Latest tax updates: AI-generated citations warning, Section 951A deduction allocation, and holding-period limits

In this edition of IRS Roundup, we cover proposed rules from the Internal Revenue Service (IRS) and the US Department of the Treasury that address the allocation of deductions to foreign-source § 951A category income, and how the IRS granted relief from a defective consolidated-return consent. We also discuss recent US Tax Court decisions concerning the § 245A dividends-received deduction, collection due process proceedings, artificial intelligence (AI)-assisted briefing, and penalty-notice requirements.

September 11, 2026: Treasury and the IRS published proposed regulations implementing recent statutory changes to the allocation and apportionment of deductions for purposes of calculating foreign-derived deduction eligible income and the foreign tax credit limitation for foreign-source § 951A category income.

For § 951A purposes, interest expense and research and experimental expenditures would not reduce foreign-source § 951A category income, while other deductions generally would reduce that income only if they are “directly allocable.” Deductions that otherwise would have been allocated to the § 951A category but do not satisfy the proposed rules generally would be reallocated to US-source income. Because that reallocation may create or increase a domestic loss, taxpayers should consider the potential multiyear consequences in addition to the immediate foreign tax credit benefit. The proposed rules generally would apply to taxable years beginning after December 31, 2025, and comments are due November 10, 2026.

September 11, 2026: In written determination 202637011, the IRS treated a subsidiary as having consented to join its parent’s consolidated return even though the parent failed to attach Forms 1122 and 851 or check the consolidated-return box.

Applying the facts-and-circumstances rule under Treasury Regulation § 1.1502-75(b)(2), the IRS emphasized that the parent included all of the subsidiary’s income, gain, deductions, and losses on its return and that the subsidiary did not file a separate return. The IRS therefore treated the subsidiary as if it had timely filed Form 1122. The determination is nonprecedential but illustrates the facts that may support relief from a defective consolidated-return consent.

Recent court decisions

September 14, 2026: In Sysco Corporation v. Commissioner, T.C. Memo. 2026-84, the Tax Court followed its prior decisions in Varian Medical Systems, Inc. v. Commissioner and rejected the taxpayer’s additional arguments concerning the § 245A dividends-received deduction.

The Court held that § 246(c)(1) limits the § 245A deduction to dividends attributable to shares directly held by the taxpayer. Indirect ownership sufficient to establish US shareholder status therefore did not satisfy the applicable holding-period requirement. The Court also held that, when calculating the foreign tax credit disallowance under § 245A(d)(1), the taxpayer’s net § 965 inclusion in the denominator must reflect the related § 965(c) deduction.

September 15, 2026: In Moore v. Commissioner, T.C. Memo. 2026-85, the Tax Court sustained the IRS’s filing of a Notice of Federal Tax Lien. The taxpayer’s statement during the collection due process proceeding that he was unsure whether the IRS’s balances were correct – without specific allegations or supporting evidence – was insufficient to place the underlying liabilities properly at issue. The Court therefore reviewed the IRS’s determination only for abuse of discretion.

The Court also observed that the taxpayer’s opening brief appeared to have been prepared with AI and contained citations to nonexistent pages and decisions that did not support the stated propositions. The Court emphasized that its rules do not prohibit the use of AI tools but that parties remain responsible for verifying all authorities and information submitted to the Court.

September 16, 2026: In Groves v. Commissioner, T.C. Memo. 2026-86, the Tax Court denied a taxpayer’s motion for summary judgment in a collection case involving a § 6707 tax-shelter penalty.

The taxpayer argued that the assessment was invalid because the IRS’s Form CP15 did not include a computation of the reduced penalty as required by § 6751(a). The Court held that the omission was a procedural error that did not invalidate the assessment absent prejudice. The taxpayer previously had received the original computation, and the IRS had explained the reduced amount during an IRS Appeals conference. Because the taxpayer understood how the penalty was calculated and did not establish prejudice, the Court denied his motion. The underlying collection case remains pending for trial.