Rule Corrections Detailed

On Aug. 31, 2026 the Treasury Department published a corrective notice in the Federal Register that amends the proposed regulations identified as REG‑115145‑25 [1]. The notice revises the Section 898(c) transition rule that governs the allocation of foreign taxes for foreign corporations and the Section 960(d)(4) provision that disallows foreign tax credits on certain distributions of previously taxed earnings and profits [1]. These corrections address errors in the original August 3, 2026 proposal, clarifying how the repeal of the one‑month deferral election impacts tax allocations for foreign entities, including those with Iranian ties [1]. The rule also tightens the criteria for credit disallowance, aiming to prevent double benefit claims on earnings that have already been taxed abroad [1].

The background to the correction stems from the Treasury’s earlier effort to restructure the tax treatment of foreign corporations after Congress eliminated the one‑month deferral election, a relief that previously allowed certain earnings to be deferred for U.S. tax purposes [1]. The original proposal sought to allocate foreign taxes proportionally among earnings and to deny credits where distributions represented previously taxed earnings and profits (PEP). However, ambiguities in the language and computational methods prompted the Treasury to issue this targeted correction rather than a wholesale rewrite [1]. The corrective action underscores the agency’s intent to preserve the integrity of the foreign tax credit system while responding to legislative changes affecting multinational firms, many of which have operations in or connections to Iran.