The IRS will issue proposed regulations to remove the disregarded payment loss (DPL) rules under Treas. Reg. §1.1503(d)-1(d), as well as certain coordinating modifications to the dual consolidated loss (DCL) rules relating to the deemed ordering rule, according to Notice 2025-44 , (PDF - 101KB) released on Aug. 20.
The DPL and DCL rules had only recently been finalized earlier this year, and the removal of the DPL rules is notable because it reflects a policy reversal by the IRS.
The notice also extends DCL transition relief for the interaction of the DCL rules with the GloBE model rules, applying to DCLs incurred in tax years beginning before Jan. 1, 2028. Finally, the notice requests comments on potential revisions to the so-called “all-or-nothing” principle and on how disregarded items should be taken into account for purposes of the DCL rules.
Removal of DPL rules
The DPL rules were introduced to address concerns regarding certain arrangements involving disregarded entity classifications allowed under the entity classification regulations that resulted in a deduction in a foreign country while having no corresponding income inclusion in the U.S. Finalized in T.D. 10026 on Jan. 14, 2025, these rules apply to a domestic corporation (DPE owner) that directly or indirectly owns an interest in a disregarded entity and involves disregarded payments that are deductible under the relevant foreign law and would be interest, structured payments, or royalties if regarded. The DPL rules generally apply to taxable years of DPE owners beginning on or after Jan. 1, 2026. See our prior coverage of the 2025 final regulations here.
Following publication of the 2025 final regulations, Treasury and IRS received feedback questioning the authority for the DPL rules and raising concerns about complexity, uncertainty, and compliance costs. In response, the IRS further considered the interaction of Section 1503(d) and the regulations under Section 7701(a) and concluded that this interaction should not be construed to cause such disregarded payments to give rise to income inclusions as set forth under the DPL rules. Accordingly, Treasury and IRS intend to issue proposed regulations that would remove the DPL rules.
Conforming changes to anti-avoidance and deemed ordering rules
With the removal of the DPL rules, the anti-avoidance rule under Treas. Reg. §1.1503(d)-1(f) will be modified so that it no longer applies to structures that would have been addressed under the DPL rules.
In addition, the deemed ordering rules under Treas. Reg. §1.1503(d)-3(c)(3) will be revised to remove the coordination provisions between the DCL rules and DPL rules, which will no longer be necessary once the DPL rules are withdrawn.
Extension of transition relief with respect to GloBE model rules
While Treasury and IRS continue to evaluate the interaction between the DCL rules and the GloBE model rules, the Notice extends the transition relief, under which the DCL rules generally apply without taking into account the Qualified Domestic Minimum Top-up Taxes or top-up taxes collected under the Income Inclusion Rule or the Undertaxed Profit Rule. Specifically, the forthcoming proposed regulations will provide that the relief under Prop. Treas. Reg. §1.1503(d)-8(b)(12) which currently applies to DCLs incurred in taxable years beginning before Aug. 6, 2024, will be extended to cover DCLs incurred in taxable years beginning before Jan. 1, 2028.
Grant Thornton insight:
By extending relief to DCLs through Jan. 1, 2028, the IRS and Treasury will provide taxpayers with much-needed certainty and planning flexibility. This marks a notable expansion of relief and is a welcome development for those navigating the interaction between DCLs and the GloBE model rules.
Applicability dates
The forthcoming proposed regulations would generally apply to taxable years beginning on or after Jan. 1, 2026. Taxpayers may rely on the notice until the proposed regulations are published in the Federal Register.
Next steps
Taxpayers should re-evaluate their existing and planned structures in light of the removal of the DPL rules and closely monitor these developments. They should also consider the extended transition relief for DCLs through Jan. 1, 2028, to align their planning and reporting with the DCL rules and the GloBE model rules.
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