IRC 901(m): Covered Asset Acquisitions, Disqualified Tax Paid, and Relevant Foreign Asset Tracking -- Practitioner Guide

IRC 901(m) was enacted in 2010 as part of the Health Care and Education Reconciliation Act to address a structural double benefit in cross-border M&A: when a U.S. tax basis step-up in acquired assets is not recognized for foreign tax purposes, the buyer can claim both U.S. depreciation deductions from the step-up and a foreign tax credit for foreign taxes on the same income. The provision denies, permanently, the portion of the FTC attributable to the basis difference. Unlike the excess FTC carryforward and carryback mechanism available under IRC 904(c), there is no carryover relief for disqualified tax paid; the denial is absolute. This makes pre-acquisition modeling of IRC 901(m) exposure an essential component of M&A tax diligence for any transaction structured as a covered asset acquisition.

This guide is written for international tax attorneys, CPAs, and enrolled agents who advise on cross-border acquisitions, CFC elections, and international FTC planning. It covers the full IRC 901(m) framework as codified and as governed by T.D. 9895 (Treas. Reg. 1.901(m)-1 through -8, effective March 23, 2020) -- from CAA identification and RFA inventory through basis difference computation, DTP calculation, Form 1118 reporting, and disposition mechanics -- and addresses the five open questions that complicate IRC 901(m) analysis in the post-OBBBA environment as of July 2026.

All statutory citations, regulatory references, example amounts, and positions in this guide must be verified at IRS.gov and against current Treasury regulations before reliance in any client matter. This guide is for informational purposes only and does not constitute legal or tax advice.

Section 1: Overview -- What IRC 901(m) Does and Why It Exists

The Policy Problem IRC 901(m) Solves

IRC 901(m) (enacted 2010, Health Care and Education Reconciliation Act) limits the foreign tax credit when a covered asset acquisition (CAA) creates a U.S. tax basis step-up that the foreign jurisdiction does not recognize. Without the provision, a buyer in a Section 338(g) CFC acquisition could claim U.S. depreciation and amortization deductions from the stepped-up basis while also crediting the foreign taxes paid on income from those same assets -- a double tax benefit that reduces both U.S. taxable income and the U.S. tax on remaining income. IRC 901(m) addresses this by denying, as a foreign tax credit, the "disqualified portion" of foreign taxes attributable to the basis difference. The denial is permanent: unlike excess FTCs under IRC 904(c), disqualified tax paid cannot be carried forward or back. IRC 901(m) primarily affects U.S. taxpayers engaged in international M&A, including acquirers making Section 338(g) elections for CFC targets, buyers in Section 1060 applicable asset acquisitions, and acquirers of partnership interests where a Section 754 election is in effect. Verify all mechanics against IRC 901(m) and IRS.gov.

How the Provision Operates: Asset by Asset

The provision operates asset by asset: it does not deny FTCs on a transaction-wide basis. Instead, each asset of the acquired entity that produces income subject to a foreign income tax (a "relevant foreign asset" or RFA) is tracked individually. The portion of the foreign tax paid on RFA income that is allocable to the RFA's basis difference is the disqualified tax paid (DTP) for that year. DTP is removed from the pool of creditable foreign taxes reported on Form 1118 (or Form 1116 for individuals) and permanently denied. The remaining foreign tax on RFA income -- that is, the portion not attributable to the basis difference -- is creditable in the normal course, subject to the IRC 904 limitation in the applicable basket. Verify the scope of the denial and all related mechanics against IRC 901(m), Treas. Reg. 1.901(m)-1 through -8, and IRS.gov for the applicable tax year.

Who Is Affected

IRC 901(m) is most relevant to U.S. multinationals and private equity sponsors acquiring foreign businesses, whether through CFC stock purchases with Section 338(g) elections, direct foreign asset purchases under Section 1060, or transactions structured as deemed asset sales. It also applies to cross-border partnership acquisitions where a Section 754 election is in effect. Companies that have completed covered asset acquisitions in prior years and have open RFA tracking obligations (including obligations under Notice 2014-44 for pre-T.D. 9895 acquisitions) must continue to compute and report DTP annually until the basis difference for each RFA is fully recovered or the RFA is disposed of. Verify the scope of IRC 901(m) applicability and all open tracking obligations against the applicable regulations and IRS.gov.

Key Defined Terms at a Glance

All definitions above are hedged summaries for orientation only. Verify each term's full current definition against the cited authority and IRS.gov for the applicable tax year before reliance in any client matter.

Section 2: Covered Asset Acquisitions (CAA) -- The Five Categories

Under IRC 901(m)(2) and Treas. Reg. 1.901(m)-2 (verify all definitions at IRS.gov), a covered asset acquisition is any transaction in which U.S. tax law recognizes a step-up in asset basis that is not correspondingly recognized under the foreign income tax law applicable to the assets. The five current CAA categories, each hedged to the applicable statute and regulation, are described below.

CAA Category 1: Section 338(g) Election for a CFC

A qualified stock purchase for which a Section 338(g) election is made with respect to a controlled foreign corporation is the most common CAA in international M&A. The election causes the CFC's assets to be treated as sold and reacquired at fair market value for U.S. tax purposes, generating a stepped-up U.S. asset basis with no corresponding increase in the CFC's foreign tax asset basis. All assets of the CFC that produce income subject to a foreign income tax become relevant foreign assets (RFAs) requiring individual basis difference tracking. Verify against IRC 901(m)(2) and Treas. Reg. 1.901(m)-2 at IRS.gov.

CAA Category 2: Section 338(h)(10) or Section 336(e) Election

A transaction treated as an asset acquisition under Section 338(h)(10) (applicable to certain consolidated group or S corporation stock sales) or Section 336(e) (applicable to certain corporate distribution or stock dispositions) is also a CAA. These elections cause the transaction to be treated as a deemed asset sale and purchase for U.S. tax purposes, generating the same type of basis step-up as a Section 338(g) election but in different corporate structural contexts. Verify all Section 338(h)(10) and Section 336(e) CAA mechanics against IRC 901(m)(2) and Treas. Reg. 1.901(m)-2 at IRS.gov.

CAA Category 3: Section 1060 Applicable Asset Acquisition

A Section 1060 applicable asset acquisition -- a direct purchase of a group of assets that constitutes a trade or business for U.S. tax purposes -- is a CAA when the assets include foreign-income-producing assets whose U.S. purchase-price-allocated basis differs from their foreign tax basis. In a direct asset acquisition, U.S. basis is set at the allocated purchase price under IRC 1060 while the foreign tax basis may be unchanged (the foreign jurisdiction may not recognize a sale-and-purchase of the same assets). Verify against IRC 901(m)(2) and Treas. Reg. 1.901(m)-2 at IRS.gov.

CAA Categories 4 and 5: Deemed Asset Sales and Partnership Interest Acquisitions

A deemed asset sale under applicable tax provisions constitutes the fourth CAA category. The fifth category is an acquisition of a partnership interest where a Section 754 election is in effect, causing a Section 743(b) basis adjustment to the partnership's assets. The Section 754 CAA category can arise in secondary market transactions involving foreign partnership interests and requires the acquiring partner to track each RFA of the partnership for which the Section 743(b) basis adjustment generates a basis difference. Verify all current CAA category definitions, scope, and any additional categories added after the date of this guide against IRC 901(m)(2), Treas. Reg. 1.901(m)-2, and IRS.gov before reliance in any client matter.

Section 3: Relevant Foreign Assets (RFA) -- Definition and Tracking

What Qualifies as a Relevant Foreign Asset

A relevant foreign asset (RFA) is, as defined under Treas. Reg. 1.901(m)-1(b)(21) (verify at IRS.gov), any asset -- directly or indirectly acquired in a CAA -- that produces, or is held for the production of, gross income subject to a foreign income tax. RFAs are tracked individually: each asset with a basis difference between its U.S. adjusted basis immediately after the CAA and its foreign tax basis at the same moment requires a separate tracking record. Intangible assets (including trademarks, patents, customer relationships, and goodwill), tangible depreciable property (including machinery, equipment, and real property), and in some cases inventory may all qualify as RFAs depending on the facts of the acquisition and the foreign income tax treatment of the income they generate. Verify the current RFA definition, scope, inclusions, and any exclusions against Treas. Reg. 1.901(m)-1 and IRS.gov for the applicable tax year.

Aggregate Tracking and the Annual Carryover Rule

T.D. 9895 permits an aggregate basis difference carryover and an annual aggregate tracking rule for practical RFA management. The aggregate basis difference carryover rule allows the taxpayer to maintain a single aggregate balance of unrecovered basis difference, rather than a separate schedule for each individual RFA, subject to conditions and prerequisites set out in the applicable regulations; verify the aggregate tracking rules and any elections or conditions against the regulations and IRS.gov before using the aggregate method.

De Minimis Exception Under Treas. Reg. 1.901(m)-3(b)(3)

A per-RFA de minimis exception under Treas. Reg. 1.901(m)-3(b)(3) may relieve certain small RFAs from individual tracking requirements. This guide does not state the de minimis threshold as a fixed dollar amount because the amount may be revised by regulatory amendment; verify the current threshold at IRS.gov and against the current regulation text before relying on the exception. Practitioners should note that the de minimis test is applied on a per-RFA basis at the time of the CAA, not on a portfolio basis; a large number of individually small RFAs may aggregate to a material DTP exposure even if each individually falls below the exception threshold. Verify all RFA tracking mechanics, aggregate rules, and de minimis conditions against Treas. Reg. 1.901(m)-1, -3, and IRS.gov.

Section 4: Basis Difference Mechanics

What Creates the Basis Difference

The "basis difference" for an RFA is the excess of the U.S. adjusted basis of the RFA over its foreign tax basis immediately after the CAA closes, per Treas. Reg. 1.901(m)-1(b)(3) and IRS.gov. A positive basis difference -- the typical case in a Section 338(g) election or Section 1060 acquisition -- exists when U.S. law recognizes a stepped-up basis that the applicable foreign tax law does not. The foreign jurisdiction continues to compute depreciation (and determine taxable income on disposition) on the asset's pre-acquisition foreign basis, while U.S. tax law permits depreciation on the higher U.S. adjusted basis. A negative basis difference (where the foreign basis exceeds the U.S. basis) can exist in some transactions and is subject to separate rules under the applicable regulations; verify at IRS.gov and against Treas. Reg. 1.901(m)-1.

Allocated Basis Difference and Recovery Over Time

After the CAA, the basis difference is not a one-time number: it is allocated and recovered over time as the RFA is depreciated or amortized for U.S. tax purposes. Per Treas. Reg. 1.901(m)-4 and IRS.gov, the "allocated basis difference" for each tax year is the portion of basis difference recovered in that year through U.S. depreciation, amortization, or other basis recovery mechanisms. A longer U.S. recovery period relative to the foreign depreciation or amortization schedule will spread the allocated basis difference -- and the resulting DTP exposure -- across more years. A shorter U.S. recovery period concentrates the DTP exposure in the early years post-CAA.

Importance of Accurate Basis Determination at Closing

Accurate determination of both U.S. and foreign tax bases immediately post-CAA is critical: errors in either number propagate through the DTP computation for the entire recovery period of each RFA. Foreign basis figures should be obtained from the target's local tax advisers and audited financial statements where available, and confirmed against the target's local tax returns for prior years. Discrepancies between book, local statutory, and local tax bases are common in cross-border acquisitions and must be resolved before the basis difference is locked in. In a Section 338(g) election, the purchase price allocation and the Allocation of Asset Consideration under Treas. Reg. 1.338-6 and -7 (verify citations at IRS.gov) drive the U.S. basis for each asset class; the foreign basis must be confirmed independently from the target's local records. Verify all basis difference computation and allocation mechanics against Treas. Reg. 1.901(m)-1(b)(3), -4, and IRS.gov.

Section 5: Disqualified Tax Paid (DTP) Computation

The DTP Formula (Hedged to Treas. Reg. 1.901(m)-5)

The disqualified tax paid (DTP) for a tax year is, as described under Treas. Reg. 1.901(m)-5 and IRC 901(m) (verify at IRS.gov), the portion of a foreign income tax paid with respect to an RFA's income that is allocable to the basis difference. As described in Treas. Reg. 1.901(m)-5 (which must be verified against the current regulation text and IRS.gov before application), the computation involves the relationship between the allocated basis difference for the year and the gross income from the RFA. Specifically, as described in that regulation, the DTP is approximately the product of (foreign income tax paid on RFA income) multiplied by (allocated basis difference divided by gross income from the RFA). This guide presents the formula for explanatory purposes only; it does not state the formula as settled or as the sole authoritative source. Practitioners must verify all DTP computation mechanics, including definitional inputs and any modifications applicable to specific transaction types, against Treas. Reg. 1.901(m)-5, current IRS.gov resources, and qualified international tax counsel before computing DTP in any client matter.

Permanent Denial -- No Carryover

The DTP amount is permanently denied as an FTC -- no carryforward or carryback is available for denied DTP, in contrast to the carryback (one year) and carryforward (ten years) available for excess FTCs under IRC 904(c). The permanence of the denial means that DTP reduces the effective FTC benefit of the acquisition in the year the foreign tax is paid, with no mechanism to recover the denied credit in future years. When DTP is expected to be material -- for example, where the basis difference is large relative to gross income from the RFA -- the deal economics should be modeled to reflect the after-DTP effective tax cost before the acquisition closes. Verify the denial rule, the no-carryover treatment, and all related mechanics against IRC 901(m), Treas. Reg. 1.901(m)-5, and IRS.gov.

Section 6: T.D. 9895 Final Regulations

Scope of Treas. Reg. 1.901(m)-1 Through -8

T.D. 9895 (effective March 23, 2020) finalized comprehensive regulations under IRC 901(m) as Treas. Reg. 1.901(m)-1 through -8. The regulations provide the operative framework for all aspects of IRC 901(m) compliance, including the following: CAA identification (Treas. Reg. 1.901(m)-2), defining which transactions are covered asset acquisitions; RFA definition, tracking, and the de minimis exception (Treas. Reg. 1.901(m)-1, -3), governing which assets must be tracked and which may be excluded; basis difference computation and allocated basis difference mechanics (Treas. Reg. 1.901(m)-4), governing how the basis difference is allocated to each tax year; DTP computation (Treas. Reg. 1.901(m)-5), providing the formula by which the disqualified tax is calculated each year; disposition rules (Treas. Reg. 1.901(m)-6), addressing acceleration of remaining basis difference on RFA disposition; and record-keeping requirements (Treas. Reg. 1.901(m)-7), detailing the documentation taxpayers must maintain. Verify all regulation text and citations against the current versions at IRS.gov.

De Minimis Exception, Aggregate Rules, and Notice 2014-44

The de minimis exception under Treas. Reg. 1.901(m)-3(b)(3) was finalized in T.D. 9895; verify the current threshold at IRS.gov -- this guide does not state a dollar amount because the threshold may be revised. The aggregate basis difference carryover rules, also addressed in T.D. 9895, allow practical management of RFA tracking for acquisitions involving large numbers of assets. For CAAs that occurred before the T.D. 9895 effective date of March 23, 2020, Notice 2014-44 provides transitional guidance that taxpayers may have relied upon during the interim period. Verify the scope, applicability, and any continuing relevance of Notice 2014-44 against the notice text and IRS.gov; practitioners with open pre-2020 CAA tracking obligations should confirm the applicable rules with reference to both Notice 2014-44 and the final T.D. 9895 regulations.

Section 7: OBBBA Interaction with IRC 901(m)

No Direct Amendments to IRC 901(m)

OBBBA made no direct amendments to IRC 901(m) as of July 2026; verify at IRS.gov. The five CAA categories under IRC 901(m)(2), the definition of relevant foreign assets, the DTP computation mechanics, and the T.D. 9895 final regulations under Treas. Reg. 1.901(m)-1 through -8 are unchanged by the OBBBA. Practitioners who are up to date on the pre-OBBBA IRC 901(m) framework have an accurate foundation; the OBBBA does not require them to re-examine the IRC 901(m) mechanics themselves.

Indirect Complexity: NCTI Basket and Section 904(b)(5)

OBBBA's changes to IRC 904 create significant indirect complexity for IRC 901(m) analysis in post-OBBBA M&A transactions. OBBBA's addition of Section 904(b)(5), restricting interest and R&E expense allocation to the NCTI basket, and its replacement of the GILTI basket with the NCTI basket, mean that post-acquisition FTC modeling must now account for a materially changed FTC limitation framework alongside the IRC 901(m) DTP denial. The two analyses -- IRC 901(m) DTP (which determines what foreign taxes are creditable) and IRC 904 limitation (which determines how much of those creditable taxes can be used) -- have always been applied sequentially, but the post-OBBBA NCTI basket environment changes the FTC limitation context into which the remaining (non-DTP) creditable foreign taxes flow.

The interaction creates an open question: in a CFC acquisition via Section 338(g) where the CFC generates NCTI inclusions in the post-OBBBA period, which FTC basket does the disqualified tax occupy -- and how does the Section 904(b)(5) expense allocation restriction affect the limitation in that basket for the non-DTP creditable tax? No IRS guidance addresses this question as of July 2026. An additional complication arises for PTEP ordering and NCTI inclusions: where a CFC acquired via Section 338(g) has existing PTEP accounts, the basis step-up interacts with PTEP ordering rules under IRC 959 and NCTI inclusion mechanics under the OBBBA in ways that remain unresolved. Monitor IRS.gov for guidance on all of these interactions, addressed further in Section 11.

Section 8: Planning Considerations

Pre-Acquisition RFA Diligence

Pre-acquisition diligence under IRC 901(m) begins with building the RFA inventory of the target and confirming foreign tax bases for each RFA. Practitioners should request foreign tax basis schedules for all material assets of the target entity during due diligence -- ideally before execution of a letter of intent -- because the basis difference and the resulting DTP exposure cannot be calculated without reliable figures for both U.S. and foreign basis immediately post-CAA. Where foreign basis schedules are unavailable or unreliable (common in acquisitions of targets in jurisdictions without robust asset-level tax accounting), the economic value of the deal may be materially overstated if a DTP obligation was not modeled in the acquisition price. Uncertainty about foreign basis should be flagged in the diligence report and reflected in representations and warranties or escrow adjustments where the parties cannot confirm the foreign basis with sufficient reliability before signing.

Transaction Structure and the DTP Trade-Off

Transaction structure choices -- stock purchase with no Section 338(g) election, stock purchase with a Section 338(g) election, or a direct asset acquisition -- each produce different IRC 901(m) outcomes. A stock purchase with no Section 338(g) election does not trigger a CAA and therefore does not give rise to IRC 901(m) DTP; the trade-off is that the buyer receives no step-up in asset basis for U.S. tax purposes, and therefore no incremental U.S. depreciation or amortization deductions from the purchase price over the target's existing basis. A Section 338(g) election provides a U.S. basis step-up but triggers IRC 901(m) and generates DTP that reduces the FTC. A direct asset acquisition under Section 1060 is also a CAA, generating DTP but providing a full U.S. asset basis step-up. This guide does not recommend any specific structure as superior; the optimal choice depends on the full facts, the foreign tax consequences, the availability of foreign tax depreciation, the size of the expected DTP obligation, and the overall deal objectives. Model the DTP impact on effective deal economics and present the analysis to the client with appropriate hedging to qualified counsel. Verify all planning analysis against IRC 901(m), Treas. Reg. 1.901(m)-1 through -8, and IRS.gov.

Section 9: Form Reporting and Documentation

How DTP Is Reported on Form 1118 and Form 1116

There is no dedicated Form 901(m). The disqualified tax paid denial is reflected as a reduction of the creditable foreign taxes reported on Form 1118 (Foreign Tax Credit -- Corporations), specifically on Schedule B (reduction of taxes), where DTP reduces the amount of foreign taxes available to credit in the applicable basket. The DTP amount is subtracted from foreign taxes paid or accrued before applying the IRC 904(a) limitation formula; DTP never enters the creditable tax pool. Individuals subject to IRC 901(m) report the reduction on the applicable schedule of Form 1116 (Foreign Tax Credit). Verify current Form 1118 and Form 1116 instructions, including the specific lines and schedules used to report DTP reductions for the applicable tax year, at IRS.gov before filing. Form instructions may be updated to reflect OBBBA changes and should not be assumed to be current without verification.

Record-Keeping Under Treas. Reg. 1.901(m)-7

Record-keeping requirements under Treas. Reg. 1.901(m)-7 and IRS.gov require taxpayers to maintain RFA-level records sufficient to support the basis difference determination, the allocated basis difference for each year, and the DTP computation for every tax year during which a basis difference exists for an RFA. Because the depreciation or amortization recovery period for an RFA may span many years -- sometimes exceeding a decade for long-lived tangible assets or intangibles -- robust record-keeping systems must be established at the time of the CAA and maintained continuously. Records should include: the purchase price allocation or Section 338(g) deemed purchase price allocation; foreign tax basis schedules obtained from the target's local advisers; the RFA-by-RFA basis difference computation as of the CAA date; the annual allocated basis difference schedule for each RFA; annual foreign income tax paid data for each RFA's income; and the resulting annual DTP computation. Verify current documentation standards, including any changes to record retention requirements, against Treas. Reg. 1.901(m)-7 and IRS.gov.

Section 10: Disposition of an RFA -- Acceleration of Remaining Basis Difference

How Disposition Rules Work Under Treas. Reg. 1.901(m)-6

T.D. 9895 finalized disposition rules under Treas. Reg. 1.901(m)-6 (verify at IRS.gov) to address what happens when an RFA is sold, exchanged, retired, or otherwise disposed of before its basis difference has been fully recovered through depreciation or amortization. Under these rules, when an RFA is disposed of, any remaining unrecovered basis difference is accelerated and treated as the allocated basis difference for the year of disposition, rather than continuing to be allocated over the remaining recovery period. The practical effect is that the DTP for the year of disposition includes the DTP attributable to the entire remaining basis difference, potentially producing a material DTP charge in the year the RFA is sold.

Why Disposition Timing Matters

Because the remaining basis difference is accelerated on disposition, the timing of an RFA sale can have a significant effect on the year in which the DTP charge arises and on the FTC position in that year. A taxpayer planning to sell an RFA (for example, as part of a portfolio company exit several years after a Section 338(g) acquisition) should model the remaining basis difference at the anticipated sale date, the resulting accelerated DTP, and the FTC limitation in the applicable basket for the disposition year. If the DTP acceleration coincides with a year in which the taxpayer already has low FTC limitation or excess FTCs, the practical impact of the accelerated DTP may be limited; if the taxpayer has significant FTC headroom in the disposition year, the accelerated DTP represents a real cost. Verify all disposition rule mechanics against Treas. Reg. 1.901(m)-6 and IRS.gov before modeling exit scenarios.

Section 10b: Illustrative Example

All amounts above are illustrative only. Verify all computations against Treas. Reg. 1.901(m)-1 through -8 and IRS.gov for the applicable tax year. Do not cite as authority.

Section 11: Open Questions (Unresolved as of July 2026)

The following five issues are unresolved or insufficiently addressed by IRS guidance as of July 2026. Each requires elevated documentation, professional judgment, and -- in most cases -- consultation with qualified international tax counsel.

1. NCTI Basket Assignment for DTP -- Unresolved as of July 2026

In a CFC acquisition via Section 338(g) where the CFC generates NCTI inclusions in the post-OBBBA period, which IRC 904(d) basket does the disqualified tax -- had it not been denied -- belong to? The interaction between the IRC 901(m) DTP denial and the OBBBA's NCTI basket (including Section 904(b)(5)'s expense allocation restrictions) has not been addressed in any IRS guidance, proposed regulations, or notices as of July 2026. The answer affects how practitioners model effective FTC utilization for post-OBBBA CFC acquisitions. Document the open question in the client file and monitor IRS.gov.

2. Post-OBBBA PTEP Basis Step-Up and IRC 901(m) for Section 338(g) CFC Acquisitions -- Unresolved as of July 2026

Where a CFC acquired via Section 338(g) has existing previously taxed earnings and profits (PTEP) accounts at the time of acquisition, the step-up in CFC asset basis interacts with PTEP ordering rules under IRC 959 and NCTI inclusion mechanics under the OBBBA in ways that are not resolved. The ordering of PTEP groups, the basis adjustments triggered under IRC 961, and the RFA tracking obligations under IRC 901(m) may interact in unresolved ways for post-OBBBA acquisitions. No IRS guidance addresses this question as of July 2026. Document the uncertainty and monitor IRS.gov.

3. Pillar Two GloBE ETR and Denied DTP Taxes -- Unresolved as of July 2026

Foreign income taxes denied as DTP under IRC 901(m) are not creditable for U.S. FTC purposes. Whether those denied taxes nonetheless count as "covered taxes" toward a CFC's GloBE effective tax rate for purposes of Pillar Two compliance in the applicable foreign jurisdiction has not been addressed by the IRS or, to the knowledge of the authors of this guide as of July 2026, by OECD Pillar Two guidance in a manner specific to IRC 901(m) DTP. The answer could affect whether a CFC with a large basis difference is at risk for a Pillar Two top-up tax in its home jurisdiction even though it pays substantial foreign income tax. Monitor IRS.gov for any guidance addressing this interaction and consult qualified Pillar Two counsel.

4. Foreign Law Changes Eliminating the Basis Difference Mid-Period -- Unresolved as of July 2026

Where a foreign jurisdiction subsequently enacts a law that causes the foreign tax basis of an RFA to step up to match (or approach) the U.S. adjusted basis -- eliminating or reducing the basis difference mid-tracking period -- the mechanics for ceasing or adjusting RFA tracking have not been specifically addressed in guidance beyond the disposition rules of Treas. Reg. 1.901(m)-6 (verify at IRS.gov), which govern dispositions of RFAs rather than mid-period foreign law changes. Practitioners facing this fact pattern should consult qualified international tax counsel, document the basis for any position taken on ceasing or adjusting the RFA tracking obligation, and monitor IRS.gov for any targeted guidance. Verify current disposition and basis change rules against Treas. Reg. 1.901(m)-6 and IRS.gov.

5. State Conformity to the Federal IRC 901(m) DTP Framework -- Unresolved as of July 2026

State income tax conformity to the federal IRC 901(m) DTP denial varies by jurisdiction and has not been uniformly addressed. Some states conform to the federal FTC framework by reference to the Internal Revenue Code; others apply separate apportionment-based foreign income tax regimes with no direct analog to the IRC 901(m) DTP denial. The practical significance of state non-conformity depends on whether the state taxes the CFC's income (directly or indirectly through combined reporting or similar regimes) and whether the state provides its own credit for foreign income taxes. Practitioners advising on cross-border M&A transactions with significant state income tax footprints should independently evaluate each state's conformity position with local state tax counsel. Verify applicable state statutes and regulations directly; this guide does not address state law conformity.

Section 12: Practitioner Checklist for IRC 901(m) CAA Analysis

The following eight-item checklist covers the key steps for a complete IRC 901(m) compliance review for a transaction that is (or may be) a covered asset acquisition. All items must be verified at IRS.gov and against applicable Treasury regulations before reliance in any client matter. This checklist is not exhaustive and does not substitute for engagement of qualified international tax counsel with expertise in cross-border M&A tax and FTC planning.

Practitioners should complete this checklist at two stages: (1) during pre-acquisition due diligence, to model the DTP exposure and inform deal economics and structuring decisions; and (2) after closing, to set up the annual RFA tracking and DTP computation obligations that will persist through the end of each RFA's U.S. recovery period. Steps 1 through 3 below are primarily pre-closing diligence steps. Steps 4 through 8 are ongoing post-closing compliance steps.

• Identify whether the transaction is a covered asset acquisition (CAA). Determine which, if any, of the five CAA categories under IRC 901(m)(2) and Treas. Reg. 1.901(m)-2 applies. For a Section 338(g) election, confirm the target is a CFC and the election is made timely. Verify all CAA category definitions against Treas. Reg. 1.901(m)-2 and IRS.gov for the applicable tax year.
• Prepare the RFA inventory immediately post-CAA. Identify every asset of the acquired entity that produces, or is held for the production of, gross income subject to a foreign income tax, per Treas. Reg. 1.901(m)-1(b)(21). Obtain foreign tax basis schedules for each RFA from the target. Confirm U.S. adjusted basis for each RFA immediately after the CAA closes. Verify the RFA definition and any exclusions at IRS.gov.
• Compute the basis difference for each RFA. For each RFA, compute the excess of U.S. adjusted basis over foreign tax basis immediately post-CAA per Treas. Reg. 1.901(m)-1(b)(3). Document the source of both basis figures. Test each RFA against the de minimis exception under Treas. Reg. 1.901(m)-3(b)(3); verify the current threshold at IRS.gov before concluding the exception applies.
• Establish the annual allocated basis difference tracking schedule for each RFA. Per Treas. Reg. 1.901(m)-4, determine how the basis difference for each RFA will be allocated to each tax year as the asset is depreciated or amortized for U.S. tax purposes. Set up a multi-year tracking schedule from the CAA date through the end of the expected recovery period. Verify all allocation mechanics against Treas. Reg. 1.901(m)-4 and IRS.gov.
• Compute DTP annually for each RFA with a basis difference. Per Treas. Reg. 1.901(m)-5, apply the DTP computation for each RFA in each tax year during which a basis difference is outstanding. Collect foreign income tax data for each RFA annually. Verify the computation formula, all definitional inputs, and the no-carryover rule against Treas. Reg. 1.901(m)-5, IRC 901(m), and IRS.gov. Do not apply the formula without qualified professional review.
• Apply disposition rules when an RFA is sold or retired. Per Treas. Reg. 1.901(m)-6, if an RFA is disposed of before the basis difference is fully recovered, apply the disposition rules to accelerate recognition of any remaining basis difference. Verify all disposition mechanics against Treas. Reg. 1.901(m)-6 and IRS.gov.
• Report DTP as a reduction of creditable foreign taxes on Form 1118 or Form 1116. Reflect the DTP denial as a reduction of foreign taxes in the applicable basket on Form 1118 Schedule B (corporations) or Form 1116 (individuals). Verify current form instructions at IRS.gov for the applicable tax year, including any updates reflecting post-OBBBA basket changes. Maintain all underlying RFA records per Treas. Reg. 1.901(m)-7 for examination support.
• Document open questions and layer in post-OBBBA IRC 904 analysis. For any CFC acquisition via Section 338(g) generating NCTI inclusions, document the open NCTI basket assignment question for the DTP (Section 11, Question 1 above), the range of reasonable positions, the position taken, and the basis. Model the combined effect of DTP denial and the post-OBBBA IRC 904 limitation framework. Monitor IRS.gov for guidance on all five open questions listed in Section 11.