On August 20, 2025, the Internal Revenue Service (IRS) released Notice 2025-44 (Notice), which announced that the Department of the Treasury (Treasury) and IRS intend to issue proposed regulations that would:
- remove the final rules (2025 final regulations) with respect to section 1503(d) “disregarded payment losses” or “DPLs”,
- modify section 1503(d) “dual consolidated loss” or “DCL” deemed ordering rules, and
- extend transition relief intended to prevent application of the Global anti-Base Erosion (GloBE) Model Rules (Pillar Two) from causing a deemed “foreign use” under the DCL rules through 2027.
For a detailed discussion of section 1503(d), see our prior alert.
The contemplated proposed regulations will have applicability dates that align with the original effective date of the DPL rules, ensuring the final DPL rules will not take effect. Taxpayers may rely on the Notice until proposed regulations are published in the Federal Register.
Key Changes Announced in the Notice
1. Removal of the DPL Rules
With the elimination of the DPL rules, the scope of the regulations under section 1503(d) will again be restricted to payments that are “regarded” for US tax purposes. Correspondingly, the anti-avoidance rule added by the 2025 final regulations that requires “appropriate adjustments” to be made with respect to transactions or business structures that are inconsistent with, or entered into with an intent to avoid, the purposes of the DCL and DPL rules will be amended to eliminate the DPL component. US businesses with disregarded foreign subsidiaries will therefore no longer have to contemplate whether operations involving those subsidiaries are inconsistent with the purpose of the DPL rules.
2. Modification of Deemed Ordering Rules
In addition, the 2025 final regulations modified the “deemed ordering rule” under Treas. Reg. § 1.1503(d)-3(c)(3) to coordinate the application of the DCL rules and the DPL rules by applying them separately, such that “foreign use” is determined only with respect to regarded separate unit income, in the case of a DCL, and with respect to disregarded payment income, in the case of a DPL.1
Consistent with the Notice’s intent to fully eliminate the DPL rules, the modifications to the deemed ordering rule that separated the determination of “foreign use” for DCL and DPL purposes will be withdrawn.
3. Extension of Transition Relief on Application of DCL Rules to GloBE Model Rules
The Notice further extends the transition relief in Prop. Treas. Reg. § 1.1503(d)-8(b)(12), which provides that a “foreign use” for purposes of the DCL rules is not considered to occur as a result of the application of a qualified domestic minimum top-up tax (QDMTT) or an income inclusion rule (IIR) solely because all or a portion of the deductions or losses that comprise the DCL are taken into account in determining the net income for a jurisdiction or whether a safe harbor applies for a jurisdiction.
The transition relief announced in connection with issuance of the 2025 final regulations would have applied with respect to any DCL incurred in a taxable year beginning before August 31, 2025. The Notice recognized an extension was appropriate to allow for further consideration of comments received in response to the 2024 proposed regulations, developments at the OECD, and to provide taxpayers more certainty. The Notice extends the transition relief through 2027 (i.e., with respect to DCLs incurred in taxable years beginning before January 1, 2028).
The OECD recently announced forthcoming proposed changes to the GloBE Model Rules that would treat the US tax system as operating side-by-side Pillar Two, such that US companies could be exempt from Pillar Two. However, the proposed safe harbor has yet to be published, and until it is relief will be required.
Continued Study of Certain Issues
Treasury and IRS stated in the Notice that they will continue to study certain issues with respect to the DCL rules. Treasury and IRS have requested comments regarding potential revisions, taking into account administrability concerns, to the “all or nothing” principle, which currently requires total disallowance of a DCL for US federal income tax purposes, even if the loss is only partially allowed in a foreign jurisdiction. That Treasury and IRS are considering modifications to this rule is welcome, as the current rule creates a cliff effect inconsistent with principles of tax fairness.
Treasury and IRS also requested comments regarding how disregarded items should be taken into account for purposes of the DCL rules, and proposed, for example, doing so in a manner similar to the foreign branch category income rules under section 904 and the regulations thereunder – specifically referencing Treas. Reg. § 1.904-4(f) (regarding categorizing a taxpayer’s income for purposes of computing the foreign tax credit limitation).
Comments on both issues are requested by October 21, 2025.
1 These modifications were intended to clarify the deemed ordering rule set forth at Treas. Reg. § 1.1503(d)-3(c) consistent with the intent of the 2024 proposed regulations. See Preamble to the 2025 final regulations, 90 Fed. Reg. at 3011–3012.
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