Internal Revenue Bulletin 2025-37

IRS Retreats on DPLs and Smooths Inbound Reorgs

This week's Internal Revenue Bulletin (IRB) 2025-37 signals a shift towards reducing regulatory friction in certain international tax contexts. The headline announcement is Notice 2025-44, where the IRS declares its intent to withdraw the controversial Disregarded Payment Loss (DPL) rules codified under § 1.1503(d)-1(d). These rules, finalized as recently as January 14, 2025, had been slated to apply to losses incurred in tax years beginning on or after January 1, 2026. Notice 2025-45 offers further relief, outlining planned regulations under Sections 897(d) and (e) to ease FIRPTA (Foreign Investment in Real Property Tax Act) restrictions on certain inbound asset reorganizations under Section 368(a)(1)(F), specifically those constituting "covered inbound F reorganizations" as defined within the notice. Finally, Rev. Rul. 2025-18 updates the interest rates for overpayments and underpayments as determined under Section 6621 for the calendar quarter beginning October 1, 2025.

Deep Dive: IRS Scraps Controversial DPL Rules

Notice 2025-44 signals a significant retreat by the IRS, announcing the forthcoming withdrawal of the disregarded payment loss ("DPL") rules under § 1.1503(d)-1(d). These DPL rules, finalized on January 14, 2025, were set to apply to losses incurred in taxable years beginning on or after January 1, 2026. The IRS is preemptively pulling back the regulations before they even go into effect, citing concerns about complexity, cost, and, crucially, doubtful statutory authority. This reversal comes amidst a backdrop of increasing scrutiny of agency overreach, particularly after the Supreme Court's decision in Loper Bright Enterprises v. Raimondo, which has emboldened challenges to regulations lacking explicit Congressional authorization.

The DPL rules were intended to prevent "Deduction/No Inclusion" (D/NI) outcomes. These arise when a Disregarded Payment Entity (DPE)—like a foreign disregarded entity (DRE) or branch—makes payments (such as interest or royalties) to its US owner. Under foreign law, these payments might be deductible, but they are often disregarded for US tax purposes because of the DRE rules. The DPL rules would have treated such losses as "regarded" in the US, potentially requiring the US owner to include an equivalent amount in taxable income if a "foreign use" of the loss occurred.

In addition to withdrawing the DPL rules, Notice 2025-44 announces a further extension of transition relief, initially provided in Notice 2023-80, regarding the interaction between the dual consolidated loss (DCL) rules under Section 1503(d) and the OECD's GloBE Model Rules (Pillar Two). Section 1503(d) prevents the "double dipping" of losses, where a single economic loss is used to offset income in two different jurisdictions. A DCL is a loss incurred by a dual resident corporation (DRC) or a separate unit (like a foreign branch or DRE) of a domestic corporation. Generally, a DCL cannot be used to offset the income of a domestic affiliate (a "domestic use") unless the taxpayer files a Domestic Use Election (DUE), certifying that no "foreign use" has occurred or will occur. The transition relief extends the period during which the application of the GloBE rules will not be treated as a "foreign use" of a DCL. This extension is critical as the OECD's Pillar Two aims to ensure a 15% minimum tax rate via the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), which could potentially trigger DCL recapture if losses are used to reduce taxes in a foreign jurisdiction.

The withdrawal of the DPL rules is a significant victory for multinational corporations, who argued that these rules represented an overreach by the IRS and were unduly burdensome. Practitioners should take note of the continued transition relief for DCLs in the context of Pillar Two, as the interaction between US loss rules and international tax regimes remains a complex area requiring careful planning.

Deep Dive: Path Cleared for Corporate Homecomings

The previous section discussed the announced withdrawal of the Disregarded Payment Loss (DPL) rules under § 1.1503(d)-1(d), which would have potentially triggered DCL recapture if losses are used to reduce taxes in a foreign jurisdiction.

Notice 2025-45 signals a shift in focus, addressing inbound corporate reorganizations and aiming to reduce friction for foreign companies seeking to redomicile in the United States.

1. The Rule: The IRS intends to issue proposed regulations under Section 897(d) and Section 897(e), modifying existing rules under §§1.897-5T and 1.897-6T, Notice 89-85, and Notice 2006-46, regarding transactions involving United States Real Property Interests (USRPIs). These forthcoming regulations will specifically address certain inbound asset reorganizations under Section 368(a)(1)(F), defining them as "covered inbound F reorganizations". Furthermore, the IRS plans to revise §1.368-2(m) to clarify that the qualification of a potential F reorganization (as defined in §1.368-2(m)(1)) under Section 368(a)(1)(F) is not affected by stock dispositions in either the transferor or resulting corporation if the disposition is not part of the plan of reorganization.

2. The Context: Publicly traded foreign corporations seeking to move their tax residency to the U.S. via an inbound F reorganization faced potential tax consequences under the Foreign Investment in Real Property Tax Act (FIRPTA), specifically Section 897. Section 897 treats gain or loss from the disposition of a United States Real Property Interest (USRPI) by a foreign person as income effectively connected with a US trade or business (ECI). A USRPI includes direct ownership of US land/improvements and stock in a US Real Property Holding Corporation (USRPHC)—a domestic corporation where 50% or more of assets are USRPIs.

   Under existing rules, a foreign corporation transferring a USRPI to a newly formed U.S. corporation during an F reorganization could trigger gain recognition under Section 897(d), unless the shares of the new U.S. corporation were also considered USRPIs. This created a deterrent for foreign companies, particularly publicly traded ones, contemplating a move to the U.S., as it could result in immediate tax liabilities. This announcement reflects a policy shift, aiming to encourage companies to redomicile in the US by removing these tax-related obstacles. Note that Liberty Global Inc. v. Commissioner (2023, 161 T.C. No. 10) addressed the recapture of Overall Foreign Losses (OFL) under Section 904(f)(3) in complex international structures, highlighting the IRS's focus on recharacterizing gains to prevent tax avoidance in cross-border shifts.

3. The Implication: The IRS is essentially creating an exception to FIRPTA's general gain recognition rule for "covered inbound F reorganizations." The proposed regulations will likely outline specific conditions that must be met to qualify for this exception, presumably involving publicly traded status and potentially limitations on the amount of stock that can be disposed of as part of the reorganization. This will allow publicly traded foreign corporations to redomicile in the U.S. without triggering immediate FIRPTA taxes.

   The clarification to §1.368-2(m) regarding the "identity of stock ownership" requirement is also significant. Section 368(a)(1)(F) defines an F Reorganization as a "mere change in identity, form, or place of organization of one corporation." The regulations at §1.368-2(m) provide additional guidance on what constitutes a valid F Reorganization. This clarification ensures that isolated dispositions of stock not connected to the reorganization plan will not jeopardize the F reorganization's tax-free status. This provides greater certainty for companies undertaking such reorganizations, as it removes the risk that minor, unrelated stock transactions could inadvertently trigger adverse tax consequences. Tax practitioners should monitor the release of the proposed regulations for the specific requirements of the "covered inbound F reorganization" exception and carefully document all stock transactions related to any F reorganization to ensure compliance with §1.368-2(m).

Deep Dive: Q4 2025 Interest Rates Held Steady

Following guidance on inbound reorganizations and the now-withdrawn DPL regulations, the IRS issued routine guidance regarding applicable interest rates. Revenue Ruling 2025-18 addresses the interest rates on tax overpayments and underpayments as dictated by Section 6621. This section of the tax code outlines the methodology for determining these rates, linking them to the federal short-term rate. Specifically, Section 6621(a)(1) sets the overpayment rate as the federal short-term rate plus 3 percentage points (or 2 percentage points for corporations), with a reduced rate for corporate overpayments exceeding $10,000. Section 6621(a)(2) establishes the underpayment rate as the federal short-term rate plus 3 percentage points, while Section 6621(c) increases this to 5 percentage points for large corporate underpayments, referring to Section 6601 regarding interest payable.

For the calendar quarter beginning October 1, 2025, Rev. Rul. 2025-18 established the following rates:

• The overpayment rate for non-corporate taxpayers and underpayment rate was set at 7%.
• The underpayment rate for large corporate underpayments was set at 9%.
• The overpayment rate for the portion of corporate overpayments exceeding $10,000 was set at 4.5%.

These rates are essential for accurate compliance calculations related to interest accruing on underpayments or overpayments of tax. The ruling also notes that these rates apply in determining the addition to tax under Sections 6654 and 6655 for failure to pay estimated tax. Furthermore, pursuant to Section 6603(d)(4), the rate of interest on Section 6603 deposits is 4 percent for the fourth calendar quarter in 2025.