The New York State Bar Association’s Tax Section has recently released two new reports concerning (1) various issues arising under section 704(c)(1)(A) and (2) IRS Notice 2025-72, which addressed the repeal of section 898(c),

• Report Number 1519 (Report on Various Issues Arising Under Section 704(c)(1)(A)):

The Report provides comments and certain recommendations of the Tax Section regarding section 704(c)(1)(A) of the Internal Revenue Code, which governs the allocation of partnership items with respect to partnership property with a tax basis that differs from its fair market value. The rules under section 704(c)(1)(A) are generally intended to prevent inappropriate shifting of tax consequences among partners with respect to pre-contribution gain or loss.

The Report identifies the need for additional guidance under section 704(c)(1)(A) with respect to a number of important topics and provides our recommendations on specific issues that we consider most critically in sneed of additional guidance.

• Report Number 1520 (Report on Notice 2025-72):

This report . . . addresses Notice 2025-72 . . . , which was released . . . on November 25, 2025. The Notice announced Treasury’s intention to issue proposed regulations under section 70352 of the [OBBBA]. The OBBBA repeals section 898(c)(2) and directs Treasury to issue guidance on the allocation of foreign taxes paid or accrued by foreign corporations affected by that repeal . . . . The Notice also announces that Treasury intends to issue proposed regulations under section 987 that would modify the election to recognize pretransition gain or loss ratably over the transition period.

The repeal of section 898(c)(2) requires many foreign corporations to adopt a new taxable year. To transition to their new taxable year, those corporations would be required to have a one-month short taxable year, which could result in distortions under the Code’s international tax
provisions. To address this, the Transition Rule directs Treasury to issue regulations or other guidance for allocating foreign taxes that are paid or accrued in such first taxable year and the succeeding taxable year among such taxable years in the manner Treasury determines appropriate to carry out the purposes of the Transition Rule. The Notice does this by formulaically allocating a portion of the foreign income taxes that would otherwise accrue during an affected corporation’s short taxable year to the succeeding taxable year.

We believe that the approach set forth in the Notice to allocating foreign income taxes among taxable years generally represents an appropriate method to mitigate distortions in a manner consistent with the purposes underlying the Transition Rule. This Report addresses the Notice and provides comments on the forthcoming proposed regulations.