Internal Revenue Code Section 898 requires certain foreign corporations controlled by U.S. shareholders to use the same tax year as the shareholder who controls them. The rule closes a timing gap that once let domestic taxpayers defer foreign income by pairing a U.S. calendar year with an off-cycle foreign fiscal year. For tax years beginning after November 30, 2025, IRC 898 is stricter: the One Big Beautiful Bill Act repealed the one-month deferral election that had given these corporations a small cushion, so the required year is now a direct match.
Which Foreign Corporations Are Covered
IRC 898 applies to a “specified foreign corporation.” Two things have to be true. The corporation must be a controlled foreign corporation under Section 957, and a U.S. shareholder must own more than 50 percent of the total voting power or the total value of its stock on each testing day.1Office of the Law Revision Counsel. 26 USC 898 – Taxable Year of Certain Foreign Corporations
A foreign corporation is a CFC when U.S. shareholders together own more than 50 percent of its voting power or value on any day of the tax year.2Office of the Law Revision Counsel. 26 US Code 957 – Controlled Foreign Corporations; United States Persons Only “United States shareholders” count toward that threshold, and under Section 951(b) a U.S. person qualifies as one only if they own at least 10 percent of the voting power or 10 percent of the value.3Office of the Law Revision Counsel. 26 USC 951 – Amounts Included in Gross Income of United States Shareholders A 5 percent U.S. holder doesn’t count.
Ownership is measured under the Section 958 attribution rules, so direct shares, indirect shares held through another entity, and constructive shares held by related parties all get counted.1Office of the Law Revision Counsel. 26 USC 898 – Taxable Year of Certain Foreign Corporations
A foreign corporation that isn’t a CFC falls outside IRC 898 entirely, and a passive foreign investment company that isn’t also a CFC doesn’t trigger it either.
How the Testing Day Sets the Year
The 50 percent question isn’t measured day by day. The statute uses a snapshot on a “testing day,” which defaults to the first day of the foreign corporation’s existing tax year (determined as if IRC 898 didn’t apply). Treasury also has authority to prescribe alternative testing days during a representative period.1Office of the Law Revision Counsel. 26 USC 898 – Taxable Year of Certain Foreign Corporations
Whatever the ownership picture looks like on that day governs the entire year that follows. If the majority shareholder drops to 40 percent in June, the year stays set. That single date also determines whose tax year the foreign corporation must adopt, so shareholders need to look at the ownership structure at the start of each year. If the controlling shareholder later changes its own fiscal year, that shift cascades to the foreign corporation and can force a mandatory year change.
The Required Tax Year
A specified foreign corporation must use the “majority U.S. shareholder year” — the tax year of the shareholder or shareholders whose ownership clears the 50 percent bar on each testing day.1Office of the Law Revision Counsel. 26 USC 898 – Taxable Year of Certain Foreign Corporations If that shareholder uses a calendar year ending December 31, so does the foreign corporation.
The point of the alignment is timing. Subpart F income and GILTI end up reported in the same period as the shareholder’s domestic return, rather than lagging by a year because of a mismatched foreign fiscal year.
When No Majority Year Exists
Sometimes no single shareholder or attributable group clears 50 percent, or those who do don’t share a common tax year. There’s no majority U.S. shareholder year to adopt, and the statute defers to Treasury regulations to prescribe the required year.4Office of the Law Revision Counsel. 26 US Code 898 – Taxable Year of Certain Foreign Corporations The answer depends on the specific ownership structure and is a place to work with a tax advisor.
The One-Month Deferral Is Repealed
Before 2026, a specified foreign corporation could elect a tax year beginning one month earlier than the majority shareholder’s year. A corporation whose majority shareholder used a calendar year could elect a November 30 year-end instead of December 31. Section 70352 of the One Big Beautiful Bill Act struck that election for tax years beginning after November 30, 2025.5Internal Revenue Service. Notice 2025-72 – Allocation of Foreign Income Taxes Resulting From the Repeal of Section 898(c)(2) For any new tax year starting in 2026 or later, the required year is a direct match with no cushion.
Corporations that were using the one-month deferral must now conform, and that transition creates a short tax period covered below.
Filing a Required Tax Year Change
The U.S. shareholders handle the paperwork when a specified foreign corporation changes its tax year to comply. Two forms do the work.
Form 1128 is the application to adopt, change, or retain a tax year. It identifies the current year-end, the proposed year-end, and the reason.6Internal Revenue Service. About Form 1128, Application to Adopt, Change or Retain a Tax Year For an automatic approval change, the form is due by the due date (including extensions) of the return for the short period created by the change.7Internal Revenue Service. Instructions for Form 1128 – Application To Adopt, Change, or Retain a Tax Year
Form 5471 is the information return U.S. shareholders file with respect to certain foreign corporations, covering identifying information, ownership, and financial activity restated under U.S. tax principles.8Internal Revenue Service. About Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations For tax year changes triggered specifically by IRC 898, Rev. Proc. 2006-45 lets controlling domestic shareholders report the change directly on Form 5471 instead of filing a separate Form 1128, when the change qualifies for automatic approval.9Internal Revenue Service. Internal Revenue Bulletin 2006-45
Automatic Approval or a Ruling Request
Most IRC 898 year changes qualify for automatic approval. No user fee applies. To qualify, the taxpayer must file on time and meet the conditions in Rev. Proc. 2006-45; the IRS can deny an automatic change only if the filing is late or the corporation falls outside the procedure’s scope.9Internal Revenue Service. Internal Revenue Bulletin 2006-45
Taxpayers who don’t qualify have to request a private letter ruling through Part III of Form 1128. The standard user fee for a 2026 Form 1128 ruling request is $5,750, with a reduced $3,450 fee for taxpayers under $400,000 in gross income and a $9,775 fee for those between $400,000 and $10 million.10Internal Revenue Service. Internal Revenue Bulletin 2026-1 Those numbers are reason enough to get the automatic path right.
The Short-Period Return
Changing a tax year creates a short period covering the gap between the old year-end and the new one, and the IRS requires a separate return for it.11Internal Revenue Service. Tax Years Filing requirements and tax calculations generally follow the same rules as a full-year return ending on the last day of the short period.
For corporations moving off the repealed one-month deferral, the short period is typically one month. A corporation that used a November 30 year-end to defer from a calendar-year majority shareholder would file a short-period return covering December 1 through December 31 to land on the calendar year going forward. Income earned in that one-month window is reported on the short-period return and flows through to the U.S. shareholders in the corresponding period.
Penalties for Getting It Wrong
A complete and correct Form 5471 that isn’t filed by the due date triggers a $10,000 penalty per annual accounting period.12Internal Revenue Service. International Information Reporting Penalties If the failure continues more than 90 days after the IRS mails notice, another $10,000 accrues for each 30-day period (or fraction of one) the failure persists, capped at an additional $50,000.13Office of the Law Revision Counsel. 26 USC 6038 – Information Reporting With Respect to Certain Foreign Corporations and Partnerships A single year’s missed filing can reach $60,000.
Using the wrong tax year can also cause the IRS to recompute when Subpart F income and GILTI are recognized, which can produce interest charges on the deferred amounts. Keeping copies of every filed form and IRS acknowledgment as part of the permanent record helps during audits and shows the foreign corporation has been on a compliant fiscal cycle.