A federal court just told the IRS that a regulation used to deny hundreds of millions of dollars in deductions to companies with foreign subsidiaries was never valid in the first place. If your business owns, or is a minority partner in, a foreign corporation, the ruling in Keysight Technologies, Inc. & Subsidiaries v. United States is worth understanding — not because you're likely to have a $500-million-a-year dispute with the IRS, but because the reasoning behind it now applies to every Treasury regulation resting on shaky statutory ground, including ones far smaller businesses run into.
On July 2, 2026, the U.S. Court of Federal Claims struck down Treasury Regulation Section 1.951A-2(c)(5), ruling that the Treasury Department lacked the statutory authority to issue it. It's the first major tax-regulation invalidation decided under the post-Loper Bright legal landscape, and it's a preview of how courts are now willing to second-guess the IRS's rulebook instead of automatically deferring to it.
The Backstory: A Gap Period Treasury Didn't Like
To understand the case, you need a quick primer on GILTI — Global Intangible Low-Taxed Income — the international tax regime created by the 2017 Tax Cuts and Jobs Act. GILTI requires U.S. shareholders who own 10% or more of a Controlled Foreign Corporation (CFC) to pay current U.S. tax on that corporation's income each year, even if no dividend is ever paid out. It was designed to stop U.S. multinationals from parking profits in low-tax foreign subsidiaries indefinitely.
When GILTI became law, it created an unintended timing quirk. Some foreign subsidiaries use a fiscal year that doesn't match the calendar year. Because of how the effective date was written, those companies had a brief "gap period" — a window after the Tax Cuts and Jobs Act passed but before GILTI's rules actually applied to them — during which they could transfer assets between related foreign entities, step up the basis of those assets, and start claiming larger depreciation and amortization deductions once GILTI did kick in. Treasury viewed this as an abuse of the transition rules and, in 2019, issued Reg. Section 1.951A-2(c)(5) specifically to shut it down.
The mechanism was blunt: for assets with "disqualified basis" acquired during the gap period, the regulation reallocated the related depreciation and amortization deductions away from a company's GILTI (tested) income and into a bucket called "residual CFC gross income" instead. In plain terms, the deductions still existed on paper, but they no longer reduced the income that actually got taxed under GILTI — which erased their value to the taxpayer.
What Keysight Argued
Keysight Technologies, the test-and-measurement equipment maker spun off from Agilent, had a foreign subsidiary that fell into exactly this gap-period fact pattern. The company claimed the regulation improperly stripped it of legitimate amortization and depreciation deductions for tax years 2020 through 2022, and sought roughly $500 million a year in deductions — a dispute large enough, if the position held for future years, to run through 2033.
Keysight's core argument wasn't that the IRS's policy concern was unreasonable. It was that Treasury didn't have the legal authority to fix that concern this way. Specifically:
- Section 7805(a), the general grant of authority letting Treasury write regulations to administer the tax code, is not a blank check to make substantive policy changes. It supports procedural and interpretive regulations, not ones that override how the statute itself defines what's deductible.
- The regulation redefined the statutory phrase "properly allocable" in a way that contradicted its ordinary meaning under the GILTI statute, rather than merely clarifying it.
- Section 951A(d)(4), an anti-abuse provision Treasury leaned on, by its terms applies to Qualified Business Asset Investment (QBAI) calculations — a different piece of the GILTI formula — not to the general allocation of depreciation and amortization deductions.
The Court's Ruling — and Why "Post-Chevron" Matters
The Court of Federal Claims agreed with Keysight on all three points and invalidated the regulation. That outcome is notable on its own, but the how is the bigger story for every business that deals with IRS regulations, not just international ones.
For four decades, courts operated under the Chevron doctrine: if a statute was ambiguous, courts deferred to a federal agency's reasonable interpretation of it, even if a judge might have read the law differently. That changed in 2024, when the Supreme Court decided Loper Bright Enterprises v. Raimondo and eliminated Chevron deference outright. Courts must now determine the single best reading of a statute themselves, using traditional tools of statutory interpretation — text, structure, and purpose — rather than rubber-stamping whatever the agency decided.
Under the replacement standard from Skidmore v. Swift & Co., an agency's interpretation still gets some weight, but only in proportion to how thorough, consistent, and persuasive its reasoning actually is. It's advisory, not automatic.
Keysight is one of the first major tax cases to apply that new framework, and Treasury lost. The court effectively said: a well-intentioned anti-abuse rule doesn't get extra credit for good policy motives if the underlying statute doesn't actually authorize it. That's a meaningfully higher bar than regulations have faced in the past, and tax practitioners are watching closely because dozens of other Treasury regulations rest on the same kind of "policy concern" reasoning built on general 7805(a) authority.
Worth noting: legal analysts caution against reading this as the start of an "anti-regulation tsunami." Early data on post-Loper Bright litigation shows agencies are still winning roughly 60% of challenges. Keysight is a real data point, not proof the floodgates are open — but it's a real crack in the wall that didn't exist two years ago.
What This Means If You Have a Foreign Subsidiary
Most readers of a small-business finance blog aren't running $500-million GILTI disputes. But if your company owns 10% or more of a foreign corporation — a common structure for indie software companies with an offshore development entity, e-commerce businesses with a foreign holding company, or any founder who incorporated part of the business abroad — a few practical takeaways apply:
- Revisit open tax years. If your GILTI calculations for 2020–2022 (or later years, if you're in a similar fiscal-year gap-period situation) were reduced because deductions got reallocated to residual CFC income under this regulation, those years may be worth a second look with your tax preparer while they're still open under the statute of limitations.
- Consider a protective refund claim. A protective claim preserves your right to a refund while the broader legal question — including any government appeal — plays out, without requiring you to prove the full case today. Your CPA can file one on a rolling basis as years approach their statute-of-limitations deadline.
- Expect an appeal, and expect uncertainty in the meantime. The government can appeal to the Federal Circuit, and other courts aren't bound to follow a Court of Federal Claims decision. Don't treat this as final law yet — treat it as a strong argument that just got a favorable first ruling.
- Know that GILTI itself is changing regardless. Under the One Big Beautiful Bill Act, GILTI is being restructured into "Net CFC Tested Income" (NCTI) starting in 2026, with a higher effective rate and a reduced Section 250 deduction. The Keysight fight is about historical years under the old GILTI rules, but the broader post-Loper Bright scrutiny of Treasury's rulemaking authority will apply just as much to however NCTI's implementing regulations get written.
Why This Is a Bookkeeping Story, Not Just a Legal One
Cases like this are won or lost on paperwork as much as legal theory. Keysight could make a credible $500-million claim because it could show, year by year, exactly which assets were transferred, what basis they carried, and how the disqualified-basis allocation changed its numbers. That kind of precision only exists if your books track asset transfers, basis adjustments, and intercompany transactions in enough detail to reconstruct five-year-old positions on demand — not just a lump-sum "depreciation expense" line that hides the history.
If a protective refund claim or an amended return is ever on the table for your business, the deciding factor is usually whether you can produce clean, auditable records for the years in question. Beancount.io provides plain-text accounting that keeps every transaction — including basis adjustments and intercompany allocations — in version-controlled, fully transparent form, so nothing has to be reconstructed from memory when a regulation five years old suddenly gets struck down. Get started for free and see why developers and finance-savvy founders are switching to plain-text accounting.