Treasury and IRS Propose New Rules for Allocating Deductions to GILTI/NCTI Income Under the OBBBA

On September 10, 2026, the Treasury Department and the IRS released proposed regulations under REG-117273-25, scheduled for publication in the Federal Register on September 11, 2026. The guidance addresses how domestic corporations allocate and apportion deductions to foreign source section 951A category income — the income category that includes GILTI, now often called "net CFC tested income" or NCTI — for purposes of the foreign tax credit limitation, and how those same corporations calculate deduction eligible income (DEI) for the section 250 foreign-derived deduction.

For businesses that operate abroad through foreign corporations, or that claim the deduction for foreign-derived deduction eligible income (FDDEI), this preamble is required reading. Here is what it says, in plain terms, and what it means for planning going forward.

Why This Guidance Exists

The One, Big, Beautiful Bill Act (OBBBA), enacted July 4, 2025 (Public Law 119-21), rewrote two pieces of the international tax puzzle that determine how much foreign tax credit a company can actually use and how large its section 250 deduction can be:

·         Section 250(b)(3)(A) — which defines a domestic corporation's deduction eligible income — was amended so that DEI is now reduced by expenses and deductions "other than interest expense and research or experimental expenditures" properly allocable to that income.

·         Section 904(b)(5) — an entirely new provision — sets special rules for allocating and apportioning deductions to foreign source section 951A category income when calculating the foreign tax credit limitation under section 904(a).

Both changes apply to tax years beginning after December 31, 2025, but neither statutory provision spelled out the mechanics. The proposed regulations are Treasury's attempt to fill in those mechanics.

Change #1: Interest and R&E Expenses No Longer Shrink the FDII Deduction

Before the OBBBA, a domestic corporation computing its DEI (and, within that, its FDDEI) had to net out essentially all properly allocable deductions — including interest expense and research and experimental (R&E) expenditures — against its gross income. That netting shrank the section 250 deduction for companies carrying significant debt or R&E budgets.

Under amended section 250(b)(3)(A)(ii), interest expense and R&E expenditures are no longer taken into account when computing gross DEI and gross FDDEI. The proposed regulations implement this by:

·         Updating proposed § 1.250(b)-1(a) to reflect that DEI and FDDEI are reduced only by properly allocable "expenses and other deductions" actually deducted in the year, excluding interest expense and R&E expenditures;

·         Removing the reference to section 163(j) in § 1.250(b)-1(d)(2)(ii), since interest is no longer allocable to DEI/FDDEI at all; and

·         Defining "interest expense" broadly (any amount deductible under section 163, including original issue discount) and "R&E expenditures" broadly (anything deducted, including as an amortization deduction, under section 174, 174A, or 59(e)(2)(B)).

Practically, this means the FDII deduction should get larger for many exporters and service providers that carry debt or invest heavily in R&E, because those costs no longer drag down the income base the deduction is calculated on. Treasury also noted that a separate project is coming to address other OBBBA changes to section 250, including the removal of the deemed tangible income return from the section 250(a)(1)(A) calculation.

Change #2: A New Three-Bucket Test for the Foreign Tax Credit Limitation

The bigger structural change is new section 904(b)(5), which controls how much of a company's deductions get allocated against foreign source section 951A category income when calculating the foreign tax credit limitation. The proposed regulations (new § 1.904(b)-4) sort deductions into three buckets:

1.       Always allocated to foreign source 951A income: the section 250(a)(1)(B) deduction (the NCTI portion of the FDII/GILTI deduction) and the section 164(a)(3) deduction for state or local taxes imposed on that same income, using the existing allocation mechanics in §§ 1.861-8(e)(14) and (e)(6).

2.      Never allocated to foreign source 951A income: interest expense and R&E expenditures — full stop, regardless of how they would otherwise be apportioned under the general section 861 rules.

3.      Allocated only if "directly allocable": every other deduction, but only if it clears a materially higher bar than the everyday "properly allocable" standard.

That third bucket is where the preamble does the most interpretive work, because the statute never defines "directly allocable." Treasury concluded that the term requires a closer, more direct link between the deduction and the income than ordinary allocation-and-apportionment principles require. In practice, a deduction that is typically spread across income categories using a proxy — like the relative value of assets (the method used for interest expense) or relative gross receipts (the method used for R&E expenditures) — is not directly allocable, even if it isn't interest or R&E itself.

Using that test, the preamble gives concrete examples:

·         Not directly allocable: stewardship expenses and legal expenses, because both are types of deductions that get apportioned by a relative-value proxy under the existing rules.

·         Directly allocable: foreign currency loss under section 986(c) tied to a distribution of previously taxed earnings and profits (PTEP) assigned to the section 951A category, and a net operating loss (NOL) deduction under section 172 to the extent it is allocated to foreign source 951A income under the existing NOL sourcing rules.

What Happens to the Deductions That Don't Qualify

Deductions that fall into buckets two or three but fail the "directly allocable" test are not simply ignored — the second sentence of section 904(b)(5) reallocates them to U.S. source income instead. The proposed regulations implement this as a two-step process: first, allocate and apportion deductions to foreign source 951A income under the normal rules as if section 904(b)(5) didn't exist; then strip out (and reallocate to U.S. source income) whatever doesn't survive the statute's exclusions.

That reallocation is not just an accounting footnote it can affect several other calculations down the line, including:

·         Whether a company has a domestic loss or an overall domestic loss (ODL) under section 904(g), which determines how much prior foreign tax credit benefit gets recaptured;

·         Whether a company has an overall foreign loss (OFL) under section 904(f); and

·         How separate limitation losses in the section 951A category are calculated and carried between years.

Treasury acknowledged it is still studying whether further changes to the section 904(f) and (g) regulations are needed to fully reflect this reallocation approach — a signal that more guidance may be coming.

Comment Requests and Applicability Dates

Treasury is not treating this as settled. The preamble specifically invites comments on:

·         Whether further guidance is needed on applying section 904(b)(5) to deductions beyond the examples given; and

·         The proposed approach of using existing allocation rules — including the current bar on allocating R&E expenditures to section 951A category income — to determine which deductions get reallocated to U.S. source income.

Written comments and requests for a public hearing are due November 10, 2026, submitted through the Federal eRulemaking Portal at regulations.gov referencing REG-117273-25.

On timing, both sets of proposed rules the section 250(b)(3) changes and the new section 904(b)(5)/§ 1.904(b)-4 rules are proposed to apply to tax years beginning after December 31, 2025. Taxpayers may rely on the proposed regulations now, before they are finalized, but only if they and their related parties follow each set of proposed rules in its entirety no cherry-picking favorable provisions while ignoring others.

Practical Takeaways

·         Exporters and service providers with debt or R&E spend should revisit their FDII calculations for 2026  excluding interest and R&E expenditures from the DEI/FDDEI computation may meaningfully increase the section 250 deduction compared to pre-OBBBA years.

·         Multinationals should map their deductions against the new three-bucket test before relying on the proposed rules, since stewardship and legal expenses are called out as failing the "directly allocable" standard while NOLs and section 986(c) currency losses tied to the 951A category are called out as passing it.

·         Reliance is all-or-nothing. A taxpayer that wants the benefit of these proposed rules for a 2026 return must follow both the section 250 changes and the section 904(b)(5) changes in full — partial reliance is not permitted.

·         Watch for a second wave of section 250 guidance. Treasury has flagged separate forthcoming regulations addressing other OBBBA changes to section 250(a)(1)(A), including removal of the deemed tangible income return.

·         The comment window closes November 10, 2026. Businesses with a stake in how "directly allocable" gets defined — particularly around stewardship, legal, and other overhead-type deductions have a limited window to weigh in before these rules are finalized.

Bottom Line

REG-117273-25 gives multinational businesses their first real roadmap for two OBBBA changes that have been in effect on paper since the start of 2026 but lacked implementing mechanics: a larger, interest-and-R&E-free FDII deduction base, and a narrower, more literal "directly allocable" standard for deductions charged against GILTI/NCTI income for foreign tax credit purposes. Companies with existing FDII claims or CFC structures should model both changes now, while the comment period is open and reliance remains available for the 2026 tax year.

Need US  International Tax  Advice?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources: 

Department of the Treasury and IRS, REG-117273-25, "Allocation and Apportionment of Deductions to Foreign Source Section 951A Category Income and Deduction Eligible Income," Federal Register, September 11, 2026; 

KPMG TaxNewsFlash, September 10, 2026; 

Bloomberg Tax, "IRS Clarifies Meshing of Foreign Credit Limit With GOP Tax Law".

$2.9 Million FBAR Penalty Upheld by the Fourth Circuit and What it eans for Anyone with an Unreported Foreign Bank Account

If you have ever opened a bank account outside the United States, for a business, an inheritance, or just because it was convenient while living or working abroad, a new federal appeals court decision should get your attention. On September 4, 2026, the Fourth Circuit Court of Appeals upheld a $2.9 million penalty against a U.S. businessman who failed to report more than a dozen foreign bank accounts over eight separate years. The case, United States v. Rund, No. 24-1958 (4th Cir. Sept. 4, 2026), is the latest reminder that the IRS's foreign account reporting rules carry real teeth — and that "I didn't mean to hide anything" is a much weaker defense than most people assume.

The Rule Everyone with Money Overseas Needs to Know

Since 1970, the Bank Secrecy Act has required U.S. persons with a financial interest in, or signature authority over, foreign financial accounts worth more than $10,000 to report those accounts every year on a form commonly known as the FBAR (Report of Foreign Bank and Financial Accounts). The rule is not really about taxes directly it exists to help the government trace money that could otherwise disappear overseas and to flag income that should have been reported.

Miss the deadline by accident, and the maximum civil penalty is a relatively modest $10,000. But if the failure to file is "willful," the penalty jumps dramatically — the greater of $100,000, or 50% of the account balance at the time of the violation, for every account, every year. That difference between "oops" and "willful" is exactly what was fought over in the Rund case, and it is the single most important concept for any client with unreported foreign accounts to understand.

What Richard Rund Did and Didn't Do

Richard Rund, a U.S. citizen and businessman, had financial interests in more than a dozen foreign accounts in Hong Kong, Switzerland, and China between 2003 and 2014. He:

·         Failed to report personal HSBC accounts in Hong Kong for several years, even though he had reported the very same accounts in other years;

·         Structured a Hong Kong company so that he would not appear as the legal owner "on the face" of things, explicitly to get "a more favourable tax rate" in the U.S., while a friend was listed as a nominee and Rund continued to actually run the business and control its money;

·         Opened a Swiss UBS account in the name of an offshore entity "for US tax reasons," while admitting he personally controlled the funds; and

·         Failed to disclose several accounts even after entering the IRS's Offshore Voluntary Disclosure Program — a program specifically designed to help people catch up before the IRS finds them first.

On his tax returns for 2005 through 2008, signed under penalty of perjury, Rund checked "no" to the question asking whether he had an interest in a foreign account. The IRS eventually identified 48 separate reporting failures and assessed a $2,915,663 civil penalty. When Rund refused to pay, the government sued to collect, and the district court granted summary judgment against him. Rund appealed on two grounds: that the penalty required proof he acted knowingly (not just carelessly), and that a $2.9 million fine violated the Eighth Amendment's ban on excessive fines.

"Willful" Includes Sticking Your Head in the Sand

This is the part that surprises a lot of people: in the civil FBAR context, "willful" does not require proof that someone intentionally set out to defraud the government. Following its own 2020 precedent in United States v. Horowitz, the Fourth Circuit reaffirmed that willfulness includes reckless conduct — meaning a person acted (or failed to act) in the face of a risk that was either known or so obvious it should have been known. The specific test: did the person clearly ought to have known there was a "grave risk" that an accurate FBAR was not being filed, while being "in a position to find out for certain very easily"?

Rund tried several defenses, and the court rejected each one:

·         "I didn't have a motive to hide anything." The court said motive to conceal isn't required — recklessness alone is enough.

·         "My ADHD and health problems distracted me." Rund claimed a decade of business litigation, an ADHD diagnosis, and a cancer diagnosis explained the gaps. The court noted he had managed to file complete, timely FBARs during other years covered by the same conditions, and that he never tied a specific health issue to a specific missed filing.

·         "My accountants knew about everything." This is probably the most instructive rejection for practitioners. Rund testified vaguely that "everybody knew about everything," but could not point to any evidence that he actually told his return preparers about the foreign accounts before the years in question, or that a preparer advised him the accounts didn't need to be reported. The court's response is worth remembering: a jury can only draw favorable inferences from evidence that actually exists in the record — general, unsupported assertions don't create a factual dispute that can survive summary judgment.

Because a simple question to a tax professional could easily have resolved any doubt, and Rund never showed he asked, the court held his FBAR violations were willful as a matter of law across every account and every year at issue.

The $2.9 Million Question: Is It an "Excessive Fine"?

Rund's fallback argument was constitutional: even if he was reckless, a $2.9 million penalty is grossly disproportionate to the harm and violates the Eighth Amendment's Excessive Fines Clause. This argument has divided the federal appeals courts — the First Circuit has held the Excessive Fines Clause doesn't even apply to civil FBAR penalties, while the Eleventh Circuit has held that it does because the penalty is at least partly punitive.

The Fourth Circuit sidestepped that split entirely. It assumed, without deciding, that the Excessive Fines Clause applies, and then held that Rund's penalty passed constitutional muster anyway. Several facts drove that conclusion:

·         The statutory maximum penalty Congress authorized for Rund's conduct was roughly $9.8 million. The $2.9 million actually assessed was about 30% of that ceiling — closer to the lower end of the willful-violator scale, not the top.

·         Rund's violations were not a single, isolated mistake (the kind of case where the Supreme Court has struck down a fine as excessive), but more than 40 separate failures across a dozen-plus accounts over eight years.

·         Unlike a case involving simple failure to declare cash at a border crossing, Rund's unreported accounts were tied to real underreporting of taxable income — meaning actual harm to the Treasury, not just a paperwork violation.

·         The penalty structure itself, tying the fine to 50% of the account balance, tracks the government's actual risk of loss: bigger hidden accounts mean bigger potential tax losses, so a proportionally bigger fine makes sense.

The court also brushed aside the government's suggestion that criminal FBAR penalties (which can include prison time) made the civil penalty look modest by comparison, noting that criminal penalties require a higher level of proof and a more culpable state of mind that the government never had to establish here. Even so, the civil penalty stood.

What This Means If You Have Money Overseas

Rund is not an outlier, as it fits squarely within a growing body of case law (including the Eleventh Circuit's Schwarzbaum decision, which the Fourth Circuit relied on repeatedly) confirming that multi-million-dollar FBAR penalties will survive constitutional challenges as long as they stay meaningfully below the statutory maximum. A few practical takeaways:

1.       "Reckless" is a low bar, and it's the bar that usually applies. You do not need to intend to evade taxes to face the enhanced willful penalty. Simply failing to ask an obvious question when you had every opportunity to ask it can be enough.

2.      Answering tax return questions carelessly is dangerous. The Fourth Circuit specifically pointed to Rund's "no" answers on the foreign-account questions on his 1040 as strong evidence of recklessness. That single checkbox matters far more than most taxpayers realize.

3.      Tell your accountant everything and be able to prove you did. The court's harshest language was reserved for Rund's inability to show he actually disclosed the foreign accounts to his preparers. If you've told your CPA or attorney about a foreign account, keep the emails, engagement letters, or notes that prove it.

4.      Voluntary disclosure only helps if it's actually complete. Rund's participation in the IRS's disclosure program did not shield him, because his disclosures during that program were themselves incomplete.

5.       Don't count on the Constitution to cap a runaway penalty. With courts treating the statutory maximum as the real ceiling for excessiveness analysis, a penalty needs to approach that maximum — not just be a large dollar figure — before an Eighth Amendment challenge has a real chance of success.

If you have unreported foreign accounts, the lesson from Rund is that time and professional advice are your best tools  not silence and hope. A proactive, complete disclosure, made with qualified counsel before the IRS comes looking, remains the most reliable way to avoid becoming the next multi-million-dollar cautionary tale.

 Do You Have A Non-Compliant Offshore Account?

 

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or Toll Free at 888-8TaxAid (888) 882-9243

Source:

Case citation: United States v. Rund, No. 24-1958, 2026 WL 2617117 (4th Cir. Sept. 4, 2026), available at https://www.ca4.uscourts.gov/opinions/241958.P.pdf. Underlying district court decision: United States v. Rund, 743 F. Supp. 3d 779 (E.D. Va. 2024), available via Justia.

 

FBAR Penalties Don't Die With You: What Every Heir and Executor Needs to Know

When a relative dies with an unreported foreign bank account, the obligation does not die with them. Federal courts have repeatedly held that penalties for a missed FBAR filing survive the account holder’s death and become a claim against the estate and the IRS pursues these claims aggressively, sometimes years after the person passed away.

The Filing Requirement

Any U.S. person citizen, green card holder, resident alien, or entity, including an estate, with a financial interest in or signature authority over foreign accounts exceeding US $10,000 in aggregate at any point in the year must file an FBAR with FinCEN. It is a separate filing from the income tax return, and many otherwise-compliant taxpayers never realize it applies to them.

The Penalties

A non-willful failure (generally an oversight) carries a penalty of US $10,000 per year. A willful failure, knowing or reckless disregard, can reach the greater of US $100,000 or 50% of the account balance per year. In Bittner v. United States (2023), the Supreme Court held the non-willful penalty applies once per report, not per account — reducing exposure, though the willful penalty was untouched.

Why It Survives Death

Courts treat FBAR penalties as remedial, compensating the government for harm, rather than purely punitive, so they survive the taxpayer’s death. United States v. Gill upheld even a non-willful penalty against an estate. United States v. Wolin allowed the government to collect roughly $1.4 million from an estate. United States v. Hendler (2024) confirmed the liability accrues on the missed filing date, so the IRS can assess it after death even if nothing was proposed before. And United States v. Green held a willful penalty against a mother’s estate survived, with her children pursued as representatives.

The IRS Pursues Heirs, Too

The government has substituted estates into pending cases, amended complaints to name heirs, and pursued distributees directly under transferee liability when assets were paid out before a known federal debt was resolved. Executors who distribute assets without addressing a suspected foreign account can face personal exposure. In United States v. Gaynor, the IRS assessed an $18.4 million willful penalty against an estate; a jury ultimately found the conduct non-willful, but the case shows how large the exposure — and the litigation — can get.

How to Protect the Estate

•        Talk to family members about foreign accounts while they are living, and review past filings with a qualified adviser.

•        Correct missed filings early as compliance pathways are far cheaper than a contested penalty.

•        Executors: confirm FBAR history, request foreign account records, and hold final distributions until reporting exposure is evaluated.

If the Problem Has Already Surfaced

Do not file just blindly file with the service Center or FinCEN. The Streamlined Filing Compliance Procedures, delinquent FBAR submission procedures, and the IRS Voluntary Disclosure Program each fit different situations, and choosing wrong can increase exposure. The Voluntary Disclosure Program generally treats conduct as willful, and non-willful claims within it succeed only with clear and convincing evidence. If a penalty is already assessed, an executor or heir may request abatement for reasonable cause, though the estate bears the burden of proof. Get professional guidance before submitting anything.

The bottom line: an unreported foreign account does not disappear with the account holder. If you are managing an estate with a known or suspected foreign account, speak with a qualified international tax attorney before distributing assets.

Need To Successfully Address Non Filed Form 5471,
5472, 8938, & 3520 Late Filing Penalties?

     Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243)

Sources:

Bittner v. United States, 598 U.S. 358 (2023): https://www.supremecourt.gov/opinions/22pdf/21-1195_h3ci.pdf

United States v. Gill (S.D. Tex.): https://freemanlaw.com/do-fbar-penalties-survive-death-a-texas-court-says-yes/

United States v. Wolin, Estate of Ziegel, 489 F. Supp. 3d 21 (E.D.N.Y. 2020): https://casetext.com/case/united-states-v-wolin-estate-of-ziegel

United States v. Hendler (S.D.N.Y. 2024): https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/death-did-not-extinguish-fbar-penalty-liability-court-says/7lm7m

United States v. Green, 457 F. Supp. 3d 1262 (S.D. Fla. 2020): https://freemanlaw.com/fbar-a-catalogue-of-fbar-cases/united-states-v-green-fbar-series/

United States v. Gaynor (M.D. Fla., estate of Lavern Gaynor): https://www.wealthmanagement.com/estate-planning/neither-death-nor-quiet-disclosure-erases-an-fbar-filing-obligation

FinCEN, Report Foreign Bank and Financial Accounts: https://www.fincen.gov/report-foreign-bank-and-financial-accounts