Owning a foreign subsidiary on the last day of its year used to be the whole test, and Treasury has now written the rules for the test that replaced it

The old test was a date.

Under section 951 as it stood before last year's tax act, a United States shareholder picked up a share of a controlled foreign corporation's subpart F income only if it held the stock on the last day of the year on which the corporation was a CFC. The preamble to Tuesday's proposal calls that the last relevant day. Miss it and there was no inclusion, whatever had happened in the eleven months before.

The One, Big, Beautiful Bill Act took the date out. Ownership at any time during the year is now enough, and the shareholder's share is the income attributable to the stock it owned and to the periods it owned it. What arrived on Tuesday is the ninety-three pages of machinery that makes that sentence operable.

Days, not dates

The Treasury Department and the IRS considered an interim closing of the books, and considered special allocation of extraordinary items. Both were rejected in the preamble as complex, administratively burdensome, or capable of producing the wrong answer where the earnings and profits limitation in section 952(c) bites.

What the proposal adopts instead is daily proration. Where nothing changes hands, a shareholder's share comes out exactly where the existing rules put it. Where stock does change hands, the income is spread across the days of the year and follows the stock.

That leaves the question of when a year should simply stop, and the proposal answers it twice.

One closing is compulsory

A foreign corporation closes its taxable year on a status change event, which the proposal defines as the corporation becoming or ceasing to be a CFC. The closing is not personal to the shareholder whose sale caused it. It applies to every shareholder and for all purposes of the Code, as of the end of the day on which the event happens.

The worked example in the document is a domestic corporation selling a wholly owned foreign corporation to a nonresident alien on 30 June. The corporation stops being a CFC that day, so its year ends that day, for everybody.

One closing is a choice, and the threshold is 50 points

Where the corporation stays a CFC, the controlling section 958(a) United States shareholders may elect to close the year, but only on what the proposal calls a significant ownership variance. That means transfers made pursuant to the same plan during one taxable year that between them cut section 958(a) shareholder ownership by more than 50 percentage points.

The plan test is doing real work. The document's own example has US1 selling 60 percent on 30 June and US2 selling the remaining 40 percent on 1 September to the same buyer under the same plan. Neither seller crosses 50 points alone. The variance lands on 1 September, the date of the second sale, and the year closes then if the election is made.

Two carve-outs narrow it. Ownership picked up by a related United States person does not count as a decrease, on the stated ground that economic ownership has not really moved. Transfers connected with an F reorganization are left out as well.

The election is not unilateral. Every controlling section 958(a) shareholder and every United States shareholder that owned stock on any day up to the variance must sign a written binding agreement, producible to the IRS on request, and the only exception is a CFC with a single controlling shareholder and nobody else. Where one plan sweeps up several CFCs, the election has to be made for all of them or none.

The substantiation fight, and who lost it

The transition rule covers foreign corporation years that include 28 June 2025 or begin after it, and it turns on whether a dividend actually increased the taxable income of a United States person subject to federal income tax. A shareholder relying on it has to attach a statement to Form 5471 saying how it reached that conclusion.

A commenter told Treasury the requirement was ambiguous and potentially onerous, said the level of analysis and third-party information expected was never spelled out, and pointed out that the transactions in question have already closed. The suggested fix was a per se rule or a safe harbour for recipients whose inclusion in taxable income is mandatory anyway.

Treasury and the IRS declined. Their answer, in the document, is that identifying the recipient as such a person would itself satisfy the requirement, and that listing acceptable documentation would be overly restrictive. The rule as proposed keeps the statement.

Dates

The main rules are proposed to apply to foreign corporation taxable years beginning after 31 December 2025, and to the shareholder years those fall into. Comments close 60 days after publication, which is scheduled for Wednesday. Treasury and the IRS say they expect to finalise by 4 January 2027, and taxpayers may rely on the whole package before then provided they and their related parties apply all of it consistently.

The Office of Management and Budget determined the proposal is not significant under Executive Order 12866, so no regulatory impact assessment was prepared and no revenue figure appears anywhere in it.