A federal court has handed taxpayers a significant win in Keysight Technologies, Inc. & Subsidiaries v. United States, holding that Treasury lacked authority to issue Treas. Reg. § 1.951A-2(c)(5), a GILTI regulation that denied certain deductions and losses tied to “gap-period” CFC transactions. The court concluded that Treasury could not use general rulemaking authority under IRC § 7805(a) to correct what it viewed as a statutory mismatch created by Congress in the TCJA’s GILTI effective-date rules.
For tax advisors, the case matters for two reasons. First, it may create refund-claim or amended-return opportunities for taxpayers whose GILTI computations were increased because deductions were disallowed under Treas. Reg. § 1.951A-2(c)(5). Second, it is another important post-Loper Bright signal that courts may scrutinize Treasury regulations more closely when the regulation appears to narrow statutory benefits without a clear delegation from Congress.
The case arose from the Tax Cuts and Jobs Act of 2017, which fundamentally changed the U.S. international tax system by creating the GILTI regime under IRC § 951A. Before the TCJA, U.S. companies generally could defer U.S. tax on foreign subsidiary earnings until those earnings were repatriated; the TCJA changed that model by taxing certain CFC earnings currently, even without repatriation.
But the effective-date rules created a mismatch between taxpayers with fiscal-year CFCs and those with calendar-year CFCs. According to the court, Congress “quietly built” this inconsistency into the GILTI statutory scheme, and the mismatch benefited Keysight and similarly situated companies with fiscal-year foreign subsidiaries.
Treasury issued Treas. Reg. § 1.951A-2(c)(5) to address what it viewed as abusive use of the gap period. The government argued that taxpayers with fiscal-year CFCs received an unwarranted benefit from Congress’s chosen GILTI effective date and that Treasury properly denied certain deductions through the regulation.
The regulation targeted deductions or losses attributable to certain non-taxable transactions between related CFCs during a “disqualified period.” Under the regulation, those deductions or losses were treated as not “properly allocable” to income taxed under GILTI and therefore could not reduce the U.S. shareholder’s GILTI inclusion.
Keysight argued that it was entitled to an IRC § 197 amortization deduction when computing its GILTI inclusion under IRC § 951A. In Keysight’s view, if Treas. Reg. § 1.951A-2(c)(5) had never been issued, the amortization deduction would have reduced its GILTI inclusion for the years at issue.
Keysight challenged the regulation on three grounds: it contradicted the statute, exceeded Treasury’s authority, and was not a logical outgrowth of the proposed rule under the Administrative Procedure Act. The company sought partial summary judgment for its refund claims for the 2020, 2021, and 2022 tax years.
The court framed the issue directly: was Treasury permitted to remedy a congressionally created distinction between fiscal year and calendar year filers that benefited Keysight and similarly situated domestic companies with CFC subsidiaries? The court's answer was no.
The court held that Treasury lacked authority to promulgate Treas. Reg. § 1.951A-2(c)(5). This is the critical tax advisor takeaway: the court did not merely disagree with Treasury's policy judgment. It concluded that Treasury lacked a sufficient statutory basis to issue the regulation in the first place.
The government argued that IRC § 7805(a) gave Treasury broad authority to issue all “needful rules and regulations.” The court acknowledged that § 7805(a) gives Treasury broad rulemaking authority, but held that the general grant alone was not sufficient to support this specific substantive regulation.
The court reasoned that if § 7805(a) allowed Treasury to issue binding substantive regulations whenever Treasury deemed them “needful,” then nearly every agency regulation could be defended on that basis, making Loper Bright effectively meaningless.
That reasoning is important beyond GILTI. The court is saying that Treasury cannot convert a broad housekeeping-style rulemaking grant into authority to narrow or override statutory outcomes Congress enacted.
Treasury also had relied on IRC § 951A(d)(4), which authorizes regulations to prevent avoidance of the purposes of “this subsection.” The court read “this subsection” to mean § 951A(d), which deals with qualified business asset investment, or QBAI.
That was a problem for the government because the regulation at issue did not merely regulate QBAI. It denied deductions in the tested-income computation under IRC § 951A(c)(2)(A)(ii). The court therefore refused to stretch QBAI-specific anti-abuse authority into a broader grant to regulate GILTI deductions generally.
The court put the point in practical statutory terms: if Congress had been as concerned about the alleged gap-period abuse as the government claimed, Congress would not have limited Treasury’s specific authority to QBAI.
The government also pointed to IRC § 954(b)(5), which addresses deductions properly allocable to certain categories of subpart F income. The court read that provision narrowly, emphasizing that § 954(b)(5) authorizes regulations “[f]or purposes of subsection (a),” which describes foreign base company income, not GILTI.
Although GILTI uses “properly allocable” language, the court was not persuaded that § 954(b)(5) gave Treasury authority to categorically disallow the deductions at issue in the GILTI context.
The court analyzed the regulation against the backdrop of Loper Bright, under which courts no longer defer to agency interpretations under the former Chevron framework. Instead, agency interpretations may receive weight under Skidmore only to the extent they are thorough, reasonable, consistent, and persuasive.
The court was not persuaded that Treasury's reading of the statute met that bar, and concluded the regulation did not survive simply because Treasury believed its rule was a sensible fix to a perceived statutory problem.
The government emphasized the financial stakes. At oral argument, government counsel put the dollar figure at roughly $500 million, noting that Keysight intended to make similar amortization claims through 2033 if it prevailed.
The court rejected the idea that revenue loss could supply statutory authority. It made clear that whether the litigation financially benefits one party over another, even when one party is Treasury, is not the court's concern.
That is a powerful message for tax controversy practice: an argument that a taxpayer's position "costs the government too much" is not a substitute for a statutory delegation.
The most immediate impact is refund-claim review. Taxpayers should evaluate whether they had deductions or losses disallowed under Treas. Reg. § 1.951A-2(c)(5) in prior open years.
The highest-priority fact pattern is a U.S. shareholder of one or more CFCs with gap-period transactions that generated amortization, depreciation, loss, or similar deductions that were not allowed to reduce GILTI because of the regulation.
Keysight itself involved alleged entitlement to IRC § 197 amortization deductions in computing GILTI for the 2020, 2021, and 2022 tax years.
2. Stronger Exam Defense
Taxpayers already under IRS examination may be able to use Keysight as authority to challenge adjustments based solely on Treas. Reg. § 1.951A-2(c)(5). The strongest defense will be where the taxpayer can show that the deduction is otherwise allowable under the Code and that the only reason for disallowance was the regulation.
Advisors should still expect the IRS to distinguish the case, preserve its position, or wait for appellate developments. This is a trial-level decision, and taxpayers should not assume the regulation is conclusively invalid in all jurisdictions or procedural settings.
For corporate taxpayers, the decision may require review of uncertain tax positions tied to GILTI deductions disallowed under the regulation. If a taxpayer previously reserved against a refund claim or return position because the regulation was presumed valid, Keysight may change the technical merits assessment.
That does not mean every reserve disappears. Advisors should consider appellate risk, venue, procedural posture, materiality, and whether the taxpayer’s facts are genuinely comparable to Keysight.
Tax advisors should use this case as a trigger to review clients with CFC structures, especially those with fiscal-year CFCs and historic GILTI computations. The review should focus less on generic foreign reporting and more on whether a specific deduction was denied because of the gap-period regulation.
This is not a “file first, analyze later” issue. Advisors should prepare a concise legal and factual memo before filing an amended return, refund claim, or current-year position.
The memo should address:
Where the statute of limitations is close to expiring, advisors should consider protective refund claims. A protective claim may be appropriate where the taxpayer’s facts appear to align with Keysight, but the final outcome may depend on appeal, IRS acquiescence, or future guidance.
The protective claim should clearly identify:
This case does not mean all Treasury regulations are vulnerable. It also does not mean every anti-abuse rule fails after Loper Bright. The court’s reasoning was specific: Treasury lacked a sufficiently specific statutory delegation to disallow the deductions at issue through Treas. Reg. § 1.951A-2(c)(5).
The better reading is that courts may be more skeptical when Treasury uses general authority to correct what it perceives as a congressional drafting problem.
At the same time, this is not a minor technical decision. Government counsel put the dollar figure at roughly $500 million, with Keysight intending to make similar claims through 2033 if the ruling stands. For taxpayers with similar fact patterns, the case could materially reduce GILTI inclusions and create refund opportunities.
One of the most important parts of the opinion is the court’s rejection of the government’s abuse framing. The court stated that if Keysight acted within the bounds of the statute Congress enacted, calling that statutorily authorized conduct “abusive” was incorrect.
That is a helpful framing for advisors. The relevant question is not merely whether the transaction produced a favorable tax result. The relevant question is whether the Code, properly interpreted, allows that result and whether Treasury had authority to disallow it.
Advisors should be careful when translating this case into current-year planning. Current IRC § 951A now refers to “net CFC tested income” rather than “global intangible low-taxed income,” reflecting 2025 statutory amendments. The current Code states that each U.S. shareholder of a CFC must include in gross income the shareholder’s net CFC tested income for the taxable year.
The current-law terminology does not erase the importance of Keysight, but the case directly involved the 2020, 2021, and 2022 tax years. Advisors should distinguish between refund claims for TCJA-era GILTI years and planning under current § 951A as amended.
Start with clients that have:
Prepare a side-by-side computation:
Classify each client into one of four buckets:
Before filing, determine whether the position satisfies the relevant standard, such as substantial authority, reasonable basis with disclosure, or more-likely-than-not. The answer may differ depending on whether the taxpayer is filing an original return, amended return, refund claim, or financial-statement position.
Given the stakes, advisors should assume the government may continue litigating the issue. Taxpayers should preserve documentation and be prepared for IRS resistance even after a taxpayer-favorable trial-level decision.
Keysight is a significant taxpayer-favorable decision limiting Treasury’s ability to use general rulemaking authority to deny deductions in the GILTI context. The court held that Treasury lacked authority to issue Treas. Reg. § 1.951A-2(c)(5), rejected the government’s reliance on IRC § 7805(a), and declined to treat revenue loss as a substitute for statutory authority.
For tax advisors, the practical move is clear: review clients with CFCs, fiscal-year subsidiaries, and prior GILTI computations affected by Treas. Reg. § 1.951A-2(c)(5). Where the facts line up and the statute remains open, consider refund claims, protective claims, amended returns, or exam-defense strategies.
Definitive recommendation: Tax advisors should immediately review affected CFC/GILTI files for open years and prepare documented claim analyses where Treas. Reg. § 1.951A-2(c)(5) was the only reason a material deduction was denied.
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