 13520 and 13522 of the Tax Cuts and Jobs Act, which amended Tax Code section 101 to exclude reportable policy sales from tax-free treatment of death benefits on insurance contracts, and created corresponding reporting requirements in section 6050Y.
Under Tax Code section 1035, a policyholder receives non-recognition upon the exchange of certain insurance contracts. The 2019 regulations prevented taxpayers from using a section 1035 exchange to avoid the reportable policy sale provision or the associated reporting requirements but, as Treasury stated in the May 2023 proposed regulations, inadvertently treated a section 1035 exchange as sometimes itself triggering the transfer for value rule.
The final regulations adopt the May 2023 proposed rules with some changes. Issuing a new policy – including in a section 1035 exchange – is not considered a transfer, so an exchange does not by itself become a reportable policy sale. However, a subsequent section 1035 exchange does not erase the consequences of an insurance contract’s previously undergoing a reportable policy sale. Taxpayers may apply this portion of the final regulations to all exchanges and acquisitions occurring after December 31, 2017 (the effective date of the TCJA provision).
The final regulations streamline some of the reporting compared to the proposed regulations. Rather than requiring both the old and new insurers to file returns with the IRS (on Form 1099-SB) for these exchanges, the final rules have the old insurer pass the necessary information – such as the policyholder's cost basis and whether the old policy had a reporting history for death benefits – directly to the new insurer, and report the exchange on Form 1099-R (the IRS expects to add a new Box 7 distribution code for this purpose the next time it updates the form).
The final regulations preserve a de minimis exception to the reportable sale rules for certain reorganizations in which the amount of life insurance held by the target and acquiring C corporations is 5% or less of the gross value of their assets, and are not engaged in the trade or business of investing in interests in life insurance contracts.
The preamble states that Treasury and the IRS will consider whether to extend the de minimis exception for other types of reorganizations.
The preamble confirms that the regulations do not change the Tax Code requirement that insurance contracts must meet state-law requirements for insurance policies, including that the holder have an insurable interest in the insured.
Senate Finance Committee to Hold July 16 Hearing on Treasury Nominations
The Senate Finance Committee will hold a hearing on July 16 to consider 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, of South Carolina, to be Assistant Secretary of the Treasury for Financial Markets.