IRS issues Notice 2025‑72 on repeal of the one‑month deferral election

The United States Internal Revenue Service (IRS) released Notice 2025‑72 (Notice) on November 25, 2025, addressing two issues arising from the repeal of the one‑month deferral election under Section 898(c)(2). Specifically, the Notice provides guidance on:

1. Allocation of foreign income taxes of affected foreign corporations across a required one‑month short year and the following year
2. Timing of pre-transition foreign exchange gain or loss under Section 987

Taxpayers may rely on the Notice, provided it is applied consistently, until the proposed regulations are issued. Below, we outline the top points for taxpayers regarding Notice 2025-72.

Who is affected and when

The repeal applies to taxable years beginning after November 30, 2025. Foreign corporations that previously elected a one‑month deferral will have a short “first required year,” ending with the taxable year of its majority US shareholder (for calendar‑year shareholders, December 31, 2025).

The Notice’s allocation regime applies for taxable years beginning after November 30, 2025, and before the proposed regulations are published. The Section 987 timing rule applies to taxable years beginning after December 31, 2024, and ending on or after November 25, 2025.

Allocation structure for foreign earned income taxes

The Notice provides a method intended to be administrable for allocating certain foreign income taxes between the shortened “first required year” and the subsequent taxable year, enabling taxes to be matched with income for purposes of Subpart F, Global Intangible Low-Taxed Income (GILTI), earnings and profits, and Section 960 deemed‑paid purposes.

Scope and exclusions

The rules apply only to a "specified foreign income tax," which the regulations define as a foreign net income tax that accrues in the first required year and for which the specified foreign corporation (the affected corporation) is the Section 901 taxpayer. The regime does not apply to withholding taxes, partnership‑level taxes taken into account by the affected corporation, foreign income taxes that accrue in the succeeding taxable year, or taxes of affected corporations that account for foreign taxes on the cash method. Taxes outside the scope continue to be taken into account under general rules.

Ordering and mechanics

The Notice contains a four‑step process:

1. Identify specified foreign income taxes
2. Allocate and apportion them under Treas. Reg. §1.861‑20 (as amended) to income groups in the first required year, treating tentative gross tested income items as income groups
3. Allocate each income group's tax between the first required year and the succeeding taxable year by using an allocation percentage derived under the principles of Treas. Reg.§1.1502‑76(b) using either a closing‑of‑the‑books or ratable approach based on foreign‑law taxable income, and
4. Treat the amounts allocated as accruing in the respective years for all purposes of the Internal Revenue Code, except Sections 905(c) and 986(a).

Additional considerations

Previously taxed earnings and profits (PTEP) groups. Any tax assigned to a PTEP group is allocated to the first required year.

Ownership changes. Where §1.901‑2(f)(5) applies (such as where there is a covered event during the foreign year), the denominator of the allocation percentage only includes the foreign‑law taxable income for the part of the foreign year the affected corporation actually had owned the entity, but only if such ownership began on or before the first day of the first required year. If ownership starts after the first required year begins, the allocation percentage is considered to be 100 percent.

High‑tax elections. In determining the high‑tax exception/exclusion, the amounts allocated to each year are considered in that year. Further, because tentative gross tested income items are treated as income groups in the first required year, taxpayers may consider elections at that level.

Sections 905(c) and 986(a). For these provisions, the entire specified foreign income tax accrues and relates to the first required year. Where there is a subsequent change in foreign tax liability, taxpayers are required to redetermine amounts under the Notice’s ordering rules and adjust amounts treated as accruing in both the first required and succeeding years. This has consequences for translation rates, redetermination, and documentation.

Section 987: Transition recognition over 120 months

The Notice announces that forthcoming proposed regulations under Section 987 will modify the ten-year transition election for recognizing pre-transition gain or loss. Instead of recognizing one-tenth annually over ten taxable years, taxpayers who make the election will recognize pre-transition gain or loss ratably over 120 months, beginning on the first day of the first taxable year in which Section 987 regulations apply.

For taxpayers who already recognized a portion of pre-transition gain or loss in a short taxable year ending before November 25, 2025, that short year is deemed to contain 12 months for purposes of determining the remaining recognition period.

Request for comments

The Notice requests public comments by January 24, 2026, including whether the allocation approach should extend to other foreign taxes and whether additional multi-year timing regimes warrant guidance in light of short taxable years resulting from the repeal.

Going forward

Notice 2025-72 aims to provide a practical, administrable framework for taxpayers facing short-year distortions from the repeal of Section 898(c)(2) and clarifies the timing of Section 987 pre-transition amounts.

Taxpayers are encouraged to assess the interaction of the allocation rules with Subpart F, net tested income of controlled foreign corporations, high‑tax elections, earnings and profits, and confirm internal systems can consistently apply the chosen attribution method across the first required and succeeding years. For Section 987, taxpayers may wish to model the 120‑month ratable recognition to evaluate financial statement and cash tax effects and ensure alignment across all affected qualified business units.

For more information, please contact the authors.