When and how Congressional Republicans pass their legislative priorities in the new Congress — including border security, energy, defense and taxation — remains a focal point. President-elect Trump this week signaled he is open to either one or two budget reconciliation bills this year, although he said his preference is for a large single reconciliation bill. The President-elect noted that a single bill would be a longer process but, "I would say I'd live with that."

House Speaker Mike Johnson (R-LA) was quoted as saying on 6 January: "The plan in the House has been one bill. … We met for two days over the weekend, two full days of discussion and strategizing with that in mind [and] that's our assumption right now." The Speaker acknowledged, however, that Republican Senators continue to favor the two-bill approach, which would "allow us [Republicans] to put points on the board … early in the year" by passing border security policy.

The issues surrounding tax legislation were under discussion in Washington this week among President-elect Trump and congressional Republicans. The President-elect is also set to convene groups of Republican members, including House committee chairs, the Freedom Caucus conservative group and representatives of high-tax states concerned about continuing the $10,000 SALT deduction cap.

The incoming President this week also reiterated his support for tariffs to offset some of the costs of GOP tax policies. In an 18 December 2024 letter to Senate Democratic leaders, the Congressional Budget Office indicated a uniform increase in tariffs of 10% of the value of goods would decrease deficits by more than $2t.

House Ways and Means Committee Chairman Jason Smith (R-MO) and Ranking Member Richard Neal (D-MA) introduced H.R. 33 to provide special rules for the taxation of certain residents of Taiwan with income from sources within the United States. The bill may receive expedited consideration under the House rules package.

The government on 10 January released a comprehensive package of guidance addressing the classification and sourcing of digital content and cloud transactions. The package consists of final regulations (TD 10022) addressing the classification of digital content and cloud transactions; proposed regulations (REG-107420-24) providing rules for sourcing income from cloud transactions; and Notice 2025-6 requesting comments on potentially expanding these rules beyond their current application to international provisions.

The final regulations notably adopt a new "predominant character" test for characterizing transactions with multiple elements. They also adopt a new sourcing rule for digital content, which provides that sales of electronically transferred copyrighted articles are sourced based on the customer's billing address (the proposed regulations would have sourced these sales based on location of download or installation on the end user's device).

The final regulations apply to tax years beginning on or after the date the regulations are published in the Federal Register.

The proposed regulations introduce a new formula for sourcing cloud transaction income based on three factors: (1) intangible property (based on R&D expenses), (2) personnel (based on technical staff compensation), and (3) tangible property (based on depreciation/rental of infrastructure). If finalized, this sourcing rule could represent a significant departure from existing practice. These sourcing rules would apply to tax years beginning after final publication.

On the same day, Treasury and IRS released final regulations (TD 10026) addressing disregarded payment losses (DPLs) and extending for another year the BEPS Pillar Two transition relief for dual consolidated losses (DCLs).

The final regulations partially implement the proposed regulations from August 2024 by finalizing the DPL rules, which require income inclusions for certain disregarded payments that give rise to foreign tax deductions and include an anti-avoidance rule and deemed ordering rule that apply to both DCLs and DPLs.

Notably, several components of the proposed regulations were not finalized, such as modifications to the "inclusions on stock" rule, the intercompany transaction rules under Reg. Section 1.1502-13, and various other DCL provisions. Treasury and IRS indicated they intend to address these remaining items in future guidance.

The DPL rules will apply to tax years beginning on or after 1 January 2026 — a significant delay from the proposed effective date. The anti-abuse rule, however, applies to DCLs incurred in tax years ending on or after 6 August 2024, and to DPLs in tax years beginning on or after 1 January 2026.

Additionally, the regulations extended transition relief regarding the interaction of DCL rules with Pillar Two. Final regulations will provide that the DCL rules apply without taking into account qualified domestic minimum top-up taxes (QDMTTs) and top-up taxes collected under an income inclusion rule (IIR) or a UTPR (commonly called the undertaxed profits rule) in tax years beginning before 31 August 2025.

Taxpayers can rely on this transition relief until final regulations addressing the Pillar Two interaction are published. Importantly, the transition relief in the proposed regulations was itself subject to an anti-abuse rule. The preamble to the final regulations does not mention that anti-abuse rule, which may therefore limit the availability of transition relief. A Tax Alert is pending.

Finally, Treasury and the IRS on 10 January also issued final regulations (TD 10028) under IRC Section 6011 to treat certain partnership related-party basis-shifting transactions and substantially similar transactions as transactions of interest that taxpayers and material advisors must report to the IRS. The final regulations largely adopt the proposed regulations from June 2024 (see Tax Alert 2024-1273) with some modifications. A Tax Alert is forthcoming.

The IRS recently released a Chief Counsel Advice memorandum (CCA 202501008) that addresses a transaction from 2018 that would have reduced future global intangible low-taxed income (GILTI) inclusions. In the CCA memorandum, the IRS argued that either IRC Section 269 or Temp. Reg. Section 1.245A-5T applied to a transaction designed to create a "GILTI Gap Period" for 11 months in 2018. Importantly, the only "transactions" involved were two tax elections: a check-the-box incorporation of a previously disregarded entity and a one-month deferral election under IRC Section 898(c).

The CCA memorandum presents novel arguments under these provisions and indicates that the IRS will likely challenge similar planning transactions.