This week's most important federal tax developments concern the limits of Treasury's regulatory authority, changes affecting health-insurance tax credits, and new IRS administrative relief. Particularly significant is the IRS's decision to accept the result of a U.S. Tax Court ruling invalidating restrictions on certain foreign-dividend deductions.
For California taxpayers, the distinction between federal relief and state tax obligations remains important. Several federal announcements have immediate consequences, while others involve proposed regulations that have not yet become final.
1. IRS Accepts Tax Court Decision Invalidating Foreign-Dividend Restrictions (IRS Action on Decision 2026-2)
In a significant development for multinational corporations, the IRS has formally acquiesced in the result of Siemens Medical Solutions USA, Inc.v. Commissioner, 167 T.C. No. 5 (July 15, 2026).
The underlying Tax Court decision addressed the foreign dividends-received deduction under Internal Revenue Code §245A.
Enacted as part of the Tax Cuts and Jobs Act of 2017, §245A generally allows qualifying U.S. corporations a 100% deduction for the foreign-source portion of dividends received from certain foreign subsidiaries.
Treasury subsequently adopted regulations limiting that deduction in specified circumstances, including transactions involving extraordinary dispositions of foreign corporate assets.
In Siemens, the taxpayer claimed a full deduction for approximately $671 million in foreign-source dividends. The IRS disallowed approximately $315 million under the extraordinary disposition rules.
The Tax Court ruled for the taxpayer.
The Court concluded that the relevant regulatory restrictions conflicted with the statutory language of §245A. Although Treasury possesses substantial authority to promulgate regulations implementing federal tax statutes, that authority does not permit regulations to contradict Congress's express
instructions.
The October 19-dated Internal Revenue Bulletin, made available October16, now reports the IRS's acquiescence in the result only.
That distinction matters. The IRS accepts the outcome and will follow the decision in cases involving the same controlling facts, but it has not necessarily endorsed every aspect of the Court's reasoning. An Action on Decision is also not itself precedential guidance or a formal repeal of the
regulation.
Why It Matters
The decision provides substantial support for corporations challenging limitations on deductions that appear inconsistent with the governing statute.
Its broader importance extends beyond international taxation. Following the Supreme Court's decision in Loper Bright Enterprises v. Raimondo, courts independently determine the meaning of statutes rather than automatically deferring to an agency's interpretation.
Siemens illustrates how that approach can affect federal tax regulations.
Taxpayers with previously disallowed §245A deductions should evaluate whether the decision affects their positions, including applicable statutes of limitations and refund opportunities.
2. IRS Accepts Court Decisions Allowing Pharmaceutical Litigation Expenses (Actions on Decision 2026-3 and 2026-4)
The same IRS bulletin announces acquiescence in two appellate decisions addressing the deductibility of pharmaceutical litigation expenses.
In Actavis Laboratories FL, Inc. v. United States, 131 F.4th1345 (Fed. Cir. 2025), and Mylan Inc. v. Commissioner, 76 F.4th230 (3d Cir. 2023), the courts addressed legal expenses incurred by generic pharmaceutical manufacturers defending patent-infringement litigation arising from abbreviated new drug applications.
The central question was whether those expenses constituted currently deductible business expenses under §162 or capital expenditures under §263.
The courts concluded that the relevant litigation expenses were deductible under §162.
The IRS has now announced that it will follow those holdings in cases presenting the same controlling facts.
Why It Matters
The distinction between deductible expenses and capital expenditures can have substantial financial consequences.
A currently deductible expenditure generally reduces taxable income in the year incurred. Capitalization may require recovery over a substantially longer period.
Although these decisions concern pharmaceutical litigation, they demonstrate the importance of carefully identifying the origin and purpose of legal expenses.
The IRS's acquiescence does not mean all litigation expenses are currently deductible. The tax treatment continues to depend on the nature of the underlying transaction and applicable capitalization rules.
Primary authority: IRS Actions on Decision 2026-3 and 2026-4
3. Treasury Proposes SignificantChanges to Health-Insurance Tax Credits (Proposed Regulations REG-101576-26)
Treasury and the IRS published proposed regulations implementing changes to the Premium Tax Credit under IRC §36B.
The credit helps qualifying individuals purchase health insurance through Affordable Care Act marketplaces, including Covered California.
The proposals implement provisions of federal legislation enacted in July 2025 and address eligibility, verification procedures, and repayment of excess advance credits.
Among the principal statutory changes are restrictions on eligibility for certain noncitizens beginning in 2027 and additional marketplace verification requirements beginning in 2028.
An especially consequential change is already effective under the enacted statute: beginning with the 2026 taxable year, taxpayers must generally repay the full amount of excess advance Premium Tax redits.
Previously, repayment limitations protected many taxpayers whose income fell below specified thresholds.
Those statutory repayment caps have been eliminated.
Consequently, taxpayers who underestimate income when applying for marketplace coverage may face larger federal income-tax liabilities when filing their returns.
The proposed regulations would conform existing Treasury regulations to these statutory changes and establish additional implementation details. They were published in the Federal Register on October 15, with comments due. November 30 Federal Register
Why it Matters
This development is particularly important for self-employed individuals, retirees, and taxpayers whose annual income fluctuates.
For example, a taxpayer receiving advance Premium Tax Credits based on modest anticipated income may subsequently realize substantial capital gains or business income.
The resulting increase in household income could reduce the allowable credit and create a substantial repayment obligation.
California taxpayers obtaining subsidized coverage through Covered California should regularly update their estimated income and evaluate the federal tax consequences before realizing unusually large amounts of income.
Legal status: The statutory amendments are enacted law. The October 15 Treasury regulations remain proposed, not final.
Primary authority: Federal Register— Premium Tax Credit Proposed Regulations,91 FR 65494
4. IRS Begins Automatic Refunds for Adoption Tax Credit Carryforwards (IRS News Release IR-2026-123)
The IRS announced that it has begun issuing automatic refunds to more than 50,000 taxpayers who previously claimed adoption tax credit carryforwards.
The development follows a revised Treasury interpretation of changes enacted in 2025.
For the 2025 taxable year only, unused adoption tax credits originating in tax years 2020 through 2024 may increase the refundable amount available to qualifying taxpayers, subject to the $5,000-per-qualifying-child limitation.
Previously, taxpayers generally could not use unused nonrefundable credit carryforwards to increase the refundable portion of the credit.
The IRS is implementing the revised interpretation through automatic account adjustments.
Affected taxpayers generally do not need to file amended returns. The agency began issuing adjustments in September and expects to complete most refunds by year-end. IRS
Why It Matters
Families with unused adoption credit carryforwards may receive refunds even if their originally filed 2025 returns did not reflect the additional refundable amount.
Taxpayers should carefully review any adjustment notices and retain them with their tax records.
Those who filed under extensions or have unresolved account issues may receive adjustments later.
Legal status: This is a confirmed administrative interpretation and refund program implementing previously enacted legislation, not a new statute.
5. IRS Temporarily Suspends FederalPenalties on Highway Use of Dyed Diesel (IRS News Release IR-2026-122)
The IRS announced temporary nationwide relief involving dyed diesel fuel sold for or used in highway vehicles.
The relief applies retroactively from October 1 through December 31,2026.
During that period, the IRS will not impose specified federal penalties associated with highway use of dyed diesel. The announcement also suspends ordinary federal fuel-inspection procedures and provides relief from certain deposit and recordkeeping penalties.
Ordinarily, dyed diesel is intended for tax-exempt uses, such asqualifying agricultural operations. Using it to power highway vehicles generally creates federal excise-tax obligations.
Importantly, the IRS announcement does not itself eliminate the underlying federal excise tax. Additional guidance concerning paymentpostponements is anticipated.
Why It Matters
The relief is significant for trucking companies, agricultural businesses, fuel distributors, and other diesel-intensive operations.
California businesses should exercise particular caution: the IRS announcement expressly does not affect state fuel taxes or penalties.
Federal administrative relief therefore does not independently authorize conduct that violates California fuel-tax requirements.
Primary authority: IRS Announcement IR-2026 22 — Dyed Diesel Fuel Relief
California Tax Law: Important Decisions Remain Pending Precedential Review
No additional major California Office of Tax Appeals opinion was published during this reporting period.
Two decisions discussed in our previous update remain particularly important: Appeals of Burch and Carden, 2026-OTA-527P, involving nonresident partnership-interest sales, and Appeal of Kimco RealtyCorporation, 2026-OTA-482P, involving REIT dividend deductions.
Both remain subject to the OTA's precedential-designation process. Comments on the October 5 opinions are due October 28.
Until that process is completed, practitioners should distinguish the decisions' persuasive value from binding precedential authority. The OTA currently indicates that its next opinions will be posted November 2. OTA
Conclusion
This week's most cosnsequential tax-law development is the IRS's acceptance of the Tax Court's decision in Siemens. It reinforces the principle that Treasury regulations must remain within the limits established by Congress.
The Premium Tax Credit changes are likely to have the broadest immediate impact on individual taxpayers, particularly those with variable income and marketplace health-insurance coverage.
Meanwhile, the adoption-credit refund program and temporary federal diesel-tax relief illustrate how administrative actions can materially affect tax obligations without new legislation.
For California taxpayers and businesses, careful attention to effective dates, federal-state differences, and the precedential status of decisions remains essential.
Disclaimer: This article is provided for general informational purposesonly and does not constitute legal or tax advice. Tax laws, regulations, and administrative interpretations are subject to change. The application of any tax rule depends on the particular facts and circumstances involved. Readers should consult qualified legal and tax advisers before taking action based on the matters discussed.