Internal Revenue Bulletin 2026-39 (PDF rendition): IRS Revenue Procedures

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Bulletin No. 2026–39
September 21, 2026
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
ADMINISTRATIVE, INCOME TAX
T.D. 10054, page 372.
This document contains final regulations regarding the
deduction for certain taxpayers for an amount up to
$10,000 of qualified passenger vehicle loan interest. This
document also contains final regulations regarding new
information reporting requirements for certain persons
who, in a trade or business, receive from any individual
interest aggregating $600 or more for any calendar year
on a specified passenger vehicle loan, including applicable
penalties for failures to file information returns or furnish
payee statements as required. These regulations affect tax-
payers that may deduct qualified passenger vehicle loan
interest, and also persons subject to these information
reporting requirements.
EXEMPT ORGANIZATIONS
Announcement 2026-16, page 413.
Revocation of IRC 501(c)(3) Organizations for failure to meet
the code section requirements. Contributions made to the
organizations by individual donors are no longer deductible
under IRC 170(b)(1)(A).
REG-119986-25, page 440.
This document contains proposed regulations providing that a
school cannot qualify for tax-exempt status as a charitable orga-
nization under § 501(c)(3) if it maintains racially discriminatory
practices or policies. The IRS has taken this position in sub-regu-
latory guidance for several decades. The proposed rules would
further state that racial discrimination is incompatible with char-
itable tax-exempt status regardless of the purpose behind that
discrimination. The proposed regulations would affect tax-ex-
empt private schools, including primary and secondary schools,
colleges, universities, and professional or trade schools.
INCOME TAX
REG-115646-25, page 414.
These proposed regulations would provide rules for determin-
ing a United States shareholder’s pro rata share of subpart F
income, tested income, or tested loss of a controlled foreign
corporation that reflect amendments made by Public Law 119-
21, 139 Stat. 72 (July 4, 2025), commonly known as the One,
Big, Beautiful Bill Act (OBBBA). The proposed regulations would
also modify certain information reporting requirements and the
applicability dates of certain related rules. Additionally, the pro-
posed regulations include the rules described in Notice 2025-
75 regarding the transition rule contained in section 70354(c)
(2) of the OBBBA.
Rev. Proc. 2026-32, page 406.
Revenue Procedure 2026-32 provides procedures under
§ 446 of the Internal Revenue Code and § 1.446-1(e) for
obtaining automatic consent of the Commissioner of Internal
Revenue to change methods of accounting for research or
experimental expenditures (i) to comply with § 174, as in
effect after amendment by § 13206(a) of Public Law 115-
97, 131 Stat 2054 (Dec. 22, 2017), commonly known as
the Tax Cuts and Jobs Act (TCJA), and prior to amendment
by § 70302(b)(1) of Public Law 119-21, 139 Stat. 189, 239
(July 4, 2025), commonly known as the One, Big, Beautiful
Bill Act (OBBBA), and (ii) to comply with §§ 174 and 174A, as
amended and enacted by the OBBBA, respectively.
Revenue Procedure 2026-32 also provides procedures
under § 446 and § 1.446-1(e) for obtaining automatic con-
sent of the Commissioner to change methods of accounting
for contracts entered into in taxable years beginning after
July 4, 2025, to comply with § 460(e), as amended by the
OBBBA.
Finding Lists begin on page ii.

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Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
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ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
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against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
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by the Department of the Treasury’s Office of the Assistant
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The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
September 21, 2026 Bulletin No. 2026–39

Part I
26 CFR 1.163-16: Qualified passenger vehicle loan
interest.
T.D. 10054
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Car Loan Interest
Deduction
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations regarding the deduction for cer-
tain taxpayers for an amount up to $10,000
of qualified passenger vehicle loan interest.
This document also contains final regula-
tions regarding new information reporting
requirements for certain persons who, in a
trade or business, receive from any individ-
ual interest aggregating $600 or more for
any calendar year on a specified passenger
vehicle loan, including applicable penal-
ties for failures to file information returns
or furnish payee statements as required.
These regulations affect taxpayers that may
deduct qualified passenger vehicle loan
interest, and also persons subject to these
information reporting requirements.
DATES: Effective date: The final regula-
tions are effective on November 9, 2026.
Applicability date: For dates of applica-
bility, see §§ 1.163-16(i) and 1.6050AA-1(i).
FOR FURTHER INFORMATION
CONTACT: Riston Escher of the Office
of Associate Chief Counsel (Income Tax
& Accounting) at (202) 317-7003 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments
that add new regulations to the Income
Tax Regulations (26 CFR part 1) under
sections 163 and 6050AA of the Internal
Revenue Code (Code), as amended and
enacted, respectively, by section 70203(a)
and (c)(1) of Public Law 119-21, 139 Stat.
72, 176-179 (July 4, 2025), commonly
known as the One, Big, Beautiful Bill
Act (OBBBA), related to the allowance
of a Federal income tax deduction under
section 163(a) and (h)(4) for qualified
passenger vehicle loan interest (QPVLI)
and certain information reporting require-
ments under section 6050AA for persons
receiving certain interest on a specified
passenger vehicle loan (SPVL). This doc-
ument also contains amendments to the
Procedure and Administration Regula-
tions (26 CFR part 301) relating to elec-
tronic filing of returns under section 6011
of the Code, and penalties under section
6721 of the Code for failures to file infor-
mation returns and under section 6722
of the Code for failures to furnish payee
statements.
The regulations are issued under the
authority of section 7805(a) of the Code,
which authorizes the Secretary of the
Treasury or the Secretary’s delegate (Sec-
retary) to prescribe all needful rules and
regulations for the enforcement of the
Code including all rules and regulations as
may be necessary by reason of any alter-
ation of law in relation to internal revenue.
The regulations under section 6050AA are
also issued under the authority of section
6050AA(e), which authorizes the Sec-
retary to issue such regulations or other
guidance as may be necessary or appro-
priate to carry out the purposes of section
6050AA, including regulations or other
guidance to prevent the duplicate report-
ing of information under section 6050AA.
The regulations under section 6011 are
also issued under the authority of section
6011(e), which authorizes the Secretary to
prescribe regulations that require taxpay-
ers to electronically file returns, includ-
ing information returns, if the taxpayer is
required to file at least 10 returns of any
type during a calendar year.
Background
Section 70203(a) of the OBBBA
amended section 163(h) (relating to the
disallowance of any deduction for per-
sonal interest) by inserting a new para-
graph (4) to provide an exception for
QPVLI. Section 70203(b) of the OBBBA
amended section 63(b) of the Code by
inserting a new paragraph (7) to allow this
deduction for taxpayers that do not item-
ize their deductions. Section 70203(c) of
the OBBBA added new section 6050AA
to the Code to require information returns
relating to applicable passenger vehicle
loan interest received in a trade or busi-
ness from individuals. The amendments
made by section 70203 of the OBBBA
apply to indebtedness incurred after
December 31, 2024. The new allowance
of a deduction for QPVLI under section
163(a) and (h)(4) applies solely to tax-
able years beginning after December 31,
2024, and before January 1, 2029. Section
6050AA(f) provides that no information
return is required under section 6050AA
for any period to which section 163(h)(4)
does not apply.
I. Section 163
Section 163(a) allows a deduction for
all interest paid or accrued within the tax-
able year on indebtedness. Section 163(h)
generally disallows a deduction for per-
sonal interest. Section 163(h)(1) provides
that a taxpayer other than a corporation
cannot take a deduction for personal inter-
est paid or accrued during the taxable year
under chapter 1 of the Code (chapter 1).
Section 163(h)(2) defines “personal inter-
est” as any interest deductible under chap-
ter 1 other than (a) interest paid or accrued
on indebtedness properly allocable to
the conduct of a trade or business (other
than the trade or business of performing
services as an employee), (b) investment
interest, (c) interest taken into account
under section 469 of the Code in comput-
ing income or loss from a passive activity,
(d) qualified residence interest, (e) interest
payable under section 6601 of the Code
on any unpaid portion of the tax imposed
by section 2001 of the Code for the period
during which an extension of time for
payment of such tax is in effect under sec-
tion 6163 of the Code, and (f) any interest
allowable as a deduction under section
221 of the Code.
September 21, 2026 372 Bulletin No. 2026–39

As added by the OBBBA, new section
163(h)(4)(A) provides that in the case
of taxable years beginning after Decem-
ber 31, 2024, and before January 1,
2029, personal interest does not include
QPVLI. As a result, a deduction for
QPVLI is allowable under section 163(a)
for such taxable years. Section 163(h)(4)
(B)(i) provides that “qualified passenger
vehicle loan interest” means any interest
that is paid or accrued during the taxable
year on indebtedness incurred by the tax-
payer after December 31, 2024, for the
purchase of, and that is secured by a first
lien on, an applicable passenger vehicle
(APV) for personal use, subject to certain
enumerated exceptions in section 163(h)
(4)(B)(ii). Section 163(h)(4)(C) provides
limitations on the amount of QPVLI
that a taxpayer can deduct during a tax-
able year. Section 163(h)(4)(D) defines
an “applicable passenger vehicle” as a
vehicle that satisfies the requirements of
section 163(h)(4)(D)(i) through (vi) but
excludes from the definition any vehicle
the final assembly of which did not occur
within the United States. Section 163(h)
(4)(E) provides the definition of “final
assembly” and special rules on the treat-
ment of refinancings and related party
indebtedness.
II. Section 63(b)(7)
Section 63 defines “taxable income”
for purposes of subtitle A of the Code
(subtitle A). Section 63(a) provides the
general rule that, except as provided in
section 63(b), for purposes of subtitle A,
the term “taxable income” means gross
income minus the deductions allowed by
chapter 1 (other than the standard deduc-
tion). Section 63(b) provides that, in the
case of an individual who does not elect to
itemize the individual’s deductions for the
taxable year, for purposes of subtitle A,
the term taxable income means “adjusted
gross income” (as defined in section 62
of the Code), minus the deductions enu-
merated in section 63(b)(1) through (7).
As amended by the OBBBA, new sec-
tion 63(b)(7) provides that so much of
the deduction allowed by section 163(a)
as is attributable to the exception under
section 163(h)(4)(A) is subtracted from
adjusted gross income in computing tax-
able income.
III. Section 6050AA
Section 6050AA(a) provides that any
person engaged in a trade or business
who, in the course of that trade or busi-
ness, receives from any individual interest
aggregating $600 or more for any calendar
year on an SPVL, must file an informa-
tion return reporting the receipt of inter-
est. Section 6050AA(b) provides that the
information return filed by the recipient of
such interest (interest recipient) must be in
the form prescribed by the Secretary and
must contain: (A) the name and address
of the individual from whom such inter-
est was received, (B) the amount of such
interest received for the calendar year, (C)
the amount of outstanding principal on
the SPVL as of the beginning of such cal-
endar year, (D) the date of origination of
that loan, (E) the year, make, model, and
vehicle identification number (VIN) of the
APV that secures that loan (or any other
description of that vehicle as the Secretary
may prescribe), and (F) any other infor-
mation as the Secretary may prescribe.
Section 6050AA(c) provides that every
person required to make an information
return under section 6050AA(a) must also
furnish to each individual whose name is
required to be included in the return a writ-
ten statement showing the name, address,
and phone number of the interest recipi-
ent, and the information required to be
included in the information return under
section 6050AA(b)(2)(B) through (F).
Section 6050AA(d)(1) provides that
terms used in section 6050AA that are also
used in section 163(h)(4) have the same
meaning as when used in section 163(h)
(4). Section 6050AA(d)(2) defines “speci-
fied passenger vehicle loan” as the indebt-
edness described in section 163(h)(4)(B)
with respect to any APV.
Section 6050AA(e) authorizes the Sec-
retary to issue regulations or guidance as
may be necessary or appropriate to carry
out the purposes of section 6050AA,
including regulations or other guidance to
prevent duplicate reporting.
IV. Section 6011 and Electronic Filing of
Information Returns
Section 6011(e) authorizes the Sec-
retary to prescribe regulations providing
standards for determining which returns
must be filed on magnetic media or in
other machine-readable form. Section
6011(e)(5) authorizes the Secretary to pre-
scribe regulations that require taxpayers to
electronically file returns, including infor-
mation returns, if the taxpayer is required
to file at least 10 returns of any type during
a calendar year.
V. Penalties Under Sections 6721 and
6722
Section 6721 imposes a penalty for
any failure to file an information return on
or before the required filing date, and for
any failure to include all the information
required to be shown on a return or the inclu-
sion of incorrect information. Section 6722
imposes a penalty for any failure to furnish
a payee statement on or before the required
furnishing date to the person to whom such
statement is required to be furnished and for
any failure to include all the information
required to be shown on a payee statement
or the inclusion of incorrect information.
Section 70203(c)(2)(A) of the OBBBA
amended section 6724(d)(1) of the Code
to add information reporting requirements
under section 6050AA—regarding returns
relating to QPVLI received in a trade or
business from individuals—to the definition
of “information return.” Section 70203(c)
(2)(B) of the OBBBA similarly amended the
definition of “payee statement” in section
6724(d)(2). As a result of these amendments,
penalties under sections 6721 and 6722 may
be imposed on interest recipients that fail to
file correct information returns and payee
statements under section 6050AA.
On October 21, 2025, the IRS released
Notice 2025-57, 2025-45 I.R.B. 692, to
provide transitional guidance on the infor-
mation reporting requirements under sec-
tion 6050AA. Notice 2025-57 provides
that an interest recipient will be deemed
to have satisfied the reporting obligations
under section 6050AA for interest on
SPVLs received in calendar year 2025 if
the interest recipient makes a statement
available to the individual indicating the
total amount of interest received in calen-
dar year 2025 on an SPVL.
VI. Notice of Proposed Rulemaking
On January 2, 2026, the Treasury
Department and the IRS published a
Bulletin No. 2026–39 373 September 21, 2026

September 21, 2026 374 Bulletin No. 2026–39
notice of proposed rulemaking and notice
of public hearing (REG-113515-25) in
the Federal Register (91 FR 67) under
sections 163, 6050AA, 6011, 6721, and
6722 (proposed regulations). The pro-
posed regulations proposed rules regard-
ing the deduction for certain taxpayers
for an amount up to $10,000 of QPVLI.
The proposed regulation also proposed
rules regarding the new information
reporting requirements for certain per-
sons who, in a trade or business, receive
from any individual interest aggregating
$600 or more for any calendar year on
an SPVL, including applicable penalties
for failures to file information returns or
furnish payee statements as required. The
proposed regulations also proposed rules
relating to electronic filing of returns
under section 6011.
Summary of Comments and
Explanation of Revisions
I. Overview
The Treasury Department and the IRS
received 63 public comments in response
to the notice of proposed rulemaking.
Copies of the comments are available for
public inspection at http://www.regula-
tions.gov or upon request. In addition, a
public hearing on the proposed regulations
was held on February 24, 2026, at which
three speakers provided testimony. After
considering all of the public comments,
speaker outlines, and testimony (collec-
tively, comments) received in response
to the proposed regulations, the Treasury
Department and the IRS adopt the pro-
posed regulations, as revised in response
to the comments described in this Sum-
mary of Comments and Explanation of
Revisions, as final regulations.
Comments addressing issues that are
outside the scope of this rulemaking are
generally not addressed in this Summary
of Comments and Explanation of Revi-
sions or adopted in the final regulations.
These comments included recommenda-
tions and questions regarding implemen-
tation issues for other Code provisions
and examination selection criteria. Unless
otherwise indicated in this Summary of
Comments and Explanation of Revisions,
provisions of the proposed regulations
with respect to which no comments were
received are adopted without substantive
change.
II. Comments on Proposed § 1.163-16
A. In General
In response to the comments received,
the final regulations include revisions to the
following provisions in proposed § 1.163-
16: proposed § 1.163-16(b)(12) (Qualified
passenger vehicle loan interest (QPVLI))
(finalized as § 1.163-16(b)(13)); proposed
§ 1.163-16(b)(13) (Qualified vehicle clas-
sification) (finalized as § 1.163-16(b)
(14) (Qualified vehicle type)); proposed
§ 1.163-16(b)(14) (Secured by a first lien)
(finalized as § 1.163-16(b)(15)); proposed
§ 1.163-16(c)(2) (Determining the amount
of interest paid or accrued during a tax-
able year); proposed § 1.163-16(d)(2)
(Indebtedness incurred for the purchase of
an APV); and proposed § 1.163-16(e)(2)
(Determining whether original use com-
mences with the taxpayer). Additionally,
in response to the comments received, the
final regulations include the addition of
the following new provisions in § 1.163-
16: § 1.163-16(b)(6) (Items or amounts
customarily financed in an APV purchase
transaction that are directly related to
the purchase of the APV); § 1.163-16(d)
(6)(v) (Example 5: Method of allocating
interest); § 1.163-16(e)(2)(ii) (Dealers);
§ 1.163-16(e)(2)(iii) (Original use for
joint purchasers).
The final regulations also include revi-
sions to § 1.163-16(c)(3)(ii) (Exception
for substitute vehicle due to an unfore-
seen intervening event). The revisions
to § 1.163-16(c)(3)(ii) are intended to
clarify that a substitute APV described
in § 1.163-16(c)(3)(ii) is treated as the
APV with respect to which the SPVL was
incurred for the purposes of § 1.163-16(c)
(5) (VIN requirement) and § 1.163-16(d)
(4) (Refinancing of an SPVL).
B. Definitions
1. Secured By A First Lien
Section 163(h)(4)(B)(i) provides that
interest is QPVLI only if it is paid or
accrued on indebtedness that is incurred
by the taxpayer after December 31, 2024,
for the purchase of, and that is secured by
a first lien on, an APV for personal use.
Proposed § 1.163-16(b)(14) provided that,
for purposes of section 163(h)(4) and the
proposed regulations, “secured by a first
lien” means a valid and enforceable secu-
rity interest in an APV under State or other
applicable law with priority ahead of all
other security interests, other than tax
liens or other similar security interests that
may be given higher priority at a later date
following the date of purchase and only in
limited circumstances.
One commenter requested that the final
regulations provide clarity on whether
“first lien” status is determined by the ini-
tial filing and attachment of the security
interest, regardless of involuntary liens
such as mechanic’s liens or State tax liens
that may cause the earlier lien to be sub-
ordinated. The commenter recommended
that the final regulations clarify that a loan
qualifies as a first lien so long as it was the
first voluntary security interest recorded
against the vehicle, disregarding involun-
tary liens (for example, mechanic’s liens
or State tax liens) that may take temporary
legal priority under State or local law.
The Treasury Department and the IRS
agree with the commenter that it would
be helpful to further clarify the status of
a lien that is subordinated by involun-
tary liens. Accordingly, § 1.163-16(b)
(15) provides that “secured by a first lien”
means the first voluntary security interest
recorded against the vehicle, disregarding
any involuntary liens that may be given
temporary higher priority at a later date.
One commenter noted that under State
law, vehicle lien placement generally
relates back to the loan origination date
if the lien is perfected within a statutory
grace period. In certain cases, however,
lien perfection may occur after this grace
period, often due to administrative delays
in title processing that are outside the lend-
er’s control. Accordingly, the commenter
recommended that the final regulations
clarify that interest accruing from the loan
origination date (rather than the lien per-
fection date) may be QPVLI so long as
the contract was originated as a purchase
transaction secured by a first lien.
This commenter also noted that there
are circumstances in which a vehicle lien
is removed before the loan is paid in full,
such as in the case of repossession and
subsequent sale of the vehicle, or an insur-

Bulletin No. 2026–39 375 September 21, 2026
ance payment following a total loss claim.
Accordingly, the commenter recom-
mended that the final regulations clarify
that temporary or permanent lien release
events that occur after loan origination do
not retroactively or prospectively disqual-
ify a taxpayer from claiming the QPVLI
deduction, provided that the vehicle
finance contract was originally secured by
a first lien on the purchased APV.
The Treasury Department and the IRS
generally agree with these comments.
Accordingly, § 1.163-16(b)(15) pro-
vides that an APV may be considered to
be secured by a first lien even in a case
in which a lien has not yet been perfected
or recorded due to processing times or
other similar short-term delays arising
under State or other applicable law, and
in limited circumstances in which a lien is
removed in connection with the taxpayer
no longer owning the vehicle but the tax-
payer continues to be liable for an SPVL,
such as in the case of a repossession of the
vehicle or an insurance payout following a
total loss claim.
2. Qualified Vehicle Type
Section 163(h)(4)(D)(iv) provides that
a vehicle is an APV only if it is a car, min-
ivan, van, sport utility vehicle, pickup
truck, or motorcycle. Proposed § 1.163-
16(b)(13)(ii) through (vii) defined the
terms “car,” “minivan,” “van,” “sport util-
ity vehicle,” “pickup truck,” and “motor-
cycle” by reference to certain vehicle
classifications and definitions used by the
Environmental Protection Agency (EPA).
Some of these classifications depend on
a vehicle’s gross vehicle weight rating
(GVWR) and one of these definitions
depend on a vehicle’s curb mass. Further,
section 163(h)(4)(D)(vi) requires, and
proposed § 1.163-16(e)(1)(vi) provided
that for a vehicle to be an APV it must
have a GVWR of less than 14,000 pounds.
One commenter noted that the pro-
posed § 1.163-16(b)(13)(v) definition of
sport utility vehicle would exclude sport
utility vehicles with a GVWR exceed-
ing 10,000 pounds. The commenter also
noted that the proposed § 1.163-16(b)
(13)(vi) definition of pickup truck would
exclude pickup trucks with a GVWR
exceeding 8,500 pounds. The commenter
requested clarification on how the defi-
nitions in proposed § 1.163-16(b)(13)(v)
and (vi) would operate together with the
14,000-pound GVWR limitation provided
by section 163(h)(4)(D)(vi) and proposed
§ 1.163-16(e)(1)(vi).
The Treasury Department and the IRS
agree with the commenter that the defini-
tions of sport utility vehicle and pickup
truck provided in proposed § 1.163-16(b)
(13) could cause confusion regarding the
treatment of those vehicles that have a
GVWR that exceeds the GVWR specified
in the applicable definition referenced in
proposed § 1.163-16(b)(13), but do not
exceed the 14,000-pound GVWR limita-
tion provided by section 163(h)(4)(D)(vi).
Further, while the definition of motorcy-
cle referenced in proposed § 1.163-16(b)
(13) would exclude motorcycles with
a curb mass greater than 1,499 pounds,
this weight restriction is not a statutory
requirement. Accordingly, § 1.163-16(b)
(14) provides broader definitions of sport
utility vehicle, pickup truck, and motorcy-
cle that do not reference a GVWR or curb
weight limitation for vehicles. Addition-
ally, for clarity and ease of administration,
the final regulations define van and mini-
van by direct reference to the applicable
EPA regulation. As under the proposed
regulations, these revised definitions oper-
ate together with, and do not alter, the sep-
arate requirement in section 163(h)(4)(D)
(v) that the vehicle be treated as a motor
vehicle for purposes of title II of the Clean
Air Act.
C. Qualified Passenger Vehicle Loan
Interest (QPVLI)
Section 163(h)(4)(B)(i) provides and
proposed § 1.163-16(d)(1) provided that
interest is QPVLI only if it is paid or
accrued on indebtedness that is incurred
by the taxpayer after December 31, 2024,
for the purchase of, and that is secured by
a first lien on, an APV for personal use.
Proposed § 1.163-16(c) provided, in rel-
evant part, that interest is QPVLI only if
the interest is paid or accrued during the
taxable year on indebtedness that is an
SPVL secured by a first lien on an APV,
and is not excluded from the definition of
QPVLI.
For purposes of section 163(h)(4),
QPVLI includes all interest payable with
respect to the amount financed under an
SPVL. In general, interest is an amount
paid, received, or accrued as compensa-
tion for the use or forbearance of money
under the terms of an instrument or con-
tractual arrangement that is treated as a
debt instrument for Federal income tax
purposes or an amount otherwise treated
as interest under the Code or Income
Tax Regulations. For example, see
§ 1.163(j)-1(b)(22)(i); see also Deputy v.
DuPont, 308 U.S. 488, 498 (1940).
Several commenters requested clarifi-
cation on what constitutes interest for pur-
poses of section 163(h)(4). Specifically,
clarification was requested as to the treat-
ment of stated periodic interest, prepaid
interest (such as points), origination-re-
lated or financing-related charges, pre-
payment penalties, late payment charges,
default-related charges, returned payment
fees, and deferred or capitalized interest
that is added to the outstanding princi-
pal balance in accordance with the terms
of the indebtedness. Some commenters
mentioned that certain of the fees are spe-
cifically referenced in other regulations
or guidance relating to the deduction of
interest for Federal income tax purposes
(for example, see §§ 1.221-1(f) and
1.6050H-1).
The Treasury Department and the IRS
agree with the commenters that additional
clarification on what constitutes interest
is appropriate, including the addition of
examples of fees that are interest for pur-
poses of section 163(h)(4). Accordingly,
§ 1.163-16(c)(2)(i) clarifies that QPVLI
includes prepaid interest in the form of
points and deferred or capitalized inter-
est. The final regulations also provide
that QPVLI includes origination-related
or financing-related charges, prepay-
ment penalties, late payment charges,
default-related charges, and similar fees,
if such charge, penalty, or fee is charac-
terized as interest expense for Federal
income tax purposes and is included in
the amount reported as interest in the
statement furnished to the taxpayer under
section 6050AA(c) and § 1.6050AA-1(h).
However, to the extent such interest
(including prepaid interest in the form of
points or deferred or capitalized interest)
creates or increases the amount of original
issue discount on the SPVL, such amounts
generally are not deductible until paid in
accordance with the payment ordering

September 21, 2026 376 Bulletin No. 2026–39
rules described in § 1.163-16(c)(2)(ii).
See also section 1275(b) of the Code.
The payment ordering rules in §§ 1.446-2
and 1.1275-2 determine when interest
(including original issue discount) is paid
and therefore deductible by the borrower.
Similarly, these rules generally apply for
information reporting purposes, including
section 6050AA.
D. Specified passenger vehicle loan
(SPVL)
1. Indebtedness
Section 163(h)(4)(B)(i) provides and
proposed § 1.163-16(d)(1) provided that
interest is QPVLI only if it is paid or
accrued on indebtedness that is incurred
by the taxpayer after December 31, 2024,
for the purchase of, and that is secured by
a first lien on, an APV for personal use.
1

Proposed § 1.163-16(c) provided, in rele-
vant part, that interest is QPVLI only if the
interest is paid or accrued during the tax-
able year on indebtedness that is an SPVL
secured by a first lien on an APV.
a. Incurring Indebtedness
Multiple commenters recommended
that taxpayers should also be able to
deduct QPVLI for vehicle loans incurred
prior to December 31, 2024. These com-
menters noted that section 163(h)(4)(B)(i)
excludes taxpayers who took out a loan to
purchase a new vehicle in late 2024 but
will pay nearly all of the interest on the
loan from 2025 through 2028, the years in
which QPVLI may be deducted.
Section 163(h)(4)(B)(i) defines “qual-
ified passenger vehicle loan interest” or
QPVLI, in relevant part, as interest paid
on a loan incurred after December 31,
2024. Therefore, the Treasury Depart-
ment and the IRS are not able to adopt the
commenters’ recommendation as doing so
would be inconsistent with the plain lan-
guage of the statute.
One commenter asked how to identify
the amount of interest if a vehicle is pur-
chased with a credit card. Section 163(h)
(4)(B)(i) requires, in relevant part, that
indebtedness be secured by a first lien on
an APV. The Treasury Department and the
IRS note that generally credit card indebt-
edness is not secured indebtedness. There-
fore, the purchase of an APV, in whole or
in part, with a credit card would generally
not result in an SPVL and therefore any
interest paid or accrued on this credit card
indebtedness would not be QPVLI.
b. Amount of the Indebtedness
i. Indebtedness Incurred to Purchase an
APV
Several commenters requested that the
Treasury Department and the IRS treat all
of the indebtedness incurred in connec-
tion with the purchase of an APV as an
SPVL, and not require an allocation of the
indebtedness between the SPVL portion
and the non-SPVL portion as provided in
proposed § 1.163-16(d)(2)(iii)(A) because
of the compliance burden this allocation
approach would impose.
The allocation approach, however, is
necessary to ensure compliance with the
statutory requirement that only interest
”for the purchase” of an APV is deductible
under section 163(h)(4). Accordingly, the
final regulations maintain the allocation
approach.
Proposed § 1.163-16(d)(2)(i) generally
provided that indebtedness qualifies as an
SPVL only to the extent the indebtedness
is incurred for the purchase of an APV
and, if part of the same purchase trans-
action, for any other items or amounts
customarily financed in an APV purchase
transaction and that are directly related to
the purchase of the APV. The preamble
to the proposed regulations provided that
whether items or amounts are customarily
financed in an APV purchase transaction
is determined on an industry-wide basis,
and not by reference to the financing terms
of a particular financing entity. Proposed
§ 1.163-16(d)(2)(i) provided examples
of such “customarily financed” items to
include vehicle service plans, extended
warranties, sales taxes, and vehicle-re-
lated fees. Proposed § 1.163-16(d)(2)
provided that any indebtedness that is not
described in proposed § 1.163-16(d)(2)
(i) would not qualify as an SPVL, even
if the items or amounts were incurred as
part of a purchase transaction for an APV.
Examples of such indebtedness include
indebtedness incurred for the repayment
of negative equity on a loan secured by
a trade-in vehicle, to purchase collision
and liability insurance, or to purchase any
property or services not directly related to
an APV (for example, a trailer or boat).
Several commenters requested that the
Treasury Department and the IRS expand
the list of examples in proposed § 1.163-
16(d)(2)(i) of items that are customarily
financed in an APV purchase transaction
that are directly related to the purchase of
the APV, including such items as vehicle
repair plans, mechanical repair coverage,
vehicle protection products (including
tire, wheel, paint, and interior protection
products), warranties, extended warran-
ties, guaranteed asset protection (GAP)
insurance, credit-related insurance prod-
ucts (including credit-related accident,
health, and life products), key fob replace-
ment, and title and registration fees.
The Treasury Department and the IRS
agree with the commenters that expand-
ing the examples of items customarily
financed in an APV purchase transaction
that are directly related to the purchase of
the APV would provide additional clarity.
Accordingly, the final regulations expand
the list of examples of items customarily
financed in an APV purchase transaction
that are directly related to the purchase
of the APV. Further, the final regulations
clarify that the exclusion for collision and
liability insurance applies only to colli-
sion or liability insurance that is not credit
insurance.
One commenter requested that the
Treasury Department and the IRS expand
the list of examples in proposed § 1.163-
16(d)(2)(i) to include vehicle-related
accessories as items that are regarded as
customarily obtained or paid for as part of
an APV purchase transaction. The Trea-
sury Department and the IRS agree that
indebtedness attributable to vehicle-re-
lated accessories that are components of
the APV may be included in an SPVL.
Accordingly, the final regulations provide
that indebtedness incurred for vehicle-re-
lated accessories that are components of
1
Section 163(h)(4)(B)(i) does not use a specific term for this indebtedness, and the final regulations, like the proposed regulations, refer to such indebtedness as a “specified passenger vehicle
loan” or an “SPVL,” which is the term used in section 6050AA to reference this indebtedness, for consistency.

Bulletin No. 2026–39 377 September 21, 2026
the APV purchased as part of an APV
transaction may be an SPVL. Addition-
ally, the final regulations now include lan-
guage adopted from the preamble to the
proposed regulations to make clear that
whether items or amounts are customarily
financed in an APV purchase transaction
and are directly related to the purchase
of the APV is determined on an indus-
try-wide basis and not by reference to the
financing terms of a particular financing
entity.
ii. Negative Equity
A number of comments received were
related to amounts representing debt on a
vehicle traded in as part of the purchase
transaction for the APV in excess of the
value of the vehicle, which is sometimes
referred to as “negative equity.” Proposed
§ 1.163-16(d)(2)(ii) provided that indebt-
edness incurred for amounts representing
negative equity under an existing loan
on a trade-in vehicle is not incurred by a
taxpayer for the purchase of an APV, and
therefore is not an SPVL.
Many commenters requested that the
Treasury Department and the IRS instead
provide that indebtedness incurred for
amounts representing negative equity may
qualify as an SPVL, especially because the
incurrence of indebtedness for amounts
representing negative equity occurs regu-
larly for many purchasers.
The Treasury Department and the IRS
do not adopt these requests, and the final
regulations provide that indebtedness
incurred for amounts representing nega-
tive equity is not incurred by a taxpayer
for the purchase of an APV, and therefore
is not an SPVL. Section 163(h)(4)(B)(i)
describes indebtedness that is incurred by
the taxpayer for the purchase of an APV
for personal use. Amounts representing
negative equity are not incurred for the
purchase of an APV as required by the
statute and instead represent indebted-
ness related to a prior purchased vehicle
that is refinanced in connection with the
purchase of a new vehicle. While pro-
posed § 1.163-16(d)(2)(i) provided that an
SPVL also includes indebtedness incurred
for items or amounts customarily financed
in an APV purchase transaction and that
are directly related to the purchase of the
APV, negative equity on an existing vehi-
cle loan is not related to the purchase of
the APV—the negative equity instead
relates to a prior vehicle purchase trans-
action that is distinct from and unrelated
to the APV purchase. Moreover, allow-
ing amounts representing negative equity
to be included in an SPVL would allow
taxpayers to deduct interest attributable
to indebtedness incurred prior to 2025 or
for the purchase of a vehicle that is not an
APV. Accordingly, the final regulations
exclude amounts of indebtedness attrib-
utable to negative equity from being an
SPVL.
c. Method of Allocating Interest
Proposed § 1.163-16(d)(2)(iii)(A) pro-
vided that in the case of indebtedness that
is partially an SPVL, payments of interest
and principal are allocated on a pro rata
basis between the portion of indebtedness
that is an SPVL and the portion of indebt-
edness that is not an SPVL.
Two commenters requested guidance
on acceptable allocation methods or,
alternatively, requested confirmation as
to whether reasonable allocation meth-
ods will be permitted. However, neither
commenter suggested any examples of an
allocation method different from the pro
rata method contained in the proposed
regulations. Another commenter proposed
calculating the amount of deductible inter-
est on a proportional basis. For example,
if a consumer financed a vehicle with a
balance of $50,000 and $5,000 of that bal-
ance was determined to not be an SPVL,
deductible interest would be 90 percent
(45,000/50,000) of the total interest paid
with 10 percent (5,000/50,000) being
non-deductible.
The final regulations require the use of
the pro rata allocation method and do not
provide for any other allocation method.
The final regulations also add an example
illustrating the pro rata allocation method.
See § 1.163-16(d)(6)(v).
2. Refinancing
Section 163(h)(4)(E)(ii) generally pro-
vides that a new loan resulting from refi-
nancing an SPVL is an SPVL if the new
loan is secured by a first lien on the APV
with respect to which the refinanced SPVL
was incurred, but only to the extent the
amount of the new loan does not exceed
the amount of the refinanced SPVL. This
proposed rule was described in proposed
§ 1.163-16(d)(4), which clarified that the
amount of the new loan that is an SPVL is
limited to the outstanding balance of the
refinanced SPVL as of the date of the refi-
nancing. Consistent with section 163(h)(4)
(B)(i) and (h)(4)(D)(i), proposed § 1.163-
16(d)(5)(i) provided that the SPVL must
have been originally incurred by the tax-
payer, and proposed § 1.163-16(d)(4) pro-
vided that, if there is a change in obligor
as part of the refinancing, the new loan is
not an SPVL with regard to any obligor
other than the original obligor unless the
refinancing is in connection with a change
in obligor by reason of the obligor’s death
within the meaning of proposed § 1.163-
16(d)(5)(ii).
A number of commenters requested
that the Treasury Department and the IRS
clarify in the final regulations whether
additional APV-related products or cus-
tomary amounts incurred in a refinanc-
ing (for example, refinancing charges
and vehicle-related consumer protec-
tion products, including warranties and
insurance products) constitute indebted-
ness that is an SPVL. The commenters
described a typical situation in which the
customer refinances the loan to purchase
an APV shortly after the customer pur-
chased the APV (for example, to get a
lower interest rate than the rate charged
by the dealer). As part of the refinanc-
ing, the customer finances the purchase
of what would otherwise be “customarily
financed” items or amounts in an APV
purchase transaction, such as GAP insur-
ance, that the customer did not purchase
in connection with the original APV pur-
chase transaction.
The Treasury Department and the IRS
do not adopt these requests. Under section
163(h)(4)(E)(ii), if an SPVL is refinanced,
the new loan cannot qualify as an SPVL
to the extent the amount of the new loan
exceeds the amount of the refinanced
SPVL. The inclusion of amounts in excess
of the amount of the refinanced loan, even
if such amounts are attributable to prod-
ucts or amounts related to or customarily
incurred with the purchase of an APV,
would conflict with the plain language of
the statute. Accordingly, the final regula-
tions do not adopt these comments.

September 21, 2026 378 Bulletin No. 2026–39
Several commenters requested that the
Treasury Department and the IRS clarify
in the final regulations whether the inclu-
sion of additional obligors in a refinancing
of an SPVL would result in the new loan
failing to qualify as an SPVL. Consistent
with section 163(h)(4)(B)(i) and (h)(4)(D)
(i), and as provided in proposed § 1.163-
16(d)(5)(i), indebtedness is an SPVL only
if it was originally incurred by the tax-
payer. Accordingly, the Treasury Depart-
ment and the IRS clarify that in the event
a new borrower is added to indebtedness
as part of a refinancing of an SPVL, the
indebtedness continues to be an SPVL
with respect to the original obligor(s), but
is not an SPVL with respect to the new
obligor(s).
One commenter requested clarification
as to whether interest attributable to prior
vehicle loan balances on an SPVL that are
rolled into a new loan as part of a refinanc-
ing may be included in the new SPVL to
the extent those balances are part of the
amount financed. The final regulations
provide that the amount of a new loan,
to the extent attributable to accrued but
unpaid interest on the refinanced SPVL,
may qualify as an SPVL provided all the
other requirements to be an SPVL are sat-
isfied.
E. Applicable Passenger Vehicle (APV)
Section 163(h)(4)(D) defines APV as
meaning any vehicle: (i) the original use
of which commences with the taxpayer;
(ii) that is manufactured primarily for use
on public streets, roads, and highways
(not including a vehicle operated exclu-
sively on a rail or rails); (iii) that has at
least 2 wheels; (iv) that is a car, minivan,
van, sport utility vehicle, pickup truck, or
motorcycle; (v) that is treated as a motor
vehicle for purposes of title II of the Clean
Air Act; and (vi) that has a GVWR of less
than 14,000 pounds. Section 163(h)(4)
(D) also provides that the term APV does
not include any vehicle the final assembly
of which did not occur within the United
States.
1. Original Use
Section 163(h)(4)(D) provides, in
relevant part, that for a vehicle to be an
APV, the original use of the vehicle must
commence with the taxpayer. Proposed
§ 1.163-16(e)(2)(i) provided that original
use of a vehicle commences with the first
person that takes delivery of the vehicle
after the vehicle is sold, registered, or
titled. In the case of a dealer, proposed
§ 1.163-16(e)(2)(i) provided that origi-
nal use of a vehicle does not commence
with the dealer unless the dealer registers
or titles the vehicle. In the case of a pur-
chaser that is not a dealer and that incurs
indebtedness to purchase a vehicle, pro-
posed § 1.163-16(e)(2)(i) provided that
original use of the vehicle does not com-
mence with that purchaser unless the vehi-
cle is treated as a new vehicle under the
loan documentation.
One commenter requested clarity
regarding the definition of “new vehicle”
in proposed § 1.163-16(e)(2)(i). The Trea-
sury Department and the IRS clarify that
the requirement that a vehicle be treated
as a new vehicle under the loan documen-
tation refers to the lender’s classification
of the vehicle for purposes of its financing
programs.
Multiple commenters recommended
that the definition of APV be extended to
include used or “nearly-new” vehicles.
Several of these commenters noted that
the definition should be changed because
lower-income taxpayers cannot afford to
purchase new vehicles. Section 163(h)
(4)(D) provides, in relevant part, that for
a vehicle to be an APV, the original use
of the vehicle must commence with the
taxpayer. If the original use of a vehicle
commences with a person other than the
taxpayer, the vehicle is not an APV in the
hands of the taxpayer. Allowing a tax-
payer that does not satisfy the original use
requirement to treat the vehicle as an APV
would be in direct conflict with the plain
language of the statute and congressional
intent. Accordingly, the Treasury Depart-
ment and the IRS decline to adopt this rec-
ommendation.
Multiple commenters noted that State
vehicle titling and registration require-
ments for demonstrator vehicles vary by
State, leading to differing consumer out-
comes in different jurisdictions. Specifi-
cally, the commenters noted that in States
that require a dealer to title or register
demonstrator vehicles, the original use
of that vehicle would always commence
with the dealer and therefore would never
commence with a purchaser that is not a
dealer. One commenter noted that this rule
is arbitrary, and recommended the final
regulations provide that original use of a
vehicle be deemed to commence with the
first purchaser that is not a dealer, notwith-
standing any prior temporary use or titling
by the dealer for demonstrator or service
vehicle purposes.
The Treasury Department and the IRS
understand and appreciate that taxpayers
are concerned that dealers’ prior use of
vehicles could prevent original use from
commencing with a subsequent purchaser
that is not a dealer, including concerns
that this result may vary among States.
Accordingly, § 1.163-16(e)(2)(ii) pro-
vides that original use of a vehicle held
by a dealer does not commence with the
dealer if the vehicle is held primarily for
sale to customers in the ordinary course
of its trade or business, and as a result the
dealer is not considered to be the first per-
son that takes delivery of the vehicle after
it is sold, registered, or titled as described
in § 1.163-16(e)(2)(i). However, original
use of a vehicle may commence with a
dealer if the vehicle is held by the dealer
for any purpose other than primarily for
sale to customers in the ordinary course of
its trade or business. For example, a dealer
may own a service vehicle that is not held
primarily for sale to customers and instead
is used to support the dealer’s business
operations, such as use as a customer
loaner. Original use of this service vehi-
cle will generally begin with the dealer. In
contrast, a dealer may own a demonstra-
tor vehicle that is held primarily for sale
to customers and is used for customer test
drives. Original use of this demonstrator
vehicle will generally not begin with the
dealer and instead may begin with a cus-
tomer that purchases the vehicle. This rule
is consistent with similar concepts in the
Code, such as the original use requirement
for certain property to be eligible for the
additional first year depreciation deduc-
tion under section 168(k)(2)(A)(ii) of the
Code. Section 1.168(k)-2(b)(3)(i) and (b)
(3)(ii)(A) provide in relevant part that
depreciable property meets the require-
ment if the original use of the property
commences with the taxpayer. Section
1.168(k)-2(b)(3)(ii)(A) explains that orig-
inal use means the first use to which the
property is put, whether or not that use cor-

Bulletin No. 2026–39 379 September 21, 2026
responds to the use of the property by the
taxpayer. Example 2 in § 1.168(k)-2(b)(3)
(vii)(B) applies the original use require-
ment to a dealer’s use of a vehicle as a
demonstrator for prospective customers
while the vehicle is held primarily for
sale to customers in the ordinary course
of the dealer’s business, concluding that
the dealer’s “use” of a vehicle as a demon-
strator does not constitute “original use”
of the vehicle for the purposes of meet-
ing the original use requirement. Simi-
larly, § 1.163-16(e)(2)(v)(A) (Example 1:
Demonstrator vehicles) of the final regu-
lations addresses how § 1.163-16(e)(1)(i)
and (e)(2) apply when a vehicle is used by
a dealer as a demonstrator vehicle while
primarily being held for sale to customers
in the ordinary course of its trade or busi-
ness.
Additionally, consistent with proposed
§ 1.163-16(e)(2)(i), § 1.163-16(e)(2)(i)
provides that in the case of any purchaser
that incurs indebtedness for the vehicle
purchase, original use of the vehicle does
not commence with that purchaser unless
the loan documentation treats the vehicle
as a new vehicle. This rule aligns with the
requirement in section 163(h)(4)(D)(i)
that for a vehicle to be an APV, the origi-
nal use of the vehicle for which indebted-
ness is incurred must commence with the
taxpayer.
One commenter asked how the pro-
posed original use rule in proposed
§ 1.163-16(e)(2)(i) would apply in the
case of two individuals who purchase a
vehicle when both individuals are listed
on the vehicle’s title and are obligors on
the loan incurred to finance the purchase.
Alternatively, the commenter asked how
the proposed rule applied if the two indi-
viduals purchase the vehicle and are obli-
gors on the loan incurred to finance the
purchase, but only one of the individuals
is listed on the title.
The Treasury Department and the IRS
confirm that if a vehicle is purchased by
more than one person, then original use
of that vehicle may commence with each
of these purchasers. Accordingly, § 1.163-
16(e)(2)(iii) provides that if more than
one person purchases a vehicle and one
of these purchasers is the first person that
takes delivery of the vehicle after the vehi-
cle is sold, registered, or titled, then each
of these purchasers is considered to be the
first person that takes delivery of the vehi-
cle after the vehicle is sold, registered, or
titled as described in § 1.163-16(e)(2)(i).
Multiple commenters requested clarity
regarding the application of the proposed
original use rule in the case of a leased
vehicle that is eventually purchased by the
lessee.
The Treasury Department and the IRS
understand that leased vehicles are often
purchased by the lessee either during or
at the end of the vehicle lease term. It is
common for original use of a leased vehi-
cle to commence with the lessor, in which
case original use would not commence
with a lessee that purchases the vehicle.
Additionally, if a lessee purchases a vehi-
cle during or at the end of a vehicle lease
term and finances that purchase by incur-
ring a loan, the loan documentation gen-
erally does not treat the vehicle as a new
vehicle. As a result, the original use of
the vehicle would not commence with the
lessee under § 1.163-16(e)(1)(i). Section
1.163-16(e)(2)(v)(C) (Example 3: Vehi-
cle purchase following a lease) addresses
how § 1.163-16(e)(1)(i) and (e)(2) apply
when a lessee purchases a vehicle at the
end of the lease term.
Multiple commenters requested clar-
ification regarding whether original use
of a vehicle manufactured in a prior year
but not purchased until a subsequent year
(for example, a 2025 model year vehicle
that was sold to a purchaser that is not a
dealer in 2026 after the manufacturer’s
release of a 2026 model year vehicle) may
commence with the purchaser. The Trea-
sury Department and the IRS confirm that
original use of a vehicle commences with
a taxpayer as described in § 1.163-16(e)
(2), regardless of whether the vehicle was
manufactured in a prior year but not sold
until a subsequent year.
2. Vehicles with Temporary Living
Quarters
One commenter requested clarity
regarding whether a self-propelled vehi-
cle designed to provide temporary living
quarters for recreational, camping, or
seasonal use could be an APV. In order
to be an APV, a vehicle must meet the
requirements to be an APV at the time of
purchase. The Treasury Department and
the IRS confirm that a vehicle that meets
the section 163(h)(4)(D) requirements at
the time of purchase will be considered
an APV, regardless of whether the vehicle
was designed to provide temporary living
quarters.
3. Final Assembly
Section 163(h)(4)(D) provides that the
definition of APV does not include any
vehicle the final assembly of which did
not occur within the United States. Sec-
tion 163(h)(4)(E)(i) provides that, for the
purposes of section 163(h)(4)(D), the term
“final assembly” means the process by
which a manufacturer produces a vehicle
at, or through the use of, a plant, factory,
or other place from which the vehicle is
delivered to a dealer with all component
parts necessary for the mechanical opera-
tion of the vehicle included with the vehi-
cle, whether or not the component parts
are permanently installed in or on the
vehicle. Proposed § 1.163-16(e)(3) pro-
vided that, to establish that final assembly
occurred within the United States, the tax-
payer may rely on (1) the vehicle’s plant of
manufacture as reported in the VIN under
49 CFR 565; or (2) the final assembly
point reported on the label affixed to the
vehicle as described in 49 CFR 583.5(a)
(3). Further, the preamble to the proposed
regulations provided that taxpayers could
determine whether the vehicle’s plant
of manufacture is located in the United
States by following the instructions on the
National Highway Traffic Safety Admin-
istration (NHTSA) VIN Decoder website:
https://www.nhtsa.gov/vin-decoder.
One commenter recommended that
APVs should include all new vehicles
regardless of where the vehicles are man-
ufactured. Another commenter recom-
mended an exemption to the final assembly
requirement for any vehicle manufactured
by certain large U.S. vehicle manufac-
turers. The Treasury Department and the
IRS do not adopt these recommendations
because section 163(h)(4)(D) explicitly
requires that a vehicle must have under-
gone final assembly in the United States
to be an APV.
One commenter noted that certain vehi-
cle models with identical specifications
may have undergone final assembly either
in the United States or in other countries.
Accordingly, the commenter recom-

September 21, 2026 380 Bulletin No. 2026–39
mended that the final assembly determi-
nation be made at the vehicle make-and-
model level rather than at the VIN level
to ensure taxpayers purchasing the same
model vehicle are not treated differently
under the Code. Alternatively, the com-
menter recommended that transitional or
safe harbor provisions be considered for
vehicle models that may have undergone
final assembly either in the United States
or in other countries.
The Treasury Department and the
IRS understand that not all vehicles of
the same make and model undergo final
assembly in the same location and where
a vehicle’s final assembly occurred cannot
be determined reliably from its make and
model. For example, the final assembly of
some vehicles of a make and model mar-
keted by a U.S.-headquartered manufac-
turer may in certain cases have occurred
outside the United States, while some
vehicles of a make and model marketed
by a non-U.S.-headquartered manufac-
turer may have occurred in the United
States. Nonetheless, section 163(h)(4)
(D) explicitly provides that a vehicle must
have undergone final assembly in the
United States to be an APV. Accordingly,
the Treasury Department and the IRS do
not adopt this commenter’s recommenda-
tions.
One commenter noted that it was
unclear what should be done if the NHTSA
VIN Decoder website is unavailable. The
Treasury Department and the IRS note
that reliance on the vehicle’s plant of man-
ufacture as reported in the VIN (which can
be checked on the NHTSA VIN Decoder
website) to establish the location of final
assembly is one non-exclusive option
provided by the IRS for taxpayers’ con-
venience. A taxpayer may also determine
where a vehicle’s final assembly occurred
by relying on the vehicle’s final assembly
point reported on the label affixed to the
vehicle as described in 49 CFR 583.5(a)
(3), which is sometimes referred to as the
“window sticker.”
F. Personal Use
Section 163(h)(4)(B)(i) provides that
QPVLI is interest paid or accrued on
indebtedness incurred by the taxpayer for
the purchase of an APV for personal use.
Proposed § 1.163-16(f)(1) provided that a
taxpayer that incurs indebtedness to pur-
chase an APV is considered to purchase
that APV for personal use if, at the time
the indebtedness is incurred, that taxpayer
expects that the APV will be used for per-
sonal use by the taxpayer, the taxpayer’s
spouse, or an individual that is related to
the taxpayer within the meaning of sec-
tion 152(c)(2) or (d)(2) of the Code, or
any combination of these individuals, for
more than 50 percent of the time.
One commenter asked if the personal
use determination is made annually or
only at the time the vehicle is purchased.
Additionally, multiple commenters asked
whether the personal use determination is
affected by a change in the way a vehicle
is used after the indebtedness is incurred.
The Treasury Department and the IRS
reaffirm that the personal use requirement
in section 163(h)(4) is a requirement that
must be satisfied at the time the indebt-
edness is incurred, and not an ongoing
requirement. Accordingly, differences
between expected use at the time the
indebtedness is incurred and later actual
use of the vehicle do not affect the per-
sonal use determination.
One commenter noted that the proposed
regulations would complicate recordkeep-
ing and the audit process by requiring
taxpayers that use a vehicle for personal
and business purposes to allocate interest
between QPVLI and business interest.
Proposed § 1.163-16(g)(2) provided
that taxpayers may deduct independently
deductible interest (generally, interest that
is QPVLI and that also is deductible as
a different type of interest under section
163(a) or a different section of the Code)
as either QPVLI or as a different type of
interest as described in proposed § 1.163-
16(g)(1). Accordingly, taxpayers that use
a vehicle for personal and business pur-
poses are not required to allocate interest
between QPVLI and business interest, but
may choose to do so.
G. QPVLI Limitations
1. Dollar Limitation
Section 163(h)(4)(C)(i) provides that
the deduction allowed for QPVLI by a tax-
payer for any taxable year cannot exceed
$10,000. Proposed § 1.163-16(h)(1) pro-
vided that the amount taken into account
as QPVLI by a taxpayer for any taxable
year may not exceed $10,000 per Federal
tax return regardless of filing status.
One commenter requested that the
Treasury Department and the IRS clar-
ify how the rules work if a taxpayer has
multiple SPVLs. The commenter recom-
mended that taxpayers be able to aggre-
gate interest from all SPVLs to determine
QPVLI and apply the $10,000 per return
limit to this total amount.
The Treasury Department and the IRS
clarify that under section 163(h)(4) a tax-
payer with multiple SPVLs may aggregate
interest from these loans to determine the
total amount of QPVLI prior to applying
the $10,000 per return limit.
2. Modified Adjusted Gross Income
Phaseout
Section 163(h)(4)(C)(ii) provides
and proposed § 1.163-16(h)(2) provided
that the amount otherwise allowable as a
deduction under section 163(a) as QPVLI
(after the application of the section 163(h)
(4)(C)(i) dollar limitation) is reduced (but
not below zero) by $200 for each $1,000
(or portion thereof) by which the mod-
ified adjusted gross income (MAGI) of
the taxpayer for the taxable year exceeds
$100,000. In the case of married taxpay-
ers filing a joint Federal income tax return,
section 163(h)(4)(C)(ii) provides and
proposed § 1.163-16(h)(2) provided that
this reduction begins after the taxpayer’s
MAGI exceeds $200,000.
Multiple commenters requested clar-
ification regarding the application of the
MAGI phaseout to taxpayers that file a
Federal income tax return with a filing
status of head of household. The MAGI
phaseout thresholds for all taxpayers are
explicitly set by section 163(h)(4)(C)(ii),
which provides two specific dollar amount
thresholds: a $200,000 phaseout threshold
applicable to joint filers and a $100,000
phaseout threshold applicable to all other
taxpayers, including taxpayers that have a
filing status of head of household. Accord-
ingly, comments requesting a change in
the phaseout threshold amount for tax-
payers that have a filing status of head of
household are not adopted.
Multiple commenters recommended
that final regulations increase the MAGI
phaseout thresholds. One of these com-

Bulletin No. 2026–39 381 September 21, 2026
menters requested a separate increased
threshold for taxpayers that file a Federal
income tax return with a filing status of
head of household. The Treasury Depart-
ment and the IRS decline to adopt these
recommendations because section 163(h)
(4)(C)(ii) explicitly provides the MAGI
phaseout thresholds for all taxpayers.
Multiple commenters recommended
that the MAGI phaseout reduce the
$10,000 annual limitation on QPVLI
under section 163(h)(4)(C)(i), rather than
reduce the amount otherwise deductible
as QPVLI under section 163(a). Sec-
tion 163(h)(4)(C)(ii) explicitly requires
that the amount otherwise allowable as a
deduction under section 163(a) be reduced
as a taxpayer’s MAGI exceeds the appli-
cable dollar amount thresholds. Accord-
ingly, the Treasury Department and the
IRS do not adopt these recommendations.
H. Taxpayers That May Deduct QPVLI
Section 163(h)(4)(B)(i) provides that
QPVLI is interest paid or accrued on
indebtedness incurred by the taxpayer for
the purchase of an APV for personal use.
Because business entities cannot satisfy
the personal use requirement, proposed
§ 1.163-16(a)(2)(i) provided that only
individuals, decedents’ estates, and non-
grantor trusts may deduct QPVLI.
One commenter requested that the
Treasury Department and the IRS clarify
in the final regulations whether nonresi-
dent alien individuals may deduct QPVLI.
The commenter noted that section 873(b)
of the Code lists the nonbusiness deduc-
tions allowed for nonresident alien indi-
viduals and does not include QPVLI in
this list.
The Treasury Department and the IRS
agree with the commenter that clarification
on whether nonresident alien individuals
may deduct QPVLI is needed. With limited
exceptions, a nonresident alien individual
is not allowed deductions that are not con-
nected with income that is effectively con-
nected with the conduct of a U.S. trade or
business. See section 873. Thus, a nonres-
ident alien individual will generally not be
allowed to deduct QPVLI, which relates
to indebtedness incurred to purchase an
APV for personal use. However, in lim-
ited circumstances, interest connected
to income that is effectively connected
with the conduct of a U.S. trade or busi-
ness will qualify as QPVLI. For exam-
ple, a nonresident alien individual that
purchases an APV primarily for personal
use may also use the APV as part of his
or her trade or business, and thus may pay
interest that qualifies as QPVLI. See part
II.F (Personal Use) of this Summary of
Comments and Explanation of Revisions.
In that case, the nonresident alien individ-
ual would be allowed under § 1.163-16(g)
(2) to deduct the interest connected to
that business as either QPVLI or as busi-
ness interest expense. This same analysis
would apply to a decedent’s estate that is
a foreign estate or a non-grantor trust that
is a foreign trust, each of which computes
its taxable income in the same manner as
a nonresident alien individual. See sec-
tion 641(b) of the Code. The Treasury
Department and the IRS intend to modify
the instructions for the relevant forms to
clarify that a nonresident alien individual,
foreign estate, or foreign non-grantor trust
is not allowed to deduct QPVLI, except in
the limited circumstances described in this
paragraph.
One commenter requested that U.S.
citizens residing in the Commonwealth
of Puerto Rico that are required to file a
Federal tax return be allowed to deduct
QPVLI. U.S. citizens residing in the
Commonwealth of Puerto Rico that are
required to file a Federal tax return are
generally entitled to claim deductions to
the extent those deductions are properly
allocated and apportioned pursuant to
the rules under sections 861 and 933 of
the Code and the regulations thereunder.
Accordingly, these taxpayers may be eli-
gible to deduct QPVLI, subject to the allo-
cation and apportionment rules in sections
861 and 933.
One commenter recommended that
individuals with any filing status (includ-
ing single, married filing jointly, and head
of household) should be able to deduct
QPVLI. The Treasury Department and
the IRS confirm that filing status does not
impact QPVLI deduction eligibility.
III. Comments on Proposed § 1.6050AA-1
A. In General
In order to make the regulations
more readable, the final regulations
include two revisions to the proposed
rules that move language from the defi-
nitions in § 1.6050AA-1(b) to other
paragraphs in § 1.6050AA-1. First, the
language in proposed § 1.6050AA-1(b)
(3)(ii) (Interest received on behalf of
another person) has been moved to new
§ 1.6050AA-1(c), and the subsequent
paragraphs in § 1.6050AA-1(b) have
been finalized accordingly. Second, the
language in proposed § 1.6050AA-1(b)
(2)(ii) (De minimis rule) and (e) (Amount
of interest received on SPVL for calen-
dar year) have been grouped together in
new § 1.6050AA-1(f)(1) and (2), respec-
tively. As a result, the language in pro-
posed § 1.6050AA-1(b)(2)(i) has been
moved to § 1.6050AA-1(b)(2) and the
heading in proposed § 1.6050AA-1(b)(2)
(i) has been deleted. As discussed more
fully in this part III of the Summary of
Comments and Explanation of Revisions
(Comments on Proposed § 1.6050AA-1),
the substantive contents of these provi-
sions have not been revised in the final
regulations.
B. Definitions
1. Applicable Passenger Vehicle (APV)
Section 6050AA(d)(1) provides that
terms used in section 6050AA have the
same meaning as when used in section
163(h)(4). The term APV is used in sec-
tion 6050AA(b)(2)(E) and (d)(2). Section
163(h)(4)(D) defines an APV as a vehicle
that satisfies the requirements of section
163(h)(4)(D)(i) through (vi), but excludes
from the definition any vehicle the final
assembly of which did not occur within
the United States.
Proposed § 1.6050AA-1(b)(1) pro-
vided that the term “applicable passenger
vehicle” or “APV” has the same meaning
as that provided in section 163(h)(4)(D)
and proposed § 1.163-16(b)(1). Proposed
§ 1.163-16(b)(1) provided that a vehicle
is an “applicable passenger vehicle” or
“APV” if it satisfies the requirements set
forth in proposed § 1.163-16(e)(1). Pro-
posed § 1.163-16(e)(1) further provided
that a vehicle is an APV only if it satisfies
the requirements set forth in section 163(h)
(4)(D). Proposed § 1.163-16(e)(2) and (3),
respectively, provided rules for determin-
ing whether original use commences with

September 21, 2026 382 Bulletin No. 2026–39
the taxpayer and whether final assembly
occurred in the United States.
Many commenters expressed general
disapproval of the requirement for interest
recipients to determine if a vehicle is an
APV, a vehicle that satisfies the require-
ments that are set forth in section 163(h)
(4)(D) and proposed § 1.163-16(b)(1).
These commenters generally claimed that
it would be burdensome for interest recip-
ients to determine if a vehicle is an APV
because interest recipients do not currently
have the information necessary to make
this determination. Specifically, several
commenters claimed that interest recipi-
ents do not currently maintain records that
include whether the vehicle’s original use
commences with the borrower, the vehi-
cle’s GVWR, where the vehicle’s final
assembly occurred, or whether the vehicle
satisfies other APV requirements. These
commenters generally recommended that
the final regulations allow interest recipi-
ents to report interest on all vehicle loans
and recommended that individual taxpay-
ers seeking to claim the deduction alone
should determine whether their vehicle
qualifies as an APV.
The Treasury Department and the IRS
acknowledge the concerns raised by these
commenters and are aware that interest
recipients may need to collect additional
information to determine whether a vehi-
cle is an APV. However, as a result of the
statutory interaction between sections
6050AA(d)(1) and 163(h)(4)(D), deter-
mining whether a vehicle is an APV is
necessary to determine whether reporting
is required under section 6050AA. See
part II.E of this Summary of Comments
and Explanation of Revisions (Applica-
ble Passenger Vehicle (APV)) for a dis-
cussion of the regulations under section
163(h)(4)(D). In addition, taxpayers need
the information reported under section
6050AA to accurately complete their
Federal income tax returns. Information
reported on the Form 1098-VLI, Vehicle
Loan Interest Statement, such as the vehi-
cle’s VIN, whether the original use of the
vehicle began with the purchaser (payor
of record), and whether final assembly
occurred in the United States, will enable
taxpayers to accurately claim the QPVLI
deduction.
Several commenters discussed their
concerns about using a vehicle’s VIN to
verify where a vehicle’s final assembly
occurred. One commenter indicated that
the commenter understands the vehicle’s
VIN indicates the plant of manufacture;
however, the commenter noted that while
taxpayers and dealers have access to the
vehicle’s window label, the interest recip-
ient may not. One commenter requested
simplified VIN and final assembly ver-
ification. Another commenter requested
that the final regulations allow interest
recipients to report the VIN reflected in
their records without requiring the interest
recipients to verify where a vehicle’s final
assembly occurred.
The statutory text of section
6050AA(b)(2)(E) requires interest recipi-
ents to report VINs. See part III.F of this
Summary of Comments and Explanation
of Revisions (Requirement to File an
Information Return) for a discussion of
the requirement to report the APV’s VIN.
Although these interest recipients may not
currently have easy access to a VIN, they
must obtain VINs to comply with their
statutory information reporting obliga-
tions. Further, the Treasury Department
and the IRS understand the VIN and the
NHTSA VIN lookup tool can be used to
determine whether a vehicle has a GVWR
of less than 14,000 pounds and whether
the final assembly of the vehicle occurred
within the United States. Accordingly, no
changes are made in the final regulations
to the text of proposed § 1.6050AA-1(b)
(1) in response to these comments.
Other commenters requested safe har-
bor provisions related to the determina-
tion of whether a vehicle is an APV. One
commenter requested that the Treasury
Department and the IRS consider includ-
ing a safe harbor in the final regulations
to allow interest recipients to rely on
dealer or manufacturer data to make the
APV determination. Another commenter
requested that the Treasury Department
and the IRS provide a safe harbor in the
final regulations allowing lenders to rely
on loan documentation and dealer certifi-
cations regarding new vehicle status and
original use.
The Treasury Department and the IRS
decline to adopt a safe harbor for inter-
est recipients with respect to determining
whether a vehicle satisfies the require-
ments of section 163(h)(4)(D). Section
6001 of the Code provides that every per-
son liable for tax or the collection thereof
must keep such records, render such state-
ments, make such returns, and comply
with such rules and regulations as may be
prescribed. Under § 1.6001-1(a), any per-
son required to file a return of information
with respect to income must keep such
permanent books of accounts or records
sufficient to establish the matters required
to be shown in any return of such infor-
mation. This includes all of the informa-
tion required by section 6050AA, which
is information that lenders can obtain.
The general recordkeeping requirements
require interest recipients to establish the
items required to be shown on the sec-
tion 6050AA information return. See part
III.B.2 of this Summary of Comments
and Explanation of Revisions (Specified
Passenger Vehicle Loan (SPVL)) for a dis-
cussion of interest recipients’ obligations
when the vehicle is refinanced.
2. Specified Passenger Vehicle Loan
(SPVL)
Section 6050AA(d)(2) provides that
the term “specified passenger vehicle
loan” means the indebtedness described in
section 163(h)(4)(B) with respect to any
APV. Proposed § 1.6050AA-1(b)(7) pro-
vided that the term “specified passenger
vehicle loan” or “SPVL” has the meaning
provided in proposed § 1.163-16(b)(15).
Proposed § 1.163-16(b)(15) provided
that “specified passenger vehicle loan” or
“SPVL” means indebtedness that satisfies
the requirements set forth in proposed
§ 1.163-16(d)(1). Proposed § 1.163-16(d)
(1) provided that SPVL means indebted-
ness that is incurred by the taxpayer after
December 31, 2024, for the purchase of,
and that is secured by a first lien on, an
APV for personal use.
Many commenters requested that
the final regulations not require interest
recipients to report interest received on
an SPVL. In general, these comment-
ers requested that the final regulations
require interest recipients to report interest
received on any vehicle loan rather than
only on an SPVL. Most of these com-
menters claimed interest recipients do not
currently possess sufficient information to
determine whether a loan is an SPVL.
Many commenters indicated that inter-
est recipients do not currently collect or

Bulletin No. 2026–39 383 September 21, 2026
maintain information relating to whether
a loan meets the requirements of section
163(h)(4)(B). Some commenters claimed
that specific interest recipients, including
credit unions, do not currently track all
the information necessary to determine
the interest allocable to different compo-
nents of a vehicle loan. Other comment-
ers claimed that interest recipients do not
currently track interest allocable to nega-
tive equity or the amount of nonqualifying
indebtedness.
Some commenters requested that the
final regulations include safe harbors
that would allow the interest recipients
to report interest received on any vehicle
loan rather than the amount of interest
received only on an SPVL. One com-
menter requested that the final regula-
tions include a safe harbor under which
interest recipients are not required to
allocate interest between qualifying and
non-qualifying portions of the vehicle
loan. Another commenter requested that
the final regulations include a safe har-
bor allowing interest recipients to pro-
vide interest statements to any borrower
who paid $600 or more in interest on a
vehicle-secured loan, accompanied by a
disclaimer.
Some commenters indicated their view
that certain requirements of section 163(h)
(4)(B) are known only to the taxpayer.
Some commenters claimed that only tax-
payers are able to know whether the vehi-
cle loan was incurred for the purchase of
an APV for personal use. Others claimed
that vehicle finance companies process
changes of party to vehicle finance con-
tracts from time to time, but do not cur-
rently have data regarding whether the
death of the original payor of record is the
reason for such transfer. These comment-
ers generally requested that the final reg-
ulations require that the taxpayer, rather
than the interest recipient, be responsible
for determining whether a vehicle loan is
an SPVL.
The statutory language does not sup-
port permitting interest recipients to report
interest received on all vehicle loans. Sec-
tion 6050AA(a) provides that the informa-
tion return relates to interest received on
an SPVL. Section 6050AA(b)(2) provides
that the information return filed by the
interest recipient must include the amount
of such interest received for the calendar
year. The interest referred to in section
6050AA(b)(2) is the interest received on
an SPVL. The Treasury Department and
the IRS understand that the definition of
SPVL in § 1.6050AA-1(b)(7) may require
interest recipients to collect information
they do not currently collect. However,
the statute requires reporting of interest
received on an SPVL, not vehicle loan
interest in general.
Several commenters discussed whether
interest recipients can determine whether
a taxpayer expects to use the vehicle for
personal use. One commenter requested
that the final regulations provide an
objective, standardized mechanism for
establishing personal use at origination
that credit unions can document through
ordinary loan records. Another com-
menter requested that the final regulations
provide that interest recipients need only
rely on the information contained in the
retail installment sales contract. This com-
menter also requested that the final regu-
lations include a safe harbor regarding the
personal use of the vehicle.
The Treasury Department and the IRS
understand that interest recipients may not
currently have documentation necessary
to determine whether the personal use
requirement is met. While retail install-
ment sales contracts may include some
indication of whether a vehicle is pur-
chased for personal or business use, this
is not true of all such contracts. Further,
even when a contract includes some indi-
cation of use, this information may not be
available to assignees of the loan. If the
information in the contract is sufficient
for the interest recipient to determine that
the personal use requirement is met, then,
in the absence of conflicting information,
the interest recipient may rely on that
information. With respect to other con-
tracts, the interest recipient may choose to
make arrangements to obtain information
regarding personal use from the obligor,
from the lender of record, or by other
means. In addition, interest recipients may
rely on the same evidence of personal use
as the obligor.
Several commenters discussed what
they consider to be unique issues when an
SPVL is refinanced. In general, these com-
menters claimed that interest recipients
after refinancing do not currently have
access to the information needed to verify
that the refinanced debt was an SPVL in
the first instance. One commenter noted
that there are currently no reliable mech-
anisms to confirm whether the borrower
was the original owner during a refinance
transaction or whether a refinanced vehi-
cle was purchased during a qualifying
year.
Some commenters requested that the
final regulations adopt different, specific
reporting requirements when a vehicle-se-
cured loan is refinanced. These comment-
ers claimed that, in a typical vehicle refi-
nance transaction, lenders do not receive
a copy of the prior retail installment sales
contract, and that refinance lenders gen-
erally receive limited information. Some
commenters recommended that the final
regulations clarify that interest recipients
may report interest paid on vehicle-se-
cured refinance loans without making
determinations regarding original pur-
chase eligibility and that vehicle eligibil-
ity determinations remain solely with the
taxpayer. One commenter requested that
the final regulations allow lenders to treat
the entire refinanced amount as an SPVL,
up to the payoff amount reflected on the
prior lender’s payoff statement, without
ongoing pro rata interest allocation that
lender systems are not currently designed
to perform. Another commenter requested
that the final regulations clarify that, for
purposes of section 6050AA reporting,
interest recipients may rely on a signed
borrower certification of original owner-
ship.
The Treasury Department and the IRS
acknowledge the concerns raised by these
commenters and are aware that interest
recipients may need to collect more infor-
mation with respect to refinanced vehicle
loans in order to determine whether the
vehicle loan is an SPVL. However, as a
result of the interaction between sections
6050AA(d) and 163(h)(4)(B), determin-
ing whether the vehicle loan is an SPVL is
necessary to determine whether reporting
is required under section 6050AA. Sec-
tion 163(h)(4)(E)(ii) generally provides
that a new loan resulting from refinancing
an SPVL is an SPVL if the new loan is
secured by a first lien on the APV with
respect to which the refinanced SPVL
was incurred, but only to the extent the
amount of the new loan does not exceed
the amount of the refinanced SPVL. The

September 21, 2026 384 Bulletin No. 2026–39
statute does not include separate rules for
reporting interest received on an SPVL
that meets the requirements of section
163(h)(4)(E)(ii). Accordingly, interest
recipients must perform adequate dili-
gence to meet their reporting requirements
for refinanced SPVLs.
Some commenters noted that it would
be useful for the amount of interest
reported under section 6050AA to be the
same as the amount of interest an eligible
borrower would be allowed to deduct. The
Treasury Department and the IRS agree
with these commenters. The Treasury
Department and the IRS acknowledge that
it is not possible for interest recipients to
know whether the amount of the SPVL
is limited by the dollar or MAGI limita-
tions in section 163(h)(4)(C). Therefore,
to minimize the risk of recipients claim-
ing an interest deduction that exceeds the
limitation imposed by section 163(h)(4)
(C), § 1.6050AA-1(h)(2)(iv) requires that
the written statement from the interest
recipient include a legend stating that the
payor of record may be unable to deduct
the full amount of interest reported on the
statement. See part III.G of this Summary
of Comments and Explanation of Revi-
sions (Requirement to Furnish a Written
Statement) for a further discussion of the
legend.
3. Calendar Year
Proposed § 1.6050AA-1(b)(2) provided
that the calendar year for which interest is
received is the later of the calendar year
for which interest is received or the cal-
endar year in which the interest properly
accrues. Proposed § 1.6050AA-1(b)(2)(ii)
permitted an interest recipient to report, as
interest received during the calendar year,
prepaid interest properly accruing by the
following January 15.
One commenter requested guidance
for handling payment reversals that cross
calendar years and other corrections that
occur after year-end processing cutoffs.
The Treasury Department and the IRS
decline to include a rule in the final reg-
ulations on how to correct information
returns under section 6050AA. IRS Pub-
lication 1099, General Instructions for
Certain Information Returns, includes
information on how to file corrected infor-
mation returns and interest recipients
should use those instructions to determine
how to file any corrected returns.
In order to make the regulations
more readable, however, the language
in proposed § 1.6050AA-1(b)(2)(ii) (De
minimis rule) has been moved to new
§ 1.6050AA-1(f)(1) and the heading has
been updated.
4. Interest Recipient
Proposed § 1.6050AA-1(b)(3) pro-
vided that the term “interest recipient”
means a person that is engaged in a trade
or business, whether or not the trade or
business of lending money, and who, in the
course of that trade or business, receives
interest on an SPVL. When a person col-
lects interest on an SPVL on behalf of
another, proposed § 1.6050AA-1(b)(3)(ii)
provided that the person that first receives
the interest generally would be required to
report under proposed § 1.6050AA-1(a),
and no reporting would be required upon
the transfer of the interest from the inter-
est recipient to the person on whose behalf
the interest recipient received the interest.
However, if the initial recipient does not
possess the reporting information for the
borrower and the person on whose behalf
the interest recipient received the inter-
est is engaged in a trade or business and
would receive the interest in the course of
its trade or business if it received the inter-
est directly, proposed § 1.6050AA-1(b)(3)
(ii)(A) would require the person on whose
behalf the interest recipient received the
interest, rather than the initial recipient, to
report.
One commenter requested clarification
regarding which party should be consid-
ered the interest recipient in a securitiza-
tion structure for retail installment sales
contracts. This commenter also requested
confirmation that parties may contrac-
tually delegate reporting obligations to
another party and, when a delegation
occurs, clarification of which party bears
the obligation for a given calendar year.
No modifications are needed in the
final regulations to the text of proposed
§ 1.6050AA-1(b)(3) in response to this
comment. Home mortgages have histori-
cally been securitized, and the final regu-
lations are similar to the interest recipient
rules for mortgage interest in § 1.6050H-
1(c). The Treasury Department and the
IRS decline to provide an example regard-
ing the specific fact pattern included in the
comment. However, the new examples in
§ 1.6050AA-1(c)(5) generally illustrate
the effect of the definition when a car loan
is securitized.
The Treasury Department and the IRS
understand that when a vehicle loan is
securitized the interest recipient may not
currently have ready access to the infor-
mation necessary to determine if a vehicle
satisfies the requirements to be an APV, or
information regarding whether a loan is
an SPVL. However, as discussed in parts
III.B.1 and III.B.5 of this Summary of
Comments and Explanation of Revisions
(Applicable Passenger Vehicle (APV) and
Specified Passenger Vehicle Loan (SPVL),
respectively), such determinations are
required by statute.
One commenter requested that the reg-
ulations address how reporting obligations
should be satisfied if the interest recipient
enters bankruptcy or is otherwise unable
to report for a calendar year. The Trea-
sury Department and the IRS decline to
address the consequences of bankruptcy
on an interest recipient’s reporting obli-
gation because it is outside the scope of
these regulations.
To make the regulations more readable,
the language in proposed § 1.6050AA-1(b)
(3)(ii) (Interest received on behalf of
another person) has been moved to new
§ 1.6050AA-1(c). As a result, the language
in proposed § 1.6050AA-1(b)(3)(i) has
been moved to § 1.6050AA-1(b)(3) and
the heading in proposed § 1.6050AA-1(b)
(3)(i) has been deleted. In addition, the
new examples in § 1.6050AA-1(c)(5)
illustrate the reporting obligation when
a person collects interest on an SPVL on
behalf of another when a car loan is secu-
ritized.
5. Payor of Record
Proposed § 1.6050AA-1(b)(5) defined
a “payor of record” on an SPVL as any per-
son carried on the books and records of the
interest recipient as the principal borrower
on the SPVL. As a result of the interaction
between proposed § 1.6050AA-1(b)(5)
and (a)(2), only the payor of record would
be furnished a written statement on the
SPVL under proposed § 1.6050AA-1(a)
(2)(ii). Proposed § 1.6050AA-1(b)(5) also

Bulletin No. 2026–39 385 September 21, 2026
provided that the term “person” for the
purposes of proposed § 1.6050AA-1(b)(5)
means any individual, decedent’s estate,
or non-grantor trust.
One commenter supported the pro-
posed definition of payor of record. This
commenter requested confirmation that
only one written statement per SPVL per
year is required and acceptable, even if
the loan has more than one borrower. The
Treasury Department and the IRS confirm
that as a result of the interaction between
§ 1.6050AA-1(b)(5) and (a)(2), when
there are co-borrowers on an SPVL, only
the payor of record is required to be fur-
nished a written statement on the SPVL
under § 1.6050AA-1(a)(2)(ii).
Another commenter requested clarifi-
cation on what, if any, reporting obliga-
tions exist when the borrower is deceased
at the time of the filing deadline. This
commenter requested that the final regu-
lations include guidance confirming that
the interest recipient may rely on avail-
able public records, correspondence, or
obligor account status indicators to deter-
mine whether to furnish a statement and
that furnishing to the estate or co-obligor
would satisfy the furnishing requirement.
No modifications are needed in the
final regulations to the text used in pro-
posed § 1.6050AA-1(b)(5). As a result of
the interaction between § 1.6050AA-1(b)
(5) and (a)(2), only the payor of record
would be furnished a written statement on
the SPVL under § 1.6050AA-1(a)(2)(ii).
The payor of record on the SPVL can be
a decedent’s estate, and the death of the
borrower does not eliminate the statutory
reporting requirement.
C. Reporting by a Foreign Person
Under proposed § 1.6050AA-1(c)(1),
an interest recipient that is a foreign person
would be required to report with respect
to interest received on an SPVL to the
extent such interest is received at a loca-
tion in the United States. Under proposed
§ 1.6050AA-1(c)(2), an interest recipient
that is a foreign person and receives inter-
est at locations outside the United States
would be required to report only if the
foreign person is a controlled foreign cor-
poration (as defined in section 957(a) of
the Code) or if 50 percent or more of the
foreign person’s gross income was effec-
tively connected with the conduct of a
trade or business within the United States.
One comment requested guidance
regarding the information reporting obli-
gations of foreign persons holding secu-
ritized interests in a vehicle loan. The
Treasury Department and the IRS do not
believe it is necessary to provide any
additional clarification in response to this
comment because foreign persons hold-
ing securitized interests in a vehicle loan
with reporting obligations under section
6050AA are subject to the same require-
ments as domestic interest recipients hold-
ing securitized interests in a vehicle loan.
D. Reporting with Respect to a
Nonresident Alien Individual, Foreign
Decedent’s Estate, or Foreign Non-
Grantor Trust
Proposed § 1.6050AA-1(d)(1) pro-
vided that the reporting requirement of
section 6050AA does not apply if the
payor of record is a nonresident alien,
foreign decedent’s estate, or foreign non-
grantor trust. Proposed § 1.6050AA-1(d)
(2) provided the documentation rules that
the interest recipient is required to follow
to determine whether the payor of record
is a nonresident alien individual, foreign
decedent’s estate, or foreign non-grantor
trust.
Some commenters requested changes
to proposed § 1.6050AA-1(d)(1) in
the final regulations. One commenter
requested specific language in the final
regulations noting that the payor of record
is presumed to be a U.S. person for section
6050AA purposes. Another commenter
claimed that vehicle finance companies
do not necessarily have data regarding the
legal status of customers and requested
that proposed § 1.6050AA-1(d)(2) and
(3) be deleted in the final regulations so
that finance companies are not required to
determine the legal status of the payor of
record.
The Treasury Department and the
IRS understand the concern that vehicle
finance companies may not currently have
the documentation necessary to determine
whether a particular payor of record is a
nonresident alien individual, foreign dece-
dent’s estate, or foreign non-grantor trust.
However, the documentation rules that the
interest recipient is required to follow are
similar to the longstanding rules applica-
ble to nonresident alien individuals who
pay mortgage interest in § 1.6050H-1(d)
(2). Accordingly, the Treasury Depart-
ment and the IRS decline to modify the
reporting requirement of section 6050AA
in the case of a payor of record that is a
nonresident alien individual, foreign dece-
dent’s estate, or foreign non-grantor trust.
E. Amount of Interest Received on an
SPVL for the Calendar Year
Under proposed § 1.6050AA-1(e),
whether an interest recipient receives $600
or more of interest on an SPVL would be
determined on an SPVL-by-SPVL basis.
To make the regulations easier to read, the
language in proposed § 1.6050AA-1(b)
(2)(ii) (De minimis rule) and (e) (Amount
of interest received on SPVL for calendar
year) have been grouped together in new
§ 1.6050AA-1(f)(1) and (2), respectively,
and new headings have been added to
the paragraphs. The contents of proposed
§ 1.6050AA-1(e) have not been changed.
F. Requirement to File an Information
Return
Section 6050AA(b) provides that the
information return filed by the interest
recipient must be in the form prescribed
by the Secretary and must contain: (A) the
name and address of the individual from
whom such interest was received, (B) the
amount of such interest received for the
calendar year, (C) the amount of outstand-
ing principal on the SPVL as of the begin-
ning of such calendar year, (D) the date
of origination of that loan, (E) the year,
make, model, and VIN of the APV that
secures that loan (or such other descrip-
tion of that vehicle as the Secretary may
prescribe), and (F) any other information
as the Secretary may prescribe.
Under proposed § 1.6050AA-1(f), the
interest recipient would be required to file
a form designated by the Secretary that
contains: (i) the name, address, and tax-
payer identification number of the payor
of record; (ii) the name, address, and tax-
payer identification number of the inter-
est recipient; (iii) the amount of interest
received for the calendar year; (iv) the
amount of outstanding principal on the
SPVL as of the beginning of such cal-

September 21, 2026 386 Bulletin No. 2026–39
endar year; (v) the date of origination of
such loan; (vi) the year, make, model, and
VIN of the APV that secures such loan;
(vii) the date the SPVL was acquired; and
(viii) any other information required by
the form or its instructions.
Some commenters discussed the
requirement to file an information return
with the IRS. One commenter recom-
mended allowing interest recipients
to submit a single information return
detailing all SPVL transactions for the
reporting period. Another commenter
noted the requirement to report the VIN,
year, make, model, loan origination date,
acquisition date, outstanding principal
balances, and lien status would require
system modifications. Other comment-
ers claimed that interest recipients may
experience difficulties accurately report-
ing the VIN. One commenter recom-
mended that the final regulations provide
a safe harbor for minor clerical errors in
VIN reporting.
The Treasury Department and the IRS
decline to change the requirement for
interest recipients to file a return with the
IRS for each SPVL, as this is expressly
required by sections 6050AA(a) and
6724(d)(1)(B). The items in proposed
§ 1.6050AA-1(f) generally followed the
items prescribed in section 6050AA(b)
(2). The Treasury Department and the
IRS understand that interest recipients
may not currently track the VIN associ-
ated with the vehicle. Section 6050AA(b)
(2)(E) requires the interest recipient to
report the VIN of the APV that secures
the loan on which interest is received.
The Treasury Department and the IRS
cannot modify this statutory requirement;
in addition, an accurate VIN will enable
the interest recipients and the IRS to ver-
ify other statutorily mandated informa-
tion. See part III.B.1 of this Summary of
Comments and Explanation of Revisions
(Applicable Passenger Vehicle (APV))
for a discussion of how to determine if a
vehicle is an APV.
One commenter requested clarifica-
tion that the “date acquired” information
ensures that the taxpayer can consolidate
multiple information returns when there
are multiple interest recipients for the
same SPVL during the same calendar
year. The Treasury Department and the
IRS understand SPVLs may be sold or
otherwise transferred to a new lender of
record during the calendar year. The Trea-
sury Department and the IRS confirm that
the date acquired information provides
the taxpayer with information regarding
which period is covered by each informa-
tion return rather than requiring consoli-
dated reporting by multiple interest recip-
ients.
G. Requirement to Furnish a Written
Statement
Section 6050AA(c) provides that
every person required to make an infor-
mation return under section 6050AA(a)
must also furnish to each individual
whose name is required to be included
in the return a written statement showing
the name, address, and phone number of
the information contact of the interest
recipient, and the information required
to be included in the information return
under section 6050AA(b)(2)(B) through
(F).
Proposed § 1.6050AA-1(g) would
require the interest recipient that would
be required to file a return under pro-
posed § 1.6050AA-1(a) to furnish a
statement to the payor of record. Under
proposed § 1.6050AA-1(g), the recipi-
ent would be the payor of record and the
written statement would be required to
include the information that was reported
on the form designated for this purpose.
In addition, the written statement would
be required to include a legend identify-
ing the statement as important tax infor-
mation that is being furnished to the IRS
and stating that penalties may apply if the
payor of record overstates a deduction
for interest reported on the statement.
Proposed § 1.6050AA-1(g)(2)(ii) would
also require that the written statement
include a legend stating that the payor of
record may be unable to deduct the full
amount of SPVL interest reported on the
statement.
Several commenters claimed the inter-
est recipients should not be required to
furnish a written statement to the payor of
record. In general, these commenters rec-
ommended allowing the interest recipient
to provide the amount of interest received
to the payor of record either on a monthly
statement or via an online portal, similar
to the requirements of Notice 2025-57.
The Treasury Department and the IRS
decline to change the requirement to fur-
nish a statement to the payor of record,
as this is expressly required by sections
6050AA(c) and 6724(d)(2)(MM).
Many commenters recommended that
the Treasury Department and the IRS
confirm that the taxpayer has the ultimate
responsibility for determining whether
and to what extent the taxpayer is able to
claim the deduction allowed under sec-
tion 163(h)(4). The Treasury Department
and the IRS confirm the taxpayer has the
ultimate responsibility for deductions
claimed on the taxpayer’s Federal income
tax return. To minimize the risk of recip-
ients claiming an interest deduction that
is limited by section 163(h)(4)(C) or for
which they are otherwise ineligible, the
written statement must include a legend
providing certain information.
Some commenters discussed the legend
described in proposed § 1.6050AA-1(g)
(2)(iii). One commenter stated that the
legend is quite lengthy and might be
improved if simplified. Two commenters
expressed concern that the legend inap-
propriately deputizes the interest recipient
as an enforcement authority or tax deduc-
tion eligibility auditor.
The Treasury Department and the IRS
decline to make any changes to the legend
in response to these comments. The leg-
end described in § 1.6050AA-1(h)(2)(iii)
is similar to the legend required on written
statements reporting mortgage interest in
§ 1.6050H-2(b)(2)(ii) and (iii). The use of
similar language is helpful to taxpayers
and minimizes the risk of recipients being
confused by any differences between the
two forms. Finally, the legend reinforces
the principle that it is the taxpayer who
must make the final decision on whether
and how much to claim as a deduction on
the tax return.
One commenter recommended that an
option to provide an electronic statement
to the payor be added to the final regula-
tions. Another commenter recommended
that the final regulations clarify that the
written statement can be sent in an elec-
tronic form if the payor of record has
consented to receiving disclosures elec-
tronically under the Electronic Signatures
in Global and National Commerce Act
(E-SIGN Act), Public Law 106-229, 114
Stat. 464 (June 30, 2000).

Bulletin No. 2026–39 387 September 21, 2026
The Treasury Department and the
IRS decline to modify the rules regard-
ing the electronic furnishing of certain
payee statements because they are out-
side the scope of these regulations. The
revenue procedure relating to electronic
furnishing of certain payee statements is
generally updated annually and is also
reproduced as IRS Publication 1179, Gen-
eral Rules and Specifications for Substi-
tute Forms 1096, 1098, 1099, 5498, and
Certain Other Information Returns. See
Rev. Proc. 2025-22, 2025-30 I.R.B. 200,
and Publication 1179 published July 21,
2025. The Treasury Department and the
IRS emphasize that interest recipients can
utilize existing procedures for electronic
furnishing of the payee statement. Interest
recipients can also provide comments on
Notice 2026-4, which requests comments
on whether the Treasury Department and
the IRS should modify the electronic fur-
nishing requirements applicable to per-
sons required to furnish payee statements.
See Notice 2026-4, 2026-13 I.R.B. 726
(March 23, 2026).
H. Transition Relief
Several commenters recommended
that the Treasury Department and the
IRS extend the transition relief provided
in Notice 2025-57. Other commenters
recommended that the final regulations
include a phased implementation timeline.
The OBBBA was signed into law
on July 4, 2025. Section 163(h)(4), as
amended, and new section 6050AA apply
to indebtedness incurred after December
31, 2024. The statute provides for report-
ing related to indebtedness incurred
prior to the enactment of the OBBBA.
The Treasury Department and the IRS
understand that recipients needed time
to make the necessary changes to their
systems to comply with their new infor-
mation reporting responsibility under
section 6050AA. In Notice 2025-57, the
Treasury Department and the IRS pro-
vided transitional guidance with respect
to the reporting obligations under sec-
tion 6050AA with regard to interest that
the recipient received on an SPVL in
calendar year 2025. However, taxpay-
ers need the information reported under
section 6050AA to complete their per-
sonal income tax returns, and interest
recipients will have had approximately
18 months from the enactment of the
OBBBA to the time that they will need to
begin reporting under section 6050AA.
Therefore, the Treasury Department and
the IRS are not including additional tran-
sitional guidance or phased implementa-
tion in the final regulations.
Some commenters requested penalty
relief for good-faith efforts made by inter-
est recipients or reasonable cause relief
during the initial compliance period.
Another commenter requested that the
Treasury Department and IRS clarify
whether reasonable cause relief would
apply when the interest recipient lacks
access to necessary data despite commer-
cially reasonable efforts. In the refinance
context, one commenter requested con-
firmation that an interest recipient would
not be penalized for relying in good faith
on its books and records for identifying
the payor of record and the information
available to it in connection with refi-
nancing, including borrower attestations
and payoff documentation from the prior
lender.
Section 6721 imposes a penalty for
any failure to file an information return on
or before the required filing date, and for
any failure to include all the information
required to be shown on a return or the
inclusion of incorrect information. Section
6722 imposes a penalty for any failure to
furnish a payee statement on or before the
required furnishing date to the person to
whom such statement is required to be fur-
nished, and for any failure to include all
the information required to be shown on a
payee statement or the inclusion of incor-
rect information. Section 6724(a) provides
that no penalty may be imposed under sec-
tions 6721 and 6722 if it is shown that any
such failure was due to reasonable cause
and not willful neglect. The Treasury
Department and the IRS have determined
that providing additional safe harbors or
reasonable cause relief is unnecessary in
light of the statutory provision in section
6724(a).
One commenter requested clarification
on the interaction between the applica-
bility date included in the final regula-
tions and Notice 2025-57. The Treasury
Department and the IRS confirm that an
interest recipient may satisfy the report-
ing obligations under section 6050AA for
interest received in calendar year 2025 by
satisfying the reporting obligations under
section 6050AA for calendar year 2025 as
described in Notice 2025-57.
I. Miscellaneous
A couple of commenters discussed
recordkeeping requirements. One com-
menter requested additional clarifica-
tion on the recordkeeping and reporting
requirements for taxpayers. Another com-
menter recommended adding a specific
record retention requirement for recipi-
ents of interest to the final regulations in
§ 1.6050AA-1.
Taxpayers are required to maintain
records that are sufficient to enable the
IRS to determine their correct tax liabil-
ities. See section 6011 and § 1.6001-1(a).
The Treasury Department and the IRS
have determined that providing additional
record retention requirements for taxpay-
ers is both unnecessary and outside the
scope of these regulations. With respect to
the information returns required by section
6050AA, it is unnecessary to prescribe
specific recordkeeping requirements
because § 1.6050AA-1(g)(2) prescribes
the information that must be reported by
interest recipients.
IV. Explanation of Revisions to Proposed
§§ 301.6011-2, 301.6721-1, and
301.6722-1
The final regulations include a revision
to proposed § 301.6011-2 to reflect that
Form 1098-VLI is used to report informa-
tion required under section 6050AA. The
final regulations also include revisions to
proposed §§ 301.6721-1 and 301.6722-1
that are necessary as a result of correcting
amendments to TD 9991, 91 FR 13220,
published March 19, 2026. The language
in proposed § 301.6721-1(j)(2) and (j)(2)
(i) and proposed § 301.6722-1(g)(2) and
(g)(2)(i) were published in the correct-
ing amendments to TD 9991 and are not
republished in the final regulations. The
language in proposed § 301.6721-1(j)(2)
(ii) has been moved to § 301.6721-1(j)
(2)(iii). Second, the language in proposed
§ 301.6722-1(g)(2)(ii) has been moved to
§ 301.6722-1(g)(2)(iii). The contents of
these provisions are not being revised in
the final regulations.

September 21, 2026 388 Bulletin No. 2026–39
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Executive Orders 12866 and 13563
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, reducing costs, harmonizing
rules, and promoting flexibility.
The final regulations have been desig-
nated by the Office of Management and
Budget’s (OMB’s) Office of Informa-
tion and Regulatory Affairs (OIRA) as
subject to review under Executive Order
12866 pursuant to the Memorandum of
Agreement (MOA, July 4, 2025) between
the Treasury Department and the Office
of Management and Budget regarding
review of tax regulations. OIRA has deter-
mined that the final rulemaking is signif-
icant under section 3(f)(1) of Executive
Order 12866 and subject to review under
Executive Order 12866 and section 1(b)
of the MOA. Accordingly, the final regu-
lations have been reviewed by OMB.
This final rule is expected to be an
Executive Order 14192 regulatory action.
Need for Regulation
Section 70203 of Public Law 119-21,
139 Stat. 72 (July 4, 2025), commonly
known as the One, Big, Beautiful Bill
Act (OBBBA), amends section 163(h)
of the Internal Revenue Code
2
to provide
a newly allowable income tax deduc-
tion for qualified passenger vehicle loan
interest (QPVLI). In the absence of reg-
ulations, taxpayers would face substan-
tial uncertainty about which vehicle loan
interest is eligible for the deduction. The
OBBBA also establishes section 6050AA
of the Code to require interest recipients
receiving at least $600 of interest on a
specified passenger vehicle loan (SPVL)
within a calendar year to file an infor-
mation return with the Internal Revenue
Service (IRS) and furnish a statement to
the payor of record. In the absence of
guidance, interest recipients would face
uncertainty about how to comply with the
requirements.
The final regulations clarify the statute
for taxpayers and lenders, including by:
defining “personal use” and providing a
standard for “personal use” of a vehicle;
clarifying the requirements for interest to
be QPVLI; clarifying the requirements
for indebtedness to be an SPVL; defin-
ing “indebtedness incurred for the pur-
chase of an applicable passenger vehicle”
to include the cost of warranties, service
plans, and other amounts customarily
financed in a vehicle purchase transaction
that are directly related to the purchased
vehicle; establishing which information
must be reported by lenders to comply
with the information reporting require-
ments; clarifying that the deduction is
limited to $10,000 per return, regardless
of the taxpayer’s filing status; provid-
ing rules for determining whether “final
assembly” of a vehicle occurred in the
United States; and offering further defini-
tions and clarifications of terms in section
163(h)(4) and section 6050AA, such as
the vehicle identification number (VIN).
I. The Statute and Final Regulations
Under section 163(h)(1), certain tax-
payers cannot deduct personal interest
paid or accrued during the taxable year.
Section 70203(a) of the OBBBA adds a
new section 163(h)(4) to the Code. Section
163(h)(4)(A) provides that, in the case of
taxable years beginning after December
31, 2024, and before January 1, 2029,
personal interest does not include QPVLI.
This allows taxpayers to deduct QPVLI
for taxable years beginning after Decem-
ber 31, 2024, and before January 1, 2029.
Section 163(h)(4)(B) defines QPVLI as
any interest that is paid or accrued during
the taxable year on indebtedness incurred
by the taxpayer after December 31, 2024,
for the purchase of, and that is secured
by a first lien on, an applicable passenger
vehicle (APV) for personal use. Section
163(h)(4)(B) also includes exceptions to
QPVLI, such as financing for commercial
vehicles or lease financing, and a require-
ment for taxpayers to include the VIN of
the APV on the tax return in order to claim
the deduction.
The final regulations provide defini-
tions and clarifications of terms related to
QPVLI in section 163(h)(4) and section
6050AA. The final regulations clarify
that individuals, decedents’ estates, and
non-grantor trusts may deduct QPVLI.
The final regulations provide that inter-
est is only QPVLI if the interest is paid
or accrued during the taxable year on
indebtedness that is an SPVL secured by
a first lien on an APV and is not otherwise
excluded from the definition of QPVLI.
The final regulations adopt a standard for
personal use that provides that a taxpayer
is considered to purchase an APV for per-
sonal use if, at the time the indebtedness
is incurred, the taxpayer expects that the
APV will be used for personal use by the
taxpayer, the taxpayer’s spouse, or an
individual that is related to the taxpayer
within the meaning of section 152(c)(2)
or (d)(2) of the Code, or any combination
of these individuals, for more than 50 per-
cent of the time the taxpayer expects to
own the APV. The 50 percent threshold is
intended to correspond to a vehicle being
predominantly used for “personal use”
within the meaning of section 163(h)(4)
(B)(i) while still allowing taxpayers with
considerable non-personal use to bene-
fit from the deduction. If the taxpayer is
a decedent’s estate or non-grantor trust,
personal use is tested based on the use by
legatees or heirs, or beneficiaries, respec-
tively. Further, under the final regulations,
the taxpayer is not required to reevaluate
compliance with the personal use stan-
dard in taxable years after the indebted-
ness is incurred. The final regulations also
clarify that taxpayers may not deduct the
same interest as both QPVLI and other-
wise deductible interest (such as a busi-
ness interest expense) and that taxpayers
must report certain information relating to
vehicle interest deducted independent of
QPVLI.
2
References to a “section” are to a section of the Internal Revenue Code of 1986, as amended (Code), unless otherwise indicated.

Bulletin No. 2026–39 389 September 21, 2026
Typical auto loan sales contracts
indicate an “amount financed” that may
include property and services in addition
to the amount for the price of the vehi-
cle. The final regulations provide that
indebtedness incurred for the purchase
of an APV as well as for certain items or
amounts customarily financed in an APV
purchase transaction that are directly
related to the purchased APV is an SPVL
and therefore interest paid or accrued on
such indebtedness is potentially eligi-
ble to be deducted. The final regulations
describe certain items and services that
are considered customarily financed in
an APV purchase transaction that are
directly related to the purchased APV,
such as vehicle service plans, extended
warranties, sales taxes, and vehicle-re-
lated fees. Indebtedness not incurred for
the purchase of an APV nor for any other
items or amounts customarily financed
in an APV purchase transaction that are
directly related to the purchased APV is
not an SPVL, and, therefore, interest paid
or accrued on such indebtedness is not
QPVLI. For example, to the extent that a
taxpayer incurs indebtedness to purchase
collision and liability insurance that is
not a credit insurance product or to pur-
chase any property or services unrelated
to the vehicle (for example, a trailer or a
boat), that indebtedness is not an SPVL,
and, therefore, interest paid or accrued on
that indebtedness is not QPVLI.
Section 163(h)(4)(C) establishes lim-
itations on the amount of QPVLI that a
taxpayer may deduct. The dollar limit is
$10,000 per taxable year. The final reg-
ulations clarify that this limit applies
regardless of the taxpayer’s filing sta-
tus for that taxable year. Additionally,
under section 163(h)(4)(C)(ii)(I), the
deduction for QPVLI is reduced (but not
below zero) by $200 for each $1,000 (or
portion thereof) by which the taxpayer’s
modified adjusted gross income (MAGI)
exceeds $100,000 ($200,000 in the case
of a married couple filing a joint return).
Section 163(h)(4)(C)(ii)(II) defines
“modified adjusted gross income” for
the purposes of this phaseout as adjusted
gross income of the taxpayer for the tax-
able year plus any amount excluded from
gross income under sections 911, 931, or
933 of the Code. The final regulations
clarify that for estates and non-grantor
trusts, the MAGI phaseout is applied to
the estate or trust, not with respect to the
beneficiaries of the estate or trust; and
for estates and non-grantor trusts, MAGI
means AGI as defined in section 67(e) of
the Code.
Section 163(h)(4)(D) defines the term
“applicable passenger vehicle.” The cri-
teria for an APV include that its original
use must commence with the taxpayer
and that its final assembly must have
occurred in the United States. The final
regulations provide rules for determining
whether original use of a vehicle begins
with the taxpayer, rules for whether a
vehicle’s final assembly occurred in the
United States, and definitions for other
APV-related terms used in the statute.
Original use generally commences with
the first person that takes delivery of a
vehicle after the vehicle is sold, regis-
tered, or titled. For purchasers that incur
indebtedness to purchase a vehicle, orig-
inal use does not commence with the
taxpayer unless the loan documentation
treats the vehicle as a new vehicle. The
final regulations provide that taxpay-
ers can determine the location of final
assembly by (1) the plant of manufac-
ture as reported in the VIN or (2) the
final assembly point reported on the label
affixed to the vehicle.
Section 163(h)(4)(E) provides other
definitions and special rules. These
include the treatment of refinancing and of
indebtedness owed to related parties. The
final regulations clarify that for refinanced
loans, the amount of the new loan on
which interest may be considered QPVLI
is limited to the outstanding balance of the
refinanced loan as of the date of the refi-
nancing.
Section 70203(b) of the OBBBA
amends section 63(b) of the Code so that
the deduction for QPVLI is allowed for
taxpayers who do not elect to itemize their
deductions. The final regulations clarify
that the deduction is available to taxpayers
who itemize their deductions and to tax-
payers who claim the standard deduction.
Section 70203(c) of the OBBBA
adds a new section 6050AA to the Code
that establishes information reporting
requirements for vehicle loan interest.
Any person who, in the course of a trade
or business, receives from any individ-
ual more than $600 in a calendar year on
an SPVL must provide an information
return to the IRS and furnish a statement
to the payor of record. The final regula-
tions provide operational definitions and
rules for complying with the information
reporting requirements. The final regula-
tions clarify the need to report the date
the SPVL was acquired; require that the
statement to the payor of record includes
a legend clarifying that the taxpayer may
be unable to deduct the full amount of
interest shown on the statement; and offer
guidance on reporting by and to certain
foreign persons. To prevent duplicate
reporting, the final regulations also pro-
vide that if an interest recipient’s records
for a loan do not indicate which borrower
is the principal borrower, the interest
recipient must designate a principal bor-
rower. This follows established practice
with respect to information reporting
requirements for qualified residence
interest.
II. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the final regulations relative to a no-ac-
tion baseline reflecting anticipated Fed-
eral income tax-related behavior in the
absence of the final regulations.
III. Affected Entities and Taxpayers
The final regulations affect individu-
als, decedents’ estates, and non-grantor
trusts that may deduct QPVLI, and also
affect any person engaged in a trade or
business, who, in the course of that trade
or business, receives interest aggregat-
ing $600 or more for any calendar year
on an SPVL and is therefore subject to
certain information reporting require-
ments. As described in the preamble to
the final regulations, interest recipients
receiving less than $600 of interest on an
SPVL have the option to provide infor-
mation returns.
Under section 163(h)(4), the deduc-
tion is limited to interest on loans for
vehicles with final assembly occurring in
the U.S. whose original use commences
with the taxpayer. The Treasury Depart-
ment and the IRS estimate that in 2024,
roughly 6 million loans originated on
new U.S.-assembled vehicles. See Table

September 21, 2026 390 Bulletin No. 2026–39
A. Retail sales of new light vehicles
in the U.S. totaled about 16 million in
2024
3
; roughly 60 percent of new vehi-
cle purchases are financed with loans
4
;
and analysis of vehicle model sales data
suggests that about 60 percent of vehi-
cles sold in the U.S. undergo U.S. final
assembly. The Treasury Department and
the IRS do not have an estimate of the
number of decedents’ estates and non-
grantor trusts that are obligors on vehi-
cle loans.
Table A: Estimated Annual Loans on New U.S.-assembled Vehicles
1. 2024 U.S. new light vehicle sales16 million
2. Share of new vehicle sales financed with loans60 percent
3. Of new vehicles sold, share with U.S. final assembly 60 percent
4. Estimated annual loans on new vehicles with U.S. final assembly Approximately 6 million
Notes: Row 4 is the rounded product of rows 1, 2, and 3.
Sources: “Light vehicle retail sales in the United States from 1976 to 2024,” Statista, last accessed October 27, 2025, https://
www.statista.com/statistics/199983/us-vehicle-sales-since-1951/; https://www.bts.gov/content/new-and-used-passenger-car-
sales-and-leases-thousands-vehicles; “New and used passenger car and light truck sales and leases,” Bureau of T
ransportation
Statistics, last accessed October 27, 2025, https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-
vehicles; “State of the Automotive Finance Market Report: Q2 2025,” Experian, last accessed October 27, 2025, https://www.
experian.com/automotive/auto-credit-webinar-form; manufacturer vehicle model sales data.
To identify the number of businesses
that the final regulations are expected to
affect, the Treasury Department and the
IRS analyzed confidential tax return data.
For tax year 2023, approximately 36,000
businesses filed a tax return with North
American Industry Classification Sys-
tem (NAICS) codes for new car dealers
(code 441110), motorcycle dealers (code
441227), car loan lenders (code 522220),
and consumer lending (code 522291).
See Table B. This total does not include
used car dealers because the statute and
regulations only apply to loans for new
vehicles.
Table B: Estimated Number of Affected Businesses by NAICS Code
New car dealers (441110)17,800
Motorcycle dealers (441227)4,100
Car loan lenders (522220)5,800
Consumer lending (522291)8,100
Total 35,800
Notes: The table shows counts of tax year 2023 filers of forms 1065, 1120S, or 1120. NAICS codes appear in parentheses.
Source: Treasury Department analysis of confidential tax return data, October 24, 2025.
IV. Economic Effects of the Final
Regulations
The final regulations clarify the stat-
ute and facilitate taxpayers claiming the
QPVLI deduction. Consider, for exam-
ple, a taxpayer who is purchasing a vehi-
cle. For most people, a vehicle is a major
purchase, and there are many elements to
be considered along the way, including
choices between a new versus used vehi-
cle, a U.S.-assembled versus foreign-as-
sembled vehicle, and a cash purchase ver-
sus a loan or a lease. With the introduction
of the deduction for QPVLI, the taxpayer
now faces questions about whether and
how the statute interacts with the vehi-
cle and financing choices they make. For
instance, in the absence of guidance, the
taxpayer may not know whether their
expected personal use of the vehicle is suf-
ficient to claim the deduction or whether a
vehicle meets the standard for U.S.-final
assembly.
The final rules assist the taxpayer in
understanding and claiming the QPVLI
deduction. For example, the final regu-
lations direct taxpayers to the National
Highway Traffic Safety Administration
(NHTSA) VIN Decoder website to deter-
mine whether a vehicle underwent final
assembly in the United States, a necessary
condition for the vehicle loan interest to
be eligible for the deduction. By facili-
tating taxpayers’ understanding of which
vehicles are American made and an APV
under the statute, the final regulations
reduce taxpayer compliance burden and,
as a result, may also increase consumer
3
“Light vehicle retail sales in the United States from 1976 to 2024,” Statista, last accessed October 27, 2025, https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/; https://
www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles; “New and used passenger car and light truck sales and leases,” Bureau of Transportation Statistics,
last accessed October 27, 2025, https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-vehicles. The 16 million total transactions (row 1 of Table A) includes
leases; the share of new vehicle transactions financed with a loan (row 2 of T
able A), used to estimate the number of loans on new U.S.-assembled vehicles, excludes leases.
4
“State of the Automotive Finance Market Report: Q2 2025,” Experian, last accessed October 27, 2025, https://www.experian.com/automotive/auto-credit-webinar-form; “New and used
passenger car and light truck sales and leases,” Bureau of Transportation Statistics, last accessed October 27, 2025, https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leas-
es-thousands-vehicles.

Bulletin No. 2026–39 391 September 21, 2026
demand for APVs and SPVLs, namely
loans for new U.S.-assembled vehicles.
The Treasury Department and the IRS
do not have readily available parameters
and models to quantify the extent of this
increase in demand for U.S. assembled
vehicles or debt financing. The follow-
ing sections describe in further detail the
potential economic impacts of specific
elements of the final regulations
a. Personal Use Standard
Section 163(h)(4) limits the deduction
to vehicles purchased for personal use.
The final regulations provide a standard
for personal use. To meet the standard, the
taxpayer must expect at the time of pur-
chase that the APV will be used for per-
sonal use for more than 50 percent of the
time the taxpayer expects to own the APV.
An alternative standard of personal use
could have required mostly or exclusively
personal use of a vehicle for loan interest
to be considered QPVLI.
The 50 percent personal use stan-
dard benefits taxpayers who debt-finance
mixed-use vehicles who would be dis-
allowed from taking the deduction for
QPVLI under stricter, alternative stan-
dards. Interest on a vehicle loan that is
properly allocable to a trade or business is
generally deductible under section 163(a).
Consider, for example, a taxpayer who
finances the purchase of an APV expect-
ing for 60 percent of use to be for personal
use and 40 percent for use in a trade or
business. Assume for a given tax year the
taxpayer pays $3,500 in interest on the
vehicle loan, drives the vehicle 55 percent
for personal use and 45 percent for use in
a trade or business, and meets all other
requirements to deduct QPVLI and inter-
est properly allocable to a trade or busi-
ness. (Note that 55 percent personal use
for this tax year differs somewhat from the
taxpayer’s expected 60 percent personal
use over the cumulative time the taxpayer
expects to own the vehicle.) Under a strict
personal use standard for QPVLI, such
as exclusive personal use, the taxpayer
would be prohibited from deducting any
interest as QPVLI, and would only be
able to deduct the interest attributable to
use in a trade or business ($1,575, equal
to 45 percent of the $3,500 of interest
paid during the year), provided all of the
other requirements for deducting interest
properly allocable to a trade or business
are met. Under the 50 percent personal
use standard, the taxpayer can potentially
deduct all $3,500 in interest as QPVLI.
Alternatively, the taxpayer would have
discretion to deduct $1,575 (45 percent of
$3,500) as interest properly allocable to
a trade or business and $1,925 as QPVLI
($3,500 minus $1,575). The 50 percent
personal use standard benefits taxpayers
with mixed-use vehicles who, under a
strict personal use standard, would be able
to deduct only interest properly allocable
to a trade or business.
The Treasury Department and the IRS
examined public survey data and confi-
dential tax records to assess the prevalence
of mixed-use vehicles that may be affected
by the personal use standard. Analysis of
Panel Study of Income Dynamics (PSID)
data suggests that, in 2023, 11 percent of
personally owned vehicles were used for
mixed personal and business purposes.
5

An alternative and narrower standard of
personal use, such as exclusive personal
use, would exclude roughly 700,000 loans
(11 percent of the estimated 6 million total
shown in Table A) from potential eligibil-
ity for the QPVLI deduction. See Table C.
Table C: Estimated Annual Loans on New U.S.-assembled Vehicles for Mixed Personal and Business Use
1. Estimated annual loans on new U.S.-assembled vehicles6 million
2. Share of personally owned vehicles used for mixed personal and business purposes11 percent
3. Estimated annual loans on new U.S.-assembled vehicles for mixed personal and business useApproximately 700,000
Notes: Row 3 is the rounded product of rows 1 and 2.
Sources: Row 2 is derived from the 2023 Panel Study of Income Dynamics, variable ER82936. Row 1 is derived in T
able A, with
data sourced from: “Light vehicle retail sales in the United States from 1976 to 2024,” Statista, last accessed October 27, 2025,
https://www.statista.com/statistics/199983/us-vehicle-sales-since-1951/; https://www.bts.gov/content/new-and-used-passenger-
car-sales-and-leases-thousands-vehicles; “New and used passenger car and light truck sales and leases,” Bureau of Transportation
Statistics, last accessed October 27, 2025, https://www.bts.gov/content/new-and-used-passenger-car-sales-and-leases-thousands-
vehicles; “State of the Automotive Finance Market Report: Q2 2025,” Experian, last accessed October 27, 2025, https://www.
experian.com/automotive/auto-credit-webinar-form; manufacturer vehicle model sales data.
Tax records also contain information on
mixed personal and business use vehicles.
Sole proprietors file Schedule C to record
business income and expenses, includ-
ing car or truck expenses. On part IV of
Schedule C, certain taxpayers are required
to enter information on their vehicle,
including the date a vehicle was placed in
service for business purposes; the number
of miles driven for business, commuting,
and other purposes; and whether the vehi-
cle was available for personal use during
off-duty hours.
6
Schedule C data has several limitations
for analysis of the personal use standard.
First, Schedule C does not distinguish
between new versus used cars, U.S.-
versus foreign-assembled cars, or cars
financed with loans versus cars that are
leased or purchased with cash. Because
sole proprietors will not have an SPVL
as a result of the purchase of used cars
or foreign-assembled cars, nor as a result
of the cash purchase or lease of any cars,
5
See variable ER82936 in the 2023 PSID. The survey language is: “Not counting routine use to get to and from work, is this vehicle also used for business purposes?”
6
Taxpayers are required to fill out part IV of Schedule C only if they claim car or truck expenses on Schedule C and are not required to file Form 4562, Depreciation and Amortization, for the
business in question. Taxpayers who have “listed property,” including automobiles, are required to enter information on such automobiles in Section B of Part V of Form 4562.

September 21, 2026 392 Bulletin No. 2026–39
totals of mixed-use vehicles from part IV
of Schedule C overstate the number of
sole proprietors’ vehicles that the personal
use standard will affect. Second, the data
available for analysis cover predominantly
electronically filed returns of Schedule C
rather than paper filed returns. Third, the
Schedule C data do not include vehicle
expenses that taxpayers may deduct on
Schedules E and F. Fourth, the Schedule
C data indicate when the car was placed
into service for business use rather than
when the individual first acquired the car.
The available Schedule C data nonethe-
less provide insight on the prevalence of
personal use of sole proprietors’ business
vehicles.
The Treasury Department and the IRS
estimate that in tax year 2023, sole pro-
prietors who filed electronically placed 5
million vehicles in service for business
purposes.
7
See Table D. About 80 percent
of these taxpayers indicated that the vehi-
cle was also available for personal use
during off-duty hours. Among filers for
whom the vehicle was available for per-
sonal use, roughly 40 percent drove the
vehicle more than 50 percent of its total
mileage for personal use. The typical filer
drove the vehicle for majority business
use; the median share of total miles driven
for business purposes was about 80 per-
cent. These estimates suggest that a sub-
stantial share of taxpayers with vehicles
for business use would benefit from the 50
percent personal use standard, relative to a
strict alternative standard, such as exclu-
sive personal use.
Table D: Statistics on Tax Year 2023 Sole Proprietor Vehicle Use from Schedule C, Part IV
1. Sole proprietors’ vehicles placed in business service in tax year 2023*5 million
2. Of vehicles placed in business service in tax year 2023 (row 1), the share reported to be available for
personal use
80 percent
3. Of vehicles placed in business service in 2023 and available for personal use, the share reported with
more than 50 percent of mileage for personal use.
40 percent
4. Of vehicles placed in business service in 2023 and available for personal use, the median share of miles
driven for business use.
80 percent
* This total does not correspond to vehicles that are APVs; it includes used, leased, and foreign-assembled vehicles, which are
not APVs. See the text for further detail on the Schedule C data and its limitations.
Source: Treasury Department analysis of confidential tax return data, October 24, 2025.
The personal use rules also benefit tax-
payers by providing clarity. In the absence
of a personal use standard, two taxpay-
ers with otherwise similar tax situations
would face uncertainty as to whether this
deduction applies to their situation. With-
out guidance, these taxpayers might make
different choices as to whether their vehi-
cle loan interest qualifies for the deduction,
and, therefore, face different tax liabili-
ties. Consider, for example, two taxpayers
who each buy an APV expecting for 75
percent of its use to be for personal use
and 25 percent for business use (assume
they meet all other requirements to claim
the deduction). Taxpayer A interprets the
section 163(h)(4) personal use require-
ment to mean that interest on the loan is
not QPVLI, because the vehicle is partly
for business use. In contrast, Taxpayer B
interprets the personal use requirement to
mean that interest on the loan is QPVLI
because a majority of the use of the vehi-
cle is for personal use. The final regula-
tions ensure that these two taxpayers use
the same standard of personal use and are
subject to the same tax treatment.
The personal use standard, relative to
a stricter alternative standard, may change
vehicle purchase patterns among tax-
payers who use their vehicles for mixed
personal and business purposes (vehicles
on which loan interest would not be con-
sidered QPVLI under a strict personal use
standard). For this population, the 50 per-
cent personal use standard would increase
the economic appeal of financing relative
to cash purchases and would increase the
economic appeal of new U.S.-assembled
vehicles relative to used or foreign-assem-
bled vehicles. The extent of consumption
changes along these margins depends on
several interacting factors, including: the
extent to which increased demand for
new U.S.-assembled vehicles driven by
the deduction affects the prices of these
vehicles; substitution elasticities between
new and used vehicles and between vehi-
cles assembled in the U.S. and assembled
abroad
8
; the salience of the tax deduction
at the time of purchase
9
; and the extent to
which taxpayers perceive the deduction
as temporary, as prescribed in statute, or
likely to be extended by future policymak-
ers. The Treasury Department and the IRS
do not have readily available parameters
and models to precisely assess the impact.
House Budget Committee Report 119-106
expects the deduction to promote domes-
tic manufacturing.
7
The 5 million total reflects sole proprietorship-vehicle pairs. A sole proprietor who placed the same vehicle in service for multiple businesses in 2023 would appear more than once in this
total. Because Schedule C does not include a VIN or other unique vehicle identifier, Treasury and the IRS cannot distinguish these cases—the same vehicle placed in service for multiple
businesses—from cases in which a sole proprietor placed multiple vehicles in service for multiple businesses.
8
There is limited evidence on elasticities relating directly to the country of vehicle assembly. See Grieco et al. (2024) for estimates on consumer responsiveness to price changes across vehicle
manufacturers. Grieco, Paul L.E., Charles Murry, and Ali Yurukoglu. 2024. “The Evolution of Market Power in the U.S. Automobile Industry.” The Quarterly Journal of Economics 139 (2):
1201-1253, https://academic.oup.com/qje/article-abstract/139/2/1201/7276495?redirectedFrom=fulltext.
9
Chetty, Raj, Adam Looney, and Kory Kroft. 2009. “Salience and Taxation: Theory and Evidence.” American Economic Review 99 (4): 1145-77, https://www.aeaweb.org/articles?id=10.1257/
aer.99.4.1145.

Bulletin No. 2026–39 393 September 21, 2026
b. Personal Use Determined Soley by
Taxpayer Expectation at Time Debt is
Incurred
The final regulations provide that per-
sonal use is determined only once, based
on taxpayers’ expectation at the time
indebtedness is incurred. An alternative
standard could have required taxpayers
to evaluate their expected use each year
or document personal use each year to
continue to qualify for the deduction. A
repeated certification requirement would
result in considerable compliance burden
to taxpayers, particularly among taxpay-
ers whose vehicles will be exclusively for
personal use. The final regulations would
benefit taxpayers by simplifying the pro-
cess of claiming the QPVLI deduction,
relative to a requirement for annual certi-
fication of sufficient personal use.
c. Personal and Business Use Allocation
Under the final regulations, if a taxpayer
meets the personal use standard (more than
50 percent of expected use of an APV for
personal use), the vehicle loan may be
considered an SPVL. Alternative guidance
could have required taxpayers to allo-
cate amounts of loan interest attributable
to personal and business uses of the APV
and allowed only interest directly linked
to personal use to be deducted. The final
rules streamline the process and reduce the
compliance burden of deducting QPVLI for
taxpayers and administering the deduction
for the IRS. Many taxpayers with mixed
personal and business use vehicles already
track and allocate personal and business
mileage for Federal income tax purposes.
For these taxpayers, the final regulations
promote flexibility by allowing taxpayers
who meet the personal use standard and all
other requirements to deduct vehicle loan
interest solely as QPVLI or, to the extent the
taxpayers have interest properly allocable to
a trade or business, as a business expense.
d. Specified Passenger Vehicle Loan
(SPVL) and Further Definitions
The final regulations clarify what con-
stitutes an SPVL. Specifically, the final
rules provide that indebtedness quali-
fies as an SPVL only if the indebtedness
is incurred for the purchase of an APV
and for items and amounts customarily
financed in an APV purchase transaction
that are directly related to the purchased
APV. These items include vehicle ser-
vice plans, extended warranties, and sales
taxes and vehicle-related fees. Indebted-
ness incurred for collision and liability
insurance or to purchase any property or
services unrelated to the APV (for exam-
ple, a trailer or a boat) is not considered an
SPVL. The final regulations strengthen the
incentive for debt financing of the items
and amounts included in the SPVL defini-
tion (such as warranties and sales taxes),
relative to a rule that excluded those items
and amounts from the SPVL definition.
Alternative guidance could have pre-
scribed that only debt directly attributable
to the price of the vehicle is an SPVL and
therefore that only interest on that por-
tion of the loan is deductible. Such an
alternative standard could result in sub-
stantial compliance costs to taxpayers
and to lenders and interest recipients in
requiring allocations of indebtedness and
associated interest. For amounts custom-
arily financed together, such as the price
of the vehicle itself and sales taxes and
warranties on the vehicle, identifying and
allocating which interest is attributable to
which portion of total indebtedness would
be difficult and costly to administer. The
guidance benefits taxpayers by removing
uncertainty and reduces burden relating
to what taxpayers may consider an SPVL.
According to Autotrader, for financed
vehicle purchases, “taxes and dealer fees
are almost always included in the pay-
ment.”
10
A substantial share of taxpayers
with QPVLI would therefore benefit from
the SPVL definition, relative to an alterna-
tive definition that would require taxpay-
ers to identify separately interest attribut-
able to the price of the vehicle and items
and amounts customarily financed with
the vehicle. Relatedly, an SPVL definition
limited strictly to the price of the vehicle
may also require additional information
reporting that burdens interest recipients
and lenders. The SPVL definition benefits
entities subject to information reporting
requirements because taxpayers can deter-
mine their QPVLI without needing infor-
mation on interest amounts related to the
price of the vehicle separate from interest
amounts related to items and amounts cus-
tomarily financed with the vehicle.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (PRA) generally
requires that a Federal agency obtain the
approval of the Office of Management
and Budget (OMB) before collecting
information from the public, whether that
collection of information is mandatory,
voluntary, or required to obtain or retain
a benefit. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the OMB.
The collection of information in these
regulations contains reporting and record-
keeping requirements. The recordkeeping
requirements mentioned in the final regu-
lations are considered general tax records
under § 1.6001-1(e). These records are
required for the IRS to validate that tax-
payers have met the regulatory require-
ments and are entitled to the deduction
for QPVLI under section 163(a) and (h)
(4) and to verify the amount of the deduc-
tion claimed. For PRA purposes, general
tax records are already approved by the
OMB under 1545-0074 for individuals
and 1545-0092 for trust and estate filers.
The final regulations also mention
reporting requirements related to claim-
ing the deduction for QPVLI under sec-
tion 163(a) and (h)(4). These collections
will be made by eligible taxpayers as part
of filing a return (such as the appropriate
Form 1040 or 1041), including filling out
the relevant schedules. These forms are
approved by the OMB under 1545-0074
for individuals and 1545-0092 for trust
and estate filers.
The final regulations also include
reporting, third-party disclosure, and
recordkeeping requirements required
under section 6050AA as set forth in
§ 1.6050AA-1. These collections of
information will be used by the IRS for
10
“Are taxes and fees included in car financing?”, Autotrader, last accessed October 28, 2025, https://www.autotrader.com/car-shopping/financing-a-car-are-taxes-and-fees-included-in-fi-
nancing-222154.

September 21, 2026 394 Bulletin No. 2026–39
tax compliance purposes and by taxpay-
ers to help calculate their deduction. The
burden associated with these information
collections is included within the Form
and Instructions for Form 1098-VLI.
The Form 1098-VLI has been approved
by the OMB, in accordance with 5 CFR
1320.10, under OMB control number
1545-2334.
No public comments were received by
the IRS directed specifically at the PRA,
but comments were received by the IRS
on the proposed information collection
and proposed reporting requirements
and the burdens associated with the doc-
umentation requirements contained in
the proposed regulations. As described
in the relevant portions of this preamble,
the Treasury Department and the IRS
have determined that the documentation
requirements are necessary to administer
section 163(h)(4) and related information
reporting and penalty provisions.
Many commenters requested that
the Treasury Department and the IRS
consider the time and cost for inter-
est recipients to make adjustments to
their systems to capture required data.
The Treasury Department and the IRS
acknowledge and appreciate that interest
recipients may need to make adjustments
to their systems and current processes to
capture the required data. However, as a
result of the interaction between sections
6050AA and 163(h)(4), certain informa-
tion such as determining whether a vehi-
cle is an APV and whether the interest
is received on an SPVL, is required by
statute. See parts III.B.1 and III.B.5 of
the Summary of Comments and Expla-
nation of Revisions (Applicable Passen-
ger Vehicle (APV) and Specified Passen-
ger Vehicle Loan (SPVL), respectively)
for a discussion of these requirements.
The Treasury Department and the IRS
have not changed the estimated burden
of this reporting because commenters
did not provide information relating to
the additional costs associated with this
reporting.
Books or records relating to a collec-
tion of information must be retained as
long as their contents may become mate-
rial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by section 6103 of the Code.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act (5
U.S.C. 601 et seq.) (RFA) imposes certain
requirements with respect to Federal rules
that are subject to the notice and comment
requirements of section 553(b) of the
Administrative Procedure Act (5 U.S.C.
551 et seq.) and that are likely to have a
significant economic impact on a substan-
tial number of small entities. Unless an
agency determines that a proposal will not
have a significant economic impact on a
substantial number of small entities, sec-
tion 604 of the RFA requires the agency to
present a final regulatory flexibility analy-
sis (FRFA) of the final regulations.
The Treasury Department and the IRS
have determined the final regulations will
likely have a significant impact on a sub-
stantial number of small entities. Accord-
ingly, an FRFA is provided in the final
regulations.
A. Need for and Objectives of the Rule
The final regulations provide the eli-
gibility rules and key definitions regard-
ing the QPVLI deduction, the deduction
allowed by section 163(h)(4), to allow
taxpayers to determine whether their
interest is QPVLI. In addition, the final
regulations provide the operational,
administrative, and definitional rules for
persons in a trade or business to comply
with the statutory information reporting
requirements under section 6050AA with
interest received on an SPVL.
Congress intended the OBBBA provi-
sion regarding the QPVLI deduction to
ease the financial burden of car owner-
ship for individuals and promote domes-
tic manufacturing. See House Budget
Committee report on the OBBBA, H.
Rept. 119-106, at 1510 (2025). The final
regulations are intended to facilitate
the easing of the financial burden of car
ownership by providing the informa-
tion necessary for taxpayers to claim the
deduction. Additionally, the final regula-
tions are consistent with the promotion of
domestic manufacturing. The rules direct
taxpayers to the NHTSA VIN lookup tool
to help taxpayers and interest recipients
determine whether a vehicle had under-
gone final assembly in the United States,
a necessary condition for the vehicle to
be an APV. Because the final regulations
assist taxpayers claiming the deduction,
the rules may also increase consumer
demand for vehicles with final assembly
in the United States. Over time, this may
lead manufacturers to increase production
and assembly of vehicles in the United
States in order to meet demand for vehi-
cles that are eligible to be APVs. Thus, the
Treasury Department and the IRS intend
and expect that the final regulations will
deliver benefits across the economy that
will favorably impact individuals, vehicle
dealers, and the domestic manufacturing
industry, including vehicle manufacturers.
Section 6050AA establishes informa-
tion reporting requirements with respect
to interest received on an SPVL. Infor-
mation reporting under section 6050AA
will provide taxpayers with information
needed to claim the QPVLI deduction.
The final regulations are expected to facil-
itate the preparation of tax returns and
reduce the number of inadvertent errors
by taxpayers who claim the deduction.
The Treasury Department and the IRS
also intend and expect that the final reg-
ulations will provide certainty to interest
recipients required to comply with the
statutory reporting requirements under
section 6050AA.
B. Significant Issues Raised by Public
Comments in Response to the Initial
Regulatory Flexibility Analysis
No public comments were received
by Treasury and the IRS that directly
addressed the initial regulatory flexibil-
ity analysis of the proposed regulations,
but comments were received by the IRS
on the general burdens associated with
the proposed information collection, pro-
posed reporting requirements, and docu-
mentation requirements contained in the
proposed regulations. Some commenters
referenced the entity size of specific inter-
est recipients, including credit unions, and
stated that these interest recipients do not
currently track all the information neces-
sary to comply with the proposed regula-
tions. As described in the relevant portions
of this preamble, the Treasury Department
and the IRS have determined that the
requirements included in the final regula-
tions are necessary to administer section
163(h)(4) and related information report-

Bulletin No. 2026–39 395 September 21, 2026
ing and penalty provisions. The Treasury
Department and the IRS also have deter-
mined that the statutory language does not
authorize or support separate information
reporting requirements for small entities.
C. Affected Small Entities
The RFA directs agencies to provide a
description of, and if feasible, an estimate
of, the number of small entities that may
be affected by the final regulation. The
Small Business Administration estimates
in its 2023 Small Business Profile that
99.9 percent of United States businesses
meet its definition of a small business.
The applicability of the final regulations
does not depend on the size of the busi-
ness, as defined by the Small Business
Administration. Small Business Adminis-
tration regulations provide small business
size standards by NAICS Industry. See 13
CFR 121.201.
As described more fully in this pre-
amble to the final regulations and in this
FRFA, these rules may affect a variety
of different businesses across several
different industries but will primarily
affect dealers of new vehicles and finan-
cial entities that would be required to file
and furnish information returns under
section 6050AA. The NAICS includes
dealers of new vehicles and financial enti-
ties in NAICS codes for new car dealers
(code 441110), motorcycle dealers (code
441227), car loan lenders (code 522220),
and consumer lending (code 522291).
Based on confidential tax return data,
the Treasury Department and the IRS
expect approximately 36,000 businesses
to issue information returns under sec-
tion 6050AA. See part I.III of this Spe-
cial Analysis (Affected Entities and Tax-
payers). This total does not include used
car dealers because the statute and final
regulations only apply to loans for new
vehicles. Of the estimated 36,000 car
and motorcycle loan lenders, the Trea-
sury Department and the IRS expect
24,600 would likely be considered a
small entity.
D. Impact of the Rules
The final regulations will increase the
recordkeeping and reporting requirements
for businesses that provide loans for new
cars and motorcycles. Although the Trea-
sury Department and the IRS do not have
sufficient data to precisely determine the
likely extent of the increased costs of
compliance, the estimated burden of com-
plying with the recordkeeping and report-
ing requirements are described in part II of
this Special Analyses (Paperwork Reduc-
tion Act). Based on the estimated number
of responses (8,000,000) and the esti-
mated time to respond of 0.25 hours, the
estimated burden is 2,000,000 total annual
burden hours.
E. Alternatives Considered for Small
Businesses
The Treasury Department and the IRS
considered several alternatives to the final
regulations that would have reduced the
burden on small businesses. For example,
the Treasury Department and the IRS con-
sidered a delay for reporting by small busi-
nesses. Although this would ease the bur-
den on small businesses, it would increase
the burden on individuals who need
the information reported under section
6050AA to accurately claim the deduc-
tion for QPVLI on their Federal income
tax returns. Accordingly, as discussed in
part III.H of the Summary of Comments
and Explanation of Revisions (Transition
Relief), the Treasury Department and the
IRS decided not to delay reporting under
section 6050AA.
Another alternative considered was
whether interest recipients should not be
required to furnish a written statement
to the payor of record and be permitted
instead to provide this information to the
payor of record either on a monthly state-
ment or via an online portal. However, as
discussed in part III.G of the Summary of
Comments and Explanation of Revisions
(Requirement to Furnish a Written State-
ment), the requirement to furnish a state-
ment to the payor of record is expressly
required by sections 6050AA(c) and
6724(d)(2)(MM).
IV. Section 7805(f)
Pursuant to section 7805(f), the pro-
posed regulations (REG-113515-25) pre-
ceding this final regulation were submit-
ted to the Chief Counsel for the Office of
Advocacy of the Small Business Adminis-
tration for comment on its impact on small
business, and no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 (UMRA) requires
that agencies assess anticipated costs and
benefits and take certain other actions
before issuing a final rule that includes
any Federal mandate that may result in
expenditures in any one year by a State,
local, or Tribal government, in the aggre-
gate, or by the private sector, of $100
million (updated annually for inflation).
The final regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector in excess of
that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Executive
order. The final regulations do not have
federalism implications and do not impose
substantial direct compliance costs on
State and local governments or preempt
State law within the meaning of the Exec-
utive order.
VII. Congressional Review Act
Pursuant to the Congressional Review
Act (5 U.S.C. 801 et seq.), the Office of
Information and Regulatory Affairs desig-
nated this rule as a major rule, as defined
by 5 U.S.C. 804(2).
Statement of Availability of IRS
Documents
Guidance cited in this preamble is pub-
lished in the Internal Revenue Bulletin
and is available from the Superintendent
of Documents, U.S. Government Publish-
ing Office, Washington, DC 20402, or by
visiting the IRS website at https://www.
irs.gov.

September 21, 2026 396 Bulletin No. 2026–39
Drafting Information
The principal author of these regu-
lations is Riston Escher, Office of the
Associate Chief Counsel (Income Tax &
Accounting), IRS. However, other person-
nel from the Treasury Department and the
IRS participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
26 CFR Part 301
Employment taxes, Excise taxes,
Income taxes, Penalties, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, the Treasury Department
and IRS amend 26 CFR parts 1 and 301
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding an entry in
numerical order for § 1.6050AA-1 to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6050AA-1 is also issued
under 26 U.S.C. 6050AA(e).
* * * * *
Par. 2. Section 1.163-16 is added to
read as follows:
§ 1.163-16 Qualified passenger vehicle
loan interest.
(a) Overview—(1) In general. In com-
puting the taxable income for a taxable
year beginning after December 31, 2024,
and before January 1, 2029, of a taxpayer
described in paragraph (a)(2) of this sec-
tion, for purposes of the deduction allow-
able under section 163(a) of the Internal
Revenue Code (Code) , section 163(h)(4)
excludes qualified passenger vehicle loan
interest (QPVLI), from the definition of
personal interest paid or accrued during
the taxable year for which a deduction
would be disallowed under section 163(h)
(1). See paragraph (b) of this section for
definitions of terms used in section 163(h)
(4) and this section.
(2) Taxpayers that may deduct
QPVLI—(i) In general. Only a taxpayer
that is an individual, decedent’s estate, or
non-grantor trust may deduct QPVLI in
computing the taxpayer’s taxable income.
(ii) Deduction available without
regard to whether the taxpayer itemizes
deductions. Under section 63(b)(7) of the
Code, the deduction for QPVLI allowable
under section 163(h)(4) may be taken by
a taxpayer without regard to whether the
taxpayer itemizes deductions or takes the
standard deduction.
(b) Definitions. The following defini-
tions apply for purposes of section 163(h)
(4) and this section:
(1) Applicable passenger vehicle
(APV). The term applicable passenger
vehicle or APV means a vehicle that sat-
isfies the requirements of paragraph (e)(1)
of this section.
(2) Dealer. The term dealer means a
person licensed by a State, the District of
Columbia, the Commonwealth of Puerto
Rico, any other territory or possession of
the United States, an Indian Tribal govern-
ment (as defined in section 7701(a)(40) of
the Code), or an Alaska Native Corpora-
tion (as defined in section 3 of the Alaska
Native Claims Settlement Act (43 U.S.C.
1602(m)) to engage in the sale of vehicles.
This term includes a dealer licensed by any
jurisdiction that makes sales at sites outside
of the jurisdiction in which it is licensed.
(3) Final assembly. The term final
assembly means the process by which
a manufacturer produces a vehicle at, or
through the use of, a plant, factory, or other
place from which the vehicle is delivered
to a dealer with all component parts nec-
essary for the mechanical operation of the
vehicle included with the vehicle, whether
or not the component parts are perma-
nently installed in or on the vehicle.
(4) Grantor trust. A grantor trust is any
portion of a trust that is treated as being
owned by one or more persons under sec-
tions 671 through 679 of the Code.
(5) Independently deductible inter-
est. The term independently deductible
interest means interest that satisfies the
requirements of paragraph (g)(1) of this
section.
(6) Items or amounts customarily
financed in an APV purchase transaction
that are directly related to the purchase
of the APV. The term items or amounts
customarily financed in an APV purchase
transaction that are directly related to the
purchase of the APV means any item or
amount that is customarily financed in
an APV purchase transaction, and that
is directly related to the purchase of the
APV, as determined on an industry-wide
basis and not by reference to the financing
terms of a particular financing entity.
(7) Lease financing. The term lease
financing means a transaction that is not
a purchase of an APV, and under which a
taxpayer has usage rights with respect to an
APV but is not considered the owner of the
APV under State or other applicable law.
(8) Modified adjusted gross income—
(i) Individuals. The term modified adjusted
gross income, in the case of an individual,
means adjusted gross income (as defined
in section 62 of the Code) increased by
any amount excluded from gross income
under sections 911, 931, or 933 of the
Code.
(ii) Decedents’ estates and non-grantor
trusts. The term modified adjusted gross
income, in the case of a decedent’s estate
or non-grantor trust, means adjusted gross
income as defined in section 67(e) of the
Code.
(9) Negative equity. The term negative
equity means existing indebtedness on
a vehicle traded in as part of a purchase
transaction for an APV, to the extent
such indebtedness exceeds the vehicle’s
trade-in value specified by the contract for
the purchase of the APV.
(10) Non-grantor trust. The term non-
grantor trust means a trust (or the portion
of a trust) that is not a grantor trust.
(11) Personal use. The term personal
use means use by an individual other than
in any trade or business (except for the use
in the trade or business of performing ser-
vices as an employee), or for the produc-
tion of income.
(12) Purchase. The term purchase
means an acquisition that is both an acqui-
sition of a vehicle for Federal income tax
purposes and the acquisition of the title of
the vehicle for purposes of State or other
applicable law.
(13) Qualified passenger vehicle loan
interest (QPVLI). The term qualified pas-

Bulletin No. 2026–39 397 September 21, 2026
senger vehicle loan interest or QPVLI
means any interest that satisfies the
requirements of paragraph (c)(1) of this
section.
(14) Qualified vehicle type—(i) In
general. The term qualified vehicle type
means one of the following vehicle types:
(ii) Car. The term car means a vehicle
classified in one of the classes of passen-
ger automobiles listed in 40 CFR 600.315-
08(a)(1).
(iii) Minivan. The term minivan means
a minivan as defined under 40 CFR
600.002.
(iv) Van. The term van means a van as
defined under 40 CFR 600.002.
(v) Sport utility vehicle. The term sport
utility vehicle means a sport utility vehicle
as defined under 40 CFR 600.002.
(vi) Pickup truck. The term pickup
truck means a pickup truck as defined
under 40 CFR 600.002.
(vii) Motorcycle. The term motorcycle
means a motorcycle as defined under 49
CFR 571.3(b).
(15) Secured by a first lien. The term
secured by a first lien means a valid and
enforceable security interest under State
or other applicable law in an APV that
is the first voluntary security interest
recorded against the vehicle, regardless
of subsequent involuntary liens such as
tax liens or other similar security inter-
ests that may be given temporary higher
priority at a later date following the date
of purchase. An APV may be considered
to be secured by a first lien as long as
there is a lending agreement evidencing
a security interest under State or other
applicable law, even if that lien has not
yet been perfected or recorded due to pro-
cessing times or other similar delays aris-
ing under State or other applicable law.
An APV may also be treated as secured
by a first lien in limited circumstances
in which a lien is removed in connection
with the taxpayer no longer owning the
vehicle but the taxpayer continues to be
liable for a specified passenger vehicle
loan (SPVL), such as a repossession of
the vehicle or insurance payout following
a total loss claim.
(16) Specified passenger vehicle loan
(SPVL). The term specified passenger
vehicle loan or SPVL means indebtedness
that satisfies the requirements of para-
graph (d)(1) of this section.
(17) Vehicle identification number
(VIN). The term vehicle identification
number or VIN means a series of Ara-
bic numbers and Roman letters that is
assigned to a motor vehicle for identifica-
tion purposes under 49 CFR 565.13.
(c) Qualified passenger vehicle loan
interest (QPVLI)—(1) In general. Inter-
est is QPVLI only if the interest is paid
or accrued during the taxable year on
indebtedness that is an SPVL secured
by a first lien on an APV and is not
excluded from the definition of QPVLI
(as described in paragraphs (c)(4) and
(5) of this section).
(2) Determining the amount of inter-
est paid or accrued during a taxable
year—(i) In general. Interest on an SPVL
accrues on a daily basis over the term of
the SPVL. The amount of QPVLI that is
deductible by a taxpayer for the taxable
year is determined under the taxpayer’s
overall method of accounting for Fed-
eral income tax purposes (either the cash
receipts and disbursements method or an
accrual method) or an applicable special
method of accounting. For purposes of
section 163(h)(4), the amount of QPVLI
includes all interest payable with respect to
the amount financed under an SPVL (that
is, the amount of indebtedness that quali-
fies for purposes of determining whether
indebtedness is an SPVL under paragraph
(d)(2) of this section), including prepaid
interest in the form of points and deferred
or capitalized interest. QPVLI includes
origination-related or financing-related
charges, prepayment penalties, late pay-
ment charges, default-related charges, and
similar fees, in each case if such charge,
penalty, or fee is characterized as interest
expense for Federal income tax purposes
and included in the amount reported as
interest received for the calendar year in
the statement furnished by the interest
recipient under section 6050AA(c) of the
Code and § 1.6050AA-1(h).
(ii) Allocation of payments. In general,
a payment on an SPVL is treated first as
a payment of interest to the extent inter-
est has accrued and remains unpaid on the
SPVL as of the date the payment is due,
and second, to the extent of any excess, as
a payment of principal. See §§ 1.446-2(e)
and 1.1275-2(a) for rules on allocating
payments between interest and principal.
However, for purposes of this paragraph
(c)(2), the amount of interest for a calen-
dar year is determined consistently with
§ 1.6050AA-1(f)(2) (special rule for inter-
est accrued by January 15). For purposes
of this paragraph (c)(2)(ii), a simple inter-
est calculation may be used to determine
the amount of interest that has accrued
and remains unpaid on an SPVL when
a payment on the SPVL is made. Under
this simple interest calculation, interest
accrues daily over the term of the SPVL
based on its outstanding principal balance
and the annual percentage rate or interest
rate provided in the retail installment sales
contract or other contract evidencing the
SPVL.
(3) Determining whether the SPVL
is secured by a first lien on an APV—(i)
In general. In order for interest paid or
accrued on an SPVL to be QPVLI, the
SPVL must be secured by a first lien on the
APV financed by the SPVL at the time the
interest is paid or accrued. For example,
the purchase of an APV with a credit card
would generally not result in an SPVL
secured by a first lien on an APV, because
such indebtedness generally is not secured
by the APV.
(ii) Exception for a substitute vehicle
due to an unforeseen intervening event. In
the case of an SPVL secured by a first lien
on an APV that is replaced at a later time
with a substitute vehicle that is an APV
due to an unforeseen intervening event
(for example, a defective APV is required
to be replaced under State or other appli-
cable law or an APV is required to be
replaced under an insurance product), and
as a result the SPVL is secured by a first
lien on that substitute vehicle, the substi-
tute vehicle is considered the initially pur-
chased APV for purposes of this paragraph
(c)(3), and for purposes of paragraphs (c)
(5) and (d)(4) of this section.
(4) Interest that is not QPVLI. QPVLI
does not include any amount paid or
accrued on any of the following:
(i) A loan to finance fleet sales.
(ii) A loan incurred for the purchase of
a commercial vehicle that is not used for
personal purposes.
(iii) Any lease financing.
(iv) A loan to finance the purchase of a
vehicle with a salvage title.
(v) A loan to finance the purchase of a
vehicle intended to be used for scrap or
parts.

September 21, 2026 398 Bulletin No. 2026–39
(5) VIN requirement. Interest paid or
accrued by the taxpayer during the taxable
year on an SPVL is not treated as QPVLI
and may not be deducted as QPVLI under
section 163(a) unless the taxpayer reports
the VIN of the purchased APV on the Fed-
eral tax return for the taxable year in the
manner prescribed by the Internal Reve-
nue Service in guidance published in the
Internal Revenue Bulletin or in forms and
instructions.
(6) Examples. The rules of paragraphs
(c)(1), (c)(3), and (c)(4)(iii) of this section
are illustrated by the following examples:
(i) Example 1: Lease financing—(A) Facts.
Dealer is located in State Y. Dealer purchases an
APV from the manufacturer and sells the car to Leas-
ing Company. Leasing Company leases the car to A
for a 120-month period in a transaction that is a lease
for State Y purposes. At the end of the lease term,
A has the option to purchase the car for a nominal
amount. For Federal income tax purposes, the lease
agreement is properly viewed as a sale. A makes
lease payments during the taxable year.
(B) Analysis. A’s lease payments are made under
a lease financing transaction and do not qualify as
QPVLI. Additionally, notwithstanding that the lease
agreement is properly viewed as a sale for Federal
income tax purposes, the transaction is not a pur-
chase as defined in paragraph (b)(12) of this section
and therefore the lease is not an SPVL. Accordingly,
no amounts paid under the lease are QPVLI.
(ii) Example 2: Defective vehicle replaced—(A)
Facts. A, a resident of State X, incurs an SPVL to
purchase Vehicle 1. The SPVL is secured by a first
lien on Vehicle 1. After purchase, A discovers Vehi-
cle 1 is defective. Under State X law that requires
the replacement of new vehicles with serious defects,
the manufacturer replaces defective Vehicle 1 with
Vehicle 2. As a result, the SPVL is secured by a first
lien on Vehicle 2. Vehicle 2 is an APV with respect to
A, as the original use of Vehicle 2 commences with
A, and the vehicle meets all other requirements of an
APV as described in paragraph (e) of this section.
The SPVL continues to be in effect with no changes
other than the substitution of Vehicle 1 for Vehicle
2 occurring under State X law. A continues making
payments under the terms of the SPVL.
(B) Analysis. The interest paid or accrued on the
SPVL that is now secured by Vehicle 2 is QPVLI.
The SPVL is secured by a first lien on the APV that
was purchased as a result of the incurred SPVL at the
time that interest is paid or accrued. As Vehicle 1 was
replaced with Vehicle 2, an APV, due to an unfore-
seen intervening event and the SPVL is secured by
a first lien on Vehicle 2, Vehicle 2 is considered the
initially purchased APV.
(d) Specified passenger vehicle loan
(SPVL)—(1) In general. Indebtedness
is an SPVL only if the indebtedness is
incurred by the taxpayer after December
31, 2024, for the purchase of an APV for
personal use, and is secured by a first lien
on that APV.
(2) Indebtedness incurred for the pur-
chase of an APV—(i) In general. For
purposes of paragraph (d)(1) of this sec-
tion, indebtedness is an SPVL only to
the extent the indebtedness is incurred
for the purchase of an APV and, if part
of the same purchase transaction, for
any other items or amounts customarily
financed in an APV purchase transaction
that are directly related to the purchase of
the APV. Items or amounts customarily
financed in an APV purchase transaction
that are directly related to the purchase of
the APV include, but are not limited to,
vehicle service or repair plans (for exam-
ple, mechanical repair coverage), vehicle
protection products (including tire, wheel,
paint, and interior protection products),
key fob replacement plans, warranties
or extended warranties, guaranteed asset
protection (GAP) waiver or insurance that
covers the difference between an APV’s
value and the outstanding balance of the
indebtedness in the event of a total loss,
credit insurance products (including cred-
it-related accident, health, and life prod-
ucts), sales taxes, vehicle-related fees
(including title and registration fees), and
vehicle-related accessories that are com-
ponents of the APV purchased as part of
the APV transaction.
(ii) Indebtedness that is not incurred
for the purchase of an APV. To the extent
any indebtedness is not incurred by a tax-
payer for the purchase of an APV or for
any other items or amounts customarily
financed in an APV purchase transaction
that are directly related to the purchase
of the APV, such indebtedness is not an
SPVL even if it is incurred as part of a pur-
chase transaction for an APV. For exam-
ple, indebtedness incurred for the repay-
ment of negative equity on a loan secured
by a trade-in vehicle, to purchase collision
and liability insurance that is not a credit
insurance product, or to purchase any
property or services unrelated to an APV
(for example, a trailer or a boat) is not
incurred by a taxpayer for the purchase of
an APV or for any other items or amounts
customarily financed in an APV purchase
transaction that are directly related to the
purchase of the APV, and as a result is not
an SPVL. In addition, indebtedness is not
incurred by a taxpayer for the purchase of
an APV or for any other items or amounts
customarily financed that are directly
related to the purchase of the APV in an
APV purchase transaction to the extent the
indebtedness relates to cash proceeds that
the taxpayer receives from the lender.
(iii) Allocation of indebtedness—(A)
In general. Except as provided in para-
graph (d)(2)(iii)(B) of this section, if a
taxpayer incurs indebtedness described in
both paragraphs (d)(2)(i) and (ii) of this
section as part of the same transaction, the
indebtedness must be allocated between
the indebtedness described in paragraph
(d)(2)(i) of this section and the indebt-
edness described in paragraph (d)(2)(ii)
of this section. Only the portion of the
indebtedness allocated to the indebtedness
described in paragraph (d)(2)(i) of this sec-
tion is an SPVL. In such cases, payments
of interest and principal are allocated to
the portion of the indebtedness described
in paragraph (d)(2)(i) of this section and
the portion of the indebtedness described
in paragraph (d)(2)(ii) of this section on a
pro rata basis.
(B) Allocation of a down payment. For
purposes of determining the portion of the
indebtedness described in paragraph (d)
(2)(ii) of this section, any down payment
(or other consideration provided by the
taxpayer at the time of the APV purchase
transaction) is applied first against any
negative equity and any other amounts
that are not incurred for the purchase of
the APV or for other items or amounts
customarily financed in an APV purchase
transaction that are directly related to the
purchase of the APV.
(3) Related party indebtedness. Any
indebtedness owed to a person who is
related to the taxpayer within the meaning
of section 267(b) or section 707(b)(1) of
the Code is not an SPVL.
(4) Refinancing of an SPVL. If a tax-
payer refinances an SPVL (refinanced
loan), the resulting indebtedness (new
loan) is an SPVL if the new loan is secured
by a first lien on the APV with respect to
which the refinanced loan was incurred.
The amount of the new loan that is an
SPVL is limited to the outstanding balance
of the refinanced loan as of the date of the
refinancing. A taxpayer allocates principal
and interest between the amount of the
new loan that is an SPVL and the remain-
ing portion of the indebtedness on a pro
rata basis. For purposes of this paragraph
(d)(4), if there is a change in obligor as

Bulletin No. 2026–39 399 September 21, 2026
part of the refinancing, the new loan is not
an SPVL with regard to any subsequent
obligor unless the refinancing is in con-
nection with a change in obligor by reason
of the obligor’s death within the meaning
of paragraph (d)(5)(ii) of this section.
(5) Whether the SPVL was incurred
by the taxpayer—(i) In general. Except
as provided in paragraph (d)(5)(ii) of this
section, indebtedness is an SPVL only if
that indebtedness was originally incurred
by the taxpayer. For example, if an indi-
vidual incurs an SPVL and subsequently
ceases to be an obligor and another indi-
vidual becomes the obligor on the indebt-
edness, the indebtedness is not an SPVL
with respect to the other individual.
(ii) Exception for a change in obligor
by reason of the death of an obligor—
(A) In general. If a change in obligor is
by reason of the death of an obligor of an
SPVL, then the indebtedness is treated as
an SPVL with respect to the new obligor.
(B) Change in obligor by reason of
the death of an obligor. For purposes of
paragraph (d)(5)(ii)(A) of this section,
a change in obligor by reason of death
includes the following:
(1) The succession to ownership of an
APV subject to an SPVL by—
(i) The deceased obligor’s estate;
(ii) A surviving joint owner of the APV;
or
(iii) The surviving beneficiary desig-
nated by contract, a transfer on death pro-
vision, or by operation of law.
(2) A distribution of an APV subject to
an SPVL by—
(i) A deceased obligor’s estate to a leg-
atee or heir; or
(ii) A trust that is made to a trust bene-
ficiary by reason of death as described in
this paragraph (d)(5)(ii).
(3) Any refinancing of an SPVL in con-
nection with a transfer by reason of death
as described in this paragraph (d)(5)(ii).
(C) Not a change in obligor by reason
of the death of an obligor. A change in
obligor by reason of death as described in
this paragraph (d)(5)(ii) does not include a
change resulting from the following:
(1) A sale, exchange, or other disposi-
tion of an APV by a decedent’s estate or
trust, other than a distribution described in
paragraph (d)(5)(ii)(B)(2) of this section.
(2) Any disposition of an APV by an
individual who received the APV by rea-
son of death (unless that disposition is by
reason of that individual’s death and the
change in obligor is described in para-
graph (d)(5)(ii)(B) of this section).
(6) Examples. The rules of paragraphs
(d)(2) and (4) of this section are illustrated
by the following examples in which A is
an individual who incurs indebtedness
after December 31, 2024, to purchase an
APV for personal use:
(i) Example 1: Vehicle-related purchases—(A)
Facts. A finances the purchase of an APV for per-
sonal use by incurring a loan. The loan is secured by
a first lien on the APV. The retail installment sales
contract, which evidences the loan, indicates that the
total amount financed is equal to the sum of the APV
purchase price, the cost for an extended warranty,
sales tax, title and registration fees, and a dealer doc-
ument fee.
(B) Analysis. All of the amount financed under
the loan is incurred for the purchase of an APV and
for other items or amounts customarily financed in
an APV purchase transaction that are directly related
to the purchase of the APV. Accordingly, the loan is
an SPVL and all of the interest on the loan may be
deductible as QPVLI.
(ii) Example 2: Non-vehicle-related purchase—
(A) Facts. A incurs indebtedness to finance the pur-
chase of both an APV and a trailer. The indebtedness
is secured by a first lien on the APV. The price of
the trailer is added to the amount financed as part of
the retail installment sales contract that includes the
purchase price of the APV. A does not make a down
payment.
(B) Analysis. The indebtedness attributable to the
purchase price of the trailer included in the amount
financed under the retail installment sales contract is
not incurred for the purchase of an APV or for any
other items or amounts customarily financed in an
APV purchase transaction that are directly related to
the purchase of the APV and therefore this indebt-
edness is not an SPVL under paragraph (d)(2)(ii) of
this section. In accordance with the allocation rules
in paragraph (d)(2)(iii) of this section, A must allo-
cate the portion of the indebtedness that is allocable
to the purchase price of the trailer to indebtedness
described in paragraph (d)(2)(ii) of this section that
is not an SPVL. Thus, none of the interest that is
attributable to that portion of the indebtedness is
QPVLI. The remaining portion of the indebtedness
is allocated to indebtedness described in paragraph
(d)(2)(i) of this section that is an SPVL.
(iii) Example 3: Vehicle refinanced—(A) Facts.
A incurs indebtedness (Loan 1) to finance the pur-
chase of an APV, and in a subsequent taxable year
in which A is eligible to deduct QPVLI, A refinances
Loan 1 by incurring new indebtedness of $38,000
(Loan 2), which is secured by a first lien on the APV.
At the time of refinancing, the APV has a fair market
value of $38,000 and Loan 1 has an outstanding bal-
ance of $30,000. The Loan 2 proceeds of $38,000 are
used to first repay the $30,000 Loan 1 balance, with
the remaining $8,000 going to A as cash proceeds.
(B) Analysis. Of the $38,000 amount financed by
Loan 2, $8,000 is the amount of the resulting indebt-
edness that exceeds the amount of such refinanced
indebtedness within the meaning of paragraph (d)(4)
of this section. Only $30,000 of the $38,000 balance
of Loan 2 is an SPVL per the rule in paragraph (d)
(4) of this section. Thus, none of the interest attribut-
able to the $8,000 portion of Loan 2 is interest that is
deductible as QPVLI.
(iv) Example 4: Negative equity and a down pay-
ment—(A) Facts. A finances the purchase of an APV
that costs $40,000, and trades in a previously owned
vehicle subject to an existing vehicle loan with
$6,000 of negative equity. A makes a down payment
of $4,000 as part of the APV purchase transaction,
incurring indebtedness of $42,000 ($40,000 plus
$6,000 minus $4,000).
(B) Analysis. The $6,000 of negative equity is
not an item or amount customarily financed in an
APV purchase transaction that directly relates to
the purchase of the APV. See paragraph (d)(2)(ii) of
this section. In accordance with the allocation rules
in paragraph (d)(2)(iii) of this section, A must allo-
cate the $42,000 of indebtedness between indebt-
edness described in paragraph (d)(2)(i) of this sec-
tion and indebtedness described in paragraph (d)
(2)(ii) of this section. For purposes of determining
the portion of the indebtedness described in para-
graph (d)(2)(ii) of this section, the down payment
of $4,000 is allocated against the $6,000 of negative
equity. As a result, of the $42,000 of indebtedness
incurred by A, $40,000 of the indebtedness incurred
is indebtedness incurred for the purchase of an APV
as described in paragraph (d)(2)(i) of this section
and $2,000 is indebtedness not incurred for the pur-
chase of an APV as described in paragraph (d)(2)
(ii) of this section.
(v) Example 5: Method of allocating interest—
(A) Facts. A finances the purchase of an APV for
personal use by incurring a loan of $40,000, of which
$36,000 was for amounts described in paragraph (d)
(2)(i) of this section and of which $4,000 was for
amounts described in paragraph (d)(2)(ii) of this sec-
tion. A did not make a down payment.
(B) Analysis. Under paragraph (d)(2)(iii) of
this section, the loan must be allocated between
indebtedness that is an SPVL and indebtedness that
is not an SPVL. The percentage of the loan that is
described in paragraph (d)(2)(i) of this section and
is an SPVL is 90 percent ($36,000/$40,000) and the
percentage of the loan that is described in paragraph
(d)(2)(ii) of this section and is not an SPVL is 10 per-
cent ($4,000/$40,000). As a result, only 90 percent
of each interest payment on the loan may be QPVLI.
The remaining 10 percent of each interest payment
on the loan is not QPVLI.
(e) Applicable passenger vehicle
(APV)—(1) In general. A vehicle is an
APV only if—
(i) The original use of the vehicle com-
mences with the taxpayer (as described in
paragraph (e)(2) of this section);
(ii) The vehicle is manufactured pri-
marily for use on public streets, roads, and
highways (not including a vehicle oper-
ated exclusively on a rail or rails);
(iii) The vehicle has at least 2 wheels;
(iv) The vehicle is a qualified vehicle
type;

September 21, 2026 400 Bulletin No. 2026–39
(v) The vehicle is treated as a motor
vehicle for purposes of title II of the Clean
Air Act;
(vi) The vehicle has a gross vehicle
weight rating of less than 14,000 pounds;
and
(vii) The final assembly of the vehi-
cle occurs within the United States (as
described in paragraph (e)(3) of this sec-
tion).
(2) Determining whether original use
commences with the taxpayer—(i) In gen-
eral. Original use of a vehicle commences
with the first person that takes delivery
of the vehicle after the vehicle is sold,
registered, or titled (taking into account
paragraphs (e)(2)(ii) and (iii) of this sec-
tion). In the case of a purchaser that incurs
indebtedness for the vehicle purchase,
original use of the vehicle does not com-
mence with that purchaser unless the loan
documentation treats the vehicle as a new
vehicle.
(ii) Dealers. Original use of a vehicle
held by a dealer does not commence with
the dealer if the vehicle is held primar-
ily for sale to customers in the ordinary
course of its trade or business, and as a
result the dealer is not considered to be
the first person that takes delivery of the
vehicle after it is sold, registered, or titled
as described in paragraph (e)(2)(i) of this
section. However, original use of a vehicle
may commence with a dealer if the vehi-
cle is held by the dealer for any purpose
other than primarily for sale to customers
in the ordinary course of its trade or busi-
ness.
(iii) Original use for joint purchasers.
If more than one person purchases a vehi-
cle and one of these purchasers is the first
person that takes delivery of the vehicle
after the vehicle is sold, registered, or
titled, then each of these purchasers is
considered to be the first person that takes
delivery of the vehicle after the vehicle is
sold, registered, or titled as described in
paragraph (e)(2)(i) of this section.
(iv) Vehicle return exception. If a pur-
chaser that is not a dealer returns a vehicle
to a seller within 30 days of taking deliv-
ery of the vehicle, then that purchaser will
not be considered the first person that takes
delivery of the vehicle after the vehicle is
sold, registered, or titled for purposes of
paragraph (e)(2)(i) of this section, and,
accordingly, original use of the vehicle
does not commence with that purchaser.
(v) Examples. The rules of this para-
graph (e) are illustrated by the following
examples:
(A) Example 1: Demonstrator vehicles—(1)
Facts. Dealer purchases and takes delivery of a
vehicle from the manufacturer. Dealer has always
held the vehicle primarily for sale to customers in
the ordinary course of Dealer’s trade or business
and also uses the vehicle as a demonstrator vehicle.
Dealer titles and registers the vehicle in its name
prior to use as a demonstrator vehicle in accordance
with State law requirements.
(2) Analysis. Original use of the vehicle does not
commence with Dealer. Although Dealer titled and
registered the vehicle as required by State law, the
vehicle was always held by Dealer primarily for sale
to customers in the ordinary course of Dealer’s trade
or business. Accordingly, Dealer is not considered to
be the first person that takes delivery of the vehicle
after the vehicle is sold, registered, or titled. Original
use of the vehicle may commence with a subsequent
purchaser of the vehicle.
(B) Example 2: Cancelled sale—(1) Facts. A
enters into a contract to purchase a special-order
vehicle from Dealer that is estimated to be deliv-
ered in one month. When Dealer purchases the
vehicle from the manufacturer, Dealer holds the
vehicle primarily for sale to customers in the ordi-
nary course of Dealer’s trade or business. A cancels
the order under the sales contract prior to the deliv-
ery occurring.
(2) Analysis. Original use of the vehicle does
not commence with Dealer. The vehicle was always
held by Dealer primarily for sale to customers in the
ordinary course of Dealer’s trade or business. Thus,
Dealer is not considered to be the first person that
takes delivery of the vehicle after the vehicle is sold,
registered, or titled. Original use of the vehicle does
not commence with A because A cancelled the order.
A is not the first person that takes delivery of the
vehicle after it is sold, registered, or titled. Original
use of the vehicle may commence with a subsequent
purchaser of the vehicle.
(C) Example 3: Vehicle purchase following a
lease—(1) Facts. Dealer is engaged in the business
of purchasing vehicles to sell to vehicle leasing com-
panies. Dealer only holds these vehicles primarily for
sale to customers in the ordinary course of Dealer’s
trade or business. Dealer sells a vehicle purchased
from the manufacturer to Leasing Company. Leasing
Company is not a dealer. Leasing Company takes
delivery of the vehicle after titling and registering the
vehicle in its name. Leasing Company immediately
leases the vehicle to A. At the end of the lease term,
A exercises its option under the lease agreement to
purchase the vehicle.
(2) Analysis. Original use of the vehicle does
not commence with Dealer. The vehicle was always
held by Dealer primarily for sale to customers in the
ordinary course of Dealer’s trade or business. Thus,
Dealer is not considered to be the first person that
takes delivery of the vehicle after the vehicle is sold,
registered, or titled. Original use of the vehicle com-
mences with Leasing Company. Leasing Company is
the first person that takes delivery of the vehicle after
the vehicle is sold, registered, or titled. Accordingly,
the original use of the vehicle does not commence
with A as A is not the first person that takes delivery
of the vehicle after the vehicle is sold, registered, or
titled.
(D) Example 4: Returned vehicle—(1) Facts. A,
who is not a dealer, purchases a vehicle from Dealer.
Dealer purchased the vehicle from the manufacturer
and has always held the vehicle primarily for sale to
customers in the ordinary course of Dealer’s trade
or business. A returns the car to Dealer 15 days after
taking delivery of the vehicle.
(2) Analysis. Original use of the vehicle does
not commence with Dealer. The vehicle was always
held by Dealer for sale to customers in the ordinary
course of Dealer’s trade or business. Thus, Dealer
is not considered to be the first person that takes
delivery of the vehicle after the vehicle is sold, reg-
istered, or titled. Original use of the vehicle does not
commence with A. A is not considered to be the first
person that takes delivery of the vehicle after it is
sold, registered, or titled as A returned the vehicle to
Dealer within 30 days of taking delivery of the vehi-
cle. Original use of the vehicle may commence with
a subsequent purchaser of the vehicle.
(3) Determining whether final assem-
bly has occurred within the United States.
To determine whether the final assembly
of a vehicle occurred within the United
States, a taxpayer may rely on—
(i) The vehicle’s plant of manufacture
as reported in the VIN; or
(ii) The final assembly point reported
on the label affixed to the vehicle as
described in 49 CFR 583.5(a)(3).
(f) Determination of personal use—(1)
In general. A taxpayer that incurs indebt-
edness to purchase an APV is considered
to purchase that APV for personal use if,
at the time the indebtedness is incurred,
that taxpayer expects that the APV will be
used for personal use by the taxpayer, the
taxpayer’s spouse, or an individual that is
related to the taxpayer within the meaning
of section 152(c)(2) or (d)(2) of the Code,
or any combination of these individuals,
for more than 50 percent of the time. The
determination of whether the taxpayer pur-
chased the APV for personal use is based
on the expected use during the period the
taxpayer expects to own the APV.
(2) Special rules for decedents’ estates
and non-grantor trusts. For purposes of
determining whether a decedent’s estate
or non-grantor trust that incurs indebted-
ness to purchase an APV expects that the
APV will be used for personal use under
paragraph (f)(1) of this section, the deter-
mination is based on the expected personal
use by one or more of the legatees or heirs,
or beneficiaries, respectively, who have a

Bulletin No. 2026–39 401 September 21, 2026
present or future interest in that decedent’s
estate or non-grantor trust; the spouse of
a legatee, heir, or beneficiary; or an indi-
vidual that is related to a legatee, heir, or
beneficiary within the meaning of section
152(c)(2) or (d)(2).
(3) Examples. The rules of this para-
graph (f) are illustrated by the following
examples in which A is an individual:
(i) Example 1: Predominant personal use—
(A) Facts. At the time A incurs indebtedness to
purchase an APV, A expects to use the APV for A’s
personal use for 85 percent of the time. A expects
to use the APV to earn income as a driver for a
rideshare service for the remaining 15 percent of
the time.
(B) Analysis. A is considered to have pur-
chased the APV for personal use. At the time A
purchases the APV, A expects that the APV will be
used for personal use more than 50 percent of the
time. A’s expectation that A will use the APV to
earn income as a driver for a rideshare service for
15 percent of the time does not preclude A from
being considered to have purchased the APV for
personal use.
(ii) Example 2: Predominant business use—
(A) Facts. At the time A incurs indebtedness to
purchase an APV, A expects to use the APV in A’s
contracting business that is a sole proprietorship for
60 percent of the time. A expects to use the APV
for A’s personal use for the remaining 40 percent
of the time.
(B) Analysis. A is not considered to have pur-
chased the APV for personal use. At the time A pur-
chases the APV, A does not expect that the APV will
be used for personal use more than 50 percent of the
time.
(iii) Example 3: Personal use by an individual
related to the taxpayer—(A) Facts. At the time A
incurs indebtedness to purchase an APV, A expects
the APV to be used exclusively for personal use by
A’s child B.
(B) Analysis. A is considered to have purchased
the APV for personal use. At the time A purchases
the APV, A expects that the APV will be used for per-
sonal use more than 50 percent of the time by B, an
individual that is related to A within the meaning of
section 152(c)(2) or (d)(2).
(g) Independently deductible interest—
(1) In general. Independently deduct-
ible interest is limited to interest that is
QPVLI determined under section 163(h)
(4)(B)(i) (prior to the application of the
dollar limitation of section 163(h)(4)(C)
(i) described in paragraph (h)(1) of this
section and determined without regard to
this paragraph (g)) and that is otherwise
deductible by the taxpayer as a different
type of interest under section 163(a) or a
different section of the Code.
(2) Deducting independently deduct-
ible interest. A taxpayer may deduct
independently deductible interest paid or
accrued by the taxpayer during the tax-
able year as QPVLI (subject to the appli-
cation of the dollar limitation of section
163(h)(4)(C)(i) described in paragraph
(h)(1) of this section), or alternatively,
as a different type of interest described
in paragraph (g)(1) of this section (non-
QPVLI), subject to any applicable lim-
itations. The amount of independently
deductible interest that may be deduct-
ible as QPVLI for a taxable year (before
the application of the dollar limitation of
section 163(h)(4)(C)(i) described in para-
graph (h)(1) of this section) is reduced to
the extent that the taxpayer deducts that
independently deductible interest as non-
QPVLI.
(3) Reporting independently deduct-
ible interest. If a taxpayer deducts inde-
pendently deductible interest in a taxable
year as non-QPVLI under paragraph (g)
(2) of this section, the taxpayer must
report information relating to that inde-
pendently deductible interest in the man-
ner prescribed by the Internal Revenue
Service in guidance published in the
Internal Revenue Bulletin or in forms
and instructions.
(4) Examples. The rules of this para-
graph (g) regarding independently deduct-
ible interest are illustrated by the follow-
ing examples in which A is an individual:
(i) Example 1: Independently deductible inter-
est—(A) Facts. During the taxable year, A paid
$1,000 of interest on an SPVL. During the taxable
year, 40 percent of the use of the APV is attribut-
able to A’s trade or business. A may deduct the full
$1,000 as QPVLI after considering the application of
the modified adjusted gross income phaseout in para-
graph (h)(2) of this section as A’s modified adjusted
gross income is less than $100,000.
(B) Analysis. $400 (40% of $1,000) is inde-
pendently deductible interest because this amount is
deductible as QPVLI and as business interest under
section 163(a). Assume A may deduct the full $400
as business interest after considering any applicable
limitations. A may deduct the interest paid on the
SPVL in multiple ways including—
(1) A may deduct this $400 of interest as QPVLI.
In this case, A would deduct all $1,000 of interest as
QPVLI; or
(2) A may deduct this $400 as business inter-
est. In this case, A would deduct $600 as QPVLI
and $400 as business interest, because A must
reduce its $1,000 of QPVLI by the $400 of inter-
est deducted as business interest to determine the
amount A can deduct as QPVLI. Additionally,
A must report information relating to that inde-
pendently deductible interest in the manner pre-
scribed by the Internal Revenue Service in guid-
ance published in the Internal Revenue Bulletin or
in forms and instructions.
(ii) Example 2: QPVLI limited by the dollar
limitation—(A) Facts. During the taxable year, A
paid $12,000 of interest on an SPVL. During the
taxable year, 30 percent of the use of the APV is
attributable to A’s trade or business. A may deduct
up to $10,000 of the interest as QPVLI after con-
sidering the application of the dollar limitation
and the modified adjusted gross income phase-
out in paragraphs (h)(1) and (2) of this section as
A’s modified adjusted gross income is less than
$100,000.
(B) Analysis. $3,600 (30% of $12,000) is inde-
pendently deductible interest because this amount is
deductible as QPVLI and as business interest under
section 163(a). Assume A may deduct the full $3,600
as business interest after considering any applicable
limitations. A may deduct the interest paid on the
SPVL in multiple ways including—
(1) A may maximize QPVLI deducted. A may
deduct $10,000 of interest as QPVLI, and deduct
the remaining $2,000 as business interest. Addi-
tionally, A must report information relating to that
independently deductible interest in the manner
prescribed by the Internal Revenue Service in guid-
ance published in the Internal Revenue Bulletin or in
forms and instructions; or
(2) A may maximize business interest deducted.
A may deduct $3,600 of business interest, and the
remaining $8,400 as QPVLI. A has $12,000 of
interest paid on an SPVL and must reduce that by
the amount of independently deductible interest A
deducts as business interest ($3,600). Additionally,
A must report information relating to that inde-
pendently deductible interest in the manner pre-
scribed by the Internal Revenue Service in guidance
published in the Internal Revenue Bulletin or in
forms and instructions.
(iii) Example 3: QPVLI limited by the dollar lim-
itation—(A) Facts. During the taxable year, A paid
$15,000 of interest on an SPVL. During the taxable
year, 20 percent of the use of the APV is attribut-
able to A’s trade or business. A may deduct up to
$10,000 of the interest as QPVLI after considering
the application of the dollar limitation and the mod-
ified adjusted gross income phaseout in paragraphs
(h)(1) and (2) of this section as A’s modified adjusted
gross income is less than $100,000.
(B) Analysis. $3,000 (20% of $15,000) is inde-
pendently deductible interest because this amount
is deductible as QPVLI and as business interest
under section 163(a). Assume A may deduct the
full $3,000 as business interest after considering
any applicable limitations. Therefore, the $3,000 is
deductible as business interest or as QPVLI. If A
were to deduct the $3,000 of independently deduct-
ible interest as QPVLI, the application of the dollar
limitation in paragraph (h)(1) of this section would
limit A’s deduction of QPVLI to $10,000 of the
$15,000. Instead, A may deduct $3,000 of interest
as business interest and deduct $10,000 as QPVLI
as the modified adjusted gross income phaseout in
paragraph (h)(2) of this section does not reduce A’s
QPVLI deduction amount. Additionally, A must
report information relating to that independently
deductible interest in the manner prescribed by the
Internal Revenue Service in guidance published
in the Internal Revenue Bulletin or in forms and
instructions.

September 21, 2026 402 Bulletin No. 2026–39
(h) Limitations—(1) Dollar limitation.
The amount taken into account as QPVLI
by a taxpayer for any taxable year may
not exceed $10,000 per Federal tax return
regardless of filing status.
(2) Modified adjusted gross income
phaseout. The amount taken into account
as QPVLI (after the application of the dol-
lar limitation in paragraph (h)(1) of this
section) is reduced (but not below zero) by
$200 for each $1,000 (or portion thereof) by
which the modified adjusted gross income
of the taxpayer for the taxable year exceeds
$100,000 or, in the case of a joint Federal
income tax return, by which the modified
adjusted gross income exceeds $200,000.
(3) Examples. The rules of this para-
graph (h) are illustrated by the following
examples:
(i) Example 1: Dollar limitation—(A) Facts. A
and B are married and file a joint Federal income tax
return. A incurs an SPVL to purchase Vehicle 1. B
incurs an SPVL to purchase Vehicle 2. During the
taxable year, A paid $6,000 of interest on the SPVL
for Vehicle 1. B paid $5,000 of interest on the SPVL
for Vehicle 2.
(B) Analysis. A and B can deduct no more than
$10,000 as QPVLI on their joint Federal income tax
return because of the dollar limitation described in
paragraph (h)(1) of this section.
(ii) Example 2: Modified adjusted gross income
phaseout—(A) Facts. A is an individual that paid
$7,000 of QPVLI on an SPVL during the taxable
year and files a Federal income tax return with a fil-
ing status as single. A has a modified adjusted gross
income of $124,200 for the taxable year.
(B) Analysis. The maximum amount of QPVLI
that A can deduct for the taxable year is $2,000.
A’s modified adjusted gross income is greater than
$100,000. Therefore, the amount of QPVLI that can
be taken into account as QPVLI after the application
of the dollar limitation ($7,000) must be reduced by
$200 for each $1,000 (or portion thereof) that A’s
modified adjusted gross income exceeds $100,000.
A’s modified adjusted gross income exceeds $100,000
by $24,200. Thus, the $7,000 amount must be reduced
by $5,000, which is equal to $200 x 25 ($24,200 /
$1,000 = 24.2 (which is then rounded up to 25)).
(i) Applicability date. This section applies
to taxable years beginning after December
31, 2024, and before January 1, 2029.
Par. 3. Section 1.6050AA-1 is added to
read as follows:
§ 1.6050AA-1 Information reporting
of applicable passenger vehicle loan
interest received in a trade or business
from an individual.
(a) Information reporting require-
ment—(1) Overview. The information
reporting requirements of section 6050AA
of the Internal Revenue Code (Code) and
this section apply to an interest recipient
who receives at least $600 of interest on a
specified passenger vehicle loan (SPVL)
from a payor of record for a calendar year
for which interest is received. See para-
graph (b) of this section for definitions
of terms used in section 6050AA and this
section.
(2) Reporting requirement. Except
as otherwise provided in this section, an
interest recipient that receives at least
$600 of interest on an SPVL for a calendar
year must—
(i) File an information return, as
described in paragraph (g) of this section,
with the Internal Revenue Service (IRS);
and
(ii) Furnish a statement to the payor of
record, as described in paragraph (h) of
this section, on the SPVL.
(3) Optional reporting. An interest
recipient may, but is not required to, report
its receipt of less than $600 of interest on
an SPVL for a calendar year. An interest
recipient that chooses to file a return as
provided in this section and to furnish a
statement as provided in this section is
subject to the requirements of this section.
(b) Definitions. The following defi-
nitions apply for purposes of section
6050AA and this section:
(1) Applicable passenger vehicle
(APV). The term applicable passenger
vehicle or APV has the meaning provided
in § 1.163-16(b)(1).
(2) Calendar year for which interest is
received. Except as provided in paragraph
(f)(2) of this section, the calendar year for
which interest is received is the later of
the calendar year in which the interest is
received or the calendar year in which the
interest properly accrues.
(3) Interest recipient. An interest recip-
ient is a person that is engaged in a trade
or business (whether or not the trade or
business of lending money) and that, in the
course of that trade or business, receives
from any payor of record interest on an
SPVL. For purposes of this paragraph (b)
(3), if a person holds an SPVL that was
originated or acquired in the course of a
trade or business, the interest on the SPVL
is considered to be received in the course
of that trade or business. The rules of this
paragraph (b)(3) are illustrated by the fol-
lowing examples:
(i) Example 1: Financing entity—(A) Facts.
Car manufacturer finance subsidiary A lends money
to individual B to enable B to purchase an APV. B
makes a payment to A of interest on the SPVL.
(B) Analysis. Under the rules of this paragraph
(b)(3), A is an interest recipient for purposes of sec-
tion 6050AA and is subject to the reporting require-
ments of section 6050AA.
(ii) Example 2: Interest not in the course of the
trade or business—(A) Facts. C, a person engaged
in the trade or business of being a physician, lends
money to individual D to enable D to purchase an
APV from car dealer A. D makes a payment to C of
interest on the SPVL.
(B) Analysis. C is not an interest recipient for
purposes of section 6050AA and this paragraph (b)
(3) because C will not receive the interest in the
course of the trade or business of being a physician.
C does not need to file an information return report-
ing the interest received from D.
(iii) Example 3: Dealer direct lending—(A)
Facts. E, a corporation, is a car dealer operat-
ing under the “buy here, pay here” model. E sells
vehicles to customers and, as part of its ordinary
course of business, extends financing directly to the
purchasers. Customer F buys a vehicle from E and
enters into an SPVL with E for the amount necessary
to buy the vehicle. F pays E $1,200 of stated interest
on the SPVL during the calendar year.
(B) Analysis. Because E is engaged in the trade
or business of selling automobiles and receives
interest on the SPVL in the course of that trade or
business, E is an interest recipient for purposes of
section 6050AA and must file an information return
reporting the interest received from F.
(4) Lender of record. The lender of
record is the person who, at the time the
loan is originated, is named as the lender
on the loan documents and whose right
to receive payment from the payor of
record is secured by a lien on the payor of
record’s APV. An intention by the lender
of record to sell or otherwise transfer the
loan to a third party subsequent to the
close of the transaction does not affect
the determination of who is the lender of
record.
(5) Payor of record. The payor of record
on an SPVL is the person specified on the
books and records of the interest recipient
as the principal borrower on the SPVL. If
the books and records of the interest recip-
ient do not indicate which borrower is the
principal borrower, the interest recipient
must designate a borrower as the principal
borrower. The term person for purposes
of this paragraph (b)(5) means any indi-
vidual, decedent’s estate, or trust that is
not a grantor trust within the meaning of
§ 1.163-16(b)(10) (non-grantor trust).
(6) Secretary. The term Secretary has
the meaning provided in section 7701(a)
(11) of the Code.

Bulletin No. 2026–39 403 September 21, 2026
(7) Specified passenger vehicle loan
(SPVL). The term specified passenger
vehicle loan or SPVL has the same mean-
ing given by § 1.163-16(b)(16).
(c) Interest received on behalf of
another person—(1) In general. A person
that, in the course of its trade or business,
receives or collects interest on an SPVL
on behalf of another person (for exam-
ple, the lender of record) is the interest
recipient (initial recipient) for purposes
of paragraph (b)(3) of this section with
respect to the SPVL. In this case, the
reporting requirement of paragraph (a) of
this section does not apply to the trans-
fer of interest from the initial recipient
to the person for which the initial recip-
ient receives or collects the interest. For
example, if financial institution A collects
interest on behalf of financial institution
B, A is the initial recipient of interest for
the SPVL and is subject to the reporting
requirements of section 6050AA. B is not
required to report the interest received on
the SPVL from A.
(2) Exception. Paragraph (c)(1) of this
section does not apply for any period for
which—
(i) An initial recipient does not possess
the information needed to comply with the
reporting requirement of paragraph (a) of
this section; and
(ii) The person for which the interest
is received or collected would receive the
interest in the course of its trade or busi-
ness if the interest were paid directly to
that person.
(3) Application of the exception. If the
exception provided by paragraph (c)(2) of
this section applies, the person for which
the interest is received or collected is the
interest recipient with respect to interest
received or collected on the SPVL.
(4) Presumption. For purposes of this
paragraph (c), if interest is received or
collected on behalf of a person other than
an individual, that person is presumed to
receive interest in the course of its trade
or business.
(5) Examples. The rules of this para-
graph (c) are illustrated by the following
examples:
(i) Example 1: Servicer has the information
needed to comply with the reporting requirement—
(A) Facts. Bank A lends money to individual B to
purchase an APV. Bank A forms a securitization
trust and sells securities that are backed by SPVLs.
Securitization Servicer C is the loan servicer and
collects interest on the SPVLs in the trust on behalf
of Bank A. Securitization Servicer C has the initial
information regarding loans in the trust (for exam-
ple, loan amount details and VINs corresponding
to the SPVLs), as well as information regarding the
amounts of interest paid on the SPVLs, such that
Securitization Servicer C has the information needed
to comply with the reporting requirement of para-
graph (a) of this section.
(B) Analysis. Securitization Servicer C is the
initial recipient of interest for the SPVL and is
subject to the reporting requirements of section
6050AA. Bank A is not required to report the inter-
est received on the SPVL from Securitization Ser-
vicer C.
(ii) Example 2: Servicer does not have the infor-
mation needed to comply with the reporting require-
ment—(A) Facts. Bank D lends money to individual
E to purchase an APV. Bank D forms a securitization
trust and sells securities that are backed by SPVLs.
Payment Agent F collects interest on the SPVLs in
the trust on behalf of Bank D, but Bank D otherwise
acts as the loan servicer. Payment Agent F does not
have the information needed to comply with the
reporting requirement of paragraph (a) of this sec-
tion.
(B) Analysis. Payment Agent F collects interest
on behalf of Bank D. However, because Payment
Agent F does not have the information needed to
comply with the reporting requirement of para-
graph (a) of this section, Payment Agent F is not
the initial recipient of interest for the SPVL. Bank
D is subject to the reporting requirements of section
6050AA.
(d) Reporting by a foreign person. An
interest recipient that is not a United States
person, as defined in section 7701(a)(30),
must report interest received on an SPVL
only if it receives the interest—
(1) At a location in the United States;
or
(2) At a location outside the United
States and—
(i) The interest recipient is a controlled
foreign corporation, within the meaning
of section 957(a) of the Code; or
(ii) 50 percent or more of the gross
income of the interest recipient from all
sources for the three-year period ending
with the close of the taxable year preced-
ing the receipt of interest (or for that part
of the period for which the person was in
existence) was effectively connected with
the conduct of a trade or business in the
United States.
(e) Reporting with respect to a non-
resident alien individual, foreign dece-
dent’s estate, or foreign non-grantor
trust—(1) In general. The reporting
requirement of paragraph (a) of this sec-
tion does not apply if the payor of record
is a nonresident alien individual, a dece-
dent’s estate that is a foreign estate
within the meaning of section 7701(a)
(31)(A), or a non-grantor trust that is a
foreign trust within the meaning of sec-
tion 7701(a)(31)(B).
(2) Nonresident alien individual, for-
eign decedent’s estate, and foreign non-
grantor trust. For purposes of paragraph
(e)(1) of this section, an interest recipient
must apply the following documentation
rules to determine whether a payor of
record is a nonresident alien individual,
foreign decedent’s estate, or foreign non-
grantor trust—
(i) If interest is paid outside the United
States, the interest recipient must satisfy
the documentary evidence standard pro-
vided in § 1.6049-5(c) with respect to the
payor of record; and
(ii) If interest is paid within the United
States, the interest recipient must secure
from the payor of record an applica-
ble Form W-8 (or a substitute form) that
meets the validity and reliance require-
ments described in § 1.1441-1(e)(4).
(3) Place of payment. For purposes of
paragraph (e)(2) of this section, the place
of payment is the place where the payor
of record completes the acts necessary
to effect payment. An amount paid by
transfer to an account maintained by an
interest recipient in the United States
or by mail to a United States address is
considered to be paid within the United
States.
(f) Amount of interest received on an
SPVL for calendar year—(1) De mini-
mis rule for interest of less than $600.
Whether an interest recipient receives
$600 or more of interest on an SPVL for a
calendar year is determined on an SPVL-
by-SPVL basis. An interest recipient
need not aggregate the interest received
on all of the SPVLs of a payor of record
held by the interest recipient to deter-
mine whether the $600 threshold is met.
Therefore, an interest recipient need not
report interest of less than $600 received
on an SPVL, even though it receives a
total of $600 or more of interest on all
of the SPVLs of the payor of record for a
calendar year.
(2) Interest accrued by January 15.
An interest recipient may treat interest
received during the current calendar
year that properly accrues by January
15 of the subsequent calendar year as
interest received for the current calendar

September 21, 2026 404 Bulletin No. 2026–39
year. For example, if an interest recipi-
ent receives a monthly interest payment
on December 31, Year 1, that includes
interest accruing for the period Decem-
ber 5, Year 1, to January 5, Year 2, the
interest recipient may treat the entire
interest payment as received in Year 1.
If a portion of the interest for which a
payment received in a calendar year
accrues after January 15 of the subse-
quent calendar year, an interest recipient
must report as interest received for the
current calendar year only the portion
that properly accrues by the end of the
current calendar year. For example, if
an interest recipient receives a monthly
payment that includes interest accruing
for the period December 20, Year 1,
through January 20, Year 2, the inter-
est recipient may not report as interest
received for Year 1 any interest accruing
after December 31, Year 1. The inter-
est recipient must report the interest
accruing after December 31, Year 1, as
received for calendar Year 2.
(g) Requirement to file a return—(1)
Form of the return. An interest recipient
must file a return required by paragraph
(a) of this section on the form specified
by the Secretary for this purpose, with
Form 1096, Annual Summary and Trans-
mittal of U.S. Information Returns. An
interest recipient may use forms contain-
ing provisions substantially similar to
those in the forms specified by the Sec-
retary for this purpose if it complies with
applicable revenue procedures relating to
those forms. An interest recipient must
file a separate return for each SPVL for
which it receives $600 or more of interest
for a calendar year.
(2) Information included on the return.
An interest recipient must include on the
form specified by the Secretary for this
purpose—
(i) The name, address, and taxpayer
identification number of the payor of
record;
(ii) The name, address, and taxpayer
identification number of the interest recip-
ient;
(iii) The amount of interest received for
the calendar year;
(iv) The amount of outstanding princi-
pal on the SPVL as of the beginning of the
calendar year;
(v) The date of the origination of the
SPVL;
(vi) The year, make, model, and vehi-
cle identification number of the APV that
secures the SPVL;
(vii) The date the SPVL was acquired;
and
(viii) Any other information required
by the form specified by the Secretary for
this purpose or its instructions.
(3) Time and place for filing the
return; cross-references to penalty and
electronic filing requirements. An inter-
est recipient must file a return required
by paragraph (a) of this section on or
before February 28 (March 31 if filed
electronically) of the year following
the calendar year for which it receives
the interest. An interest recipient must
file the return required by paragraph
(a) of this section with the IRS office
designated in the instructions for the
form. For provisions relating to the
penalty provided for the failure to file
a correct information return required
by paragraph (a) of this section, see
§ 301.6721-1 of this chapter. See
§ 301.6724-1 of this chapter for the
waiver of a penalty if the failure is due
to reasonable cause and not due to will-
ful neglect. See § 301.6011-2(b) of this
chapter for the requirement to submit
the information returns required by this
section electronically.
(h) Requirement to furnish a state-
ment—(1) In general. An interest recipi-
ent that must file a return under paragraph
(a) of this section must furnish a statement
to the payor of record.
(2) Information included on the state-
ment. An interest recipient must include
on the statement that it furnishes to the
payor of record—
(i) The name, address, and phone num-
ber of the information contact of the per-
son required to make such return;
(ii) The information required under
paragraph (g)(2) of this section;
(iii) A legend that—
(A) Identifies the statement as import-
ant tax information that is being furnished
to the IRS; and
(B) Notifies the payor of record that
if the payor of record is required to file
a return, a negligence penalty or other
sanction may be imposed if the IRS deter-
mines that an underpayment of tax results
because the payor of record overstated a
deduction for this interest (if any) on the
payor of record’s return; and
(iv) A legend stating that the payor of
record may be unable to deduct the full
amount of SPVL interest reported on the
statement; that limitations based on the
payor of record’s modified adjusted gross
income may apply; and that the payor of
record may deduct QPVLI only to the
extent the SPVL was incurred by, and the
QPVLI was actually paid by, the payor of
record.
(3) Copy of the form determined by the
Secretary to the payor of record. An inter-
est recipient will satisfy the requirement
of paragraph (h)(1) of this section by fur-
nishing to a payor of record a copy of the
form determined by the Secretary (or sub-
stitute statement that complies with appli-
cable revenue procedures) containing all
the information filed with the IRS and all
the legends required by paragraph (h)(2)
of this section.
(4) Furnishing the statement with other
information returns. An interest recipi-
ent may transmit the statement required
by paragraph (h)(1) of this section to the
payor of record with other information,
including other information returns, as
permitted by applicable revenue proce-
dures.
(5) Time and place for furnishing the
statement. An interest recipient must fur-
nish a statement required by paragraph (h)
(1) of this section to the payor of record on
or before January 31 of the year following
the calendar year for which it receives the
interest. The interest recipient will be con-
sidered to have furnished the statement to
the payor of record if it mails the state-
ment to the payor of record’s last known
address.
(i) Applicability date. This section
applies to calendar years beginning after
December 31, 2024, and before January 1,
2029.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 4. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U.S.C. 7805.
* * * * *

Bulletin No. 2026–39 405 September 21, 2026
Par. 5. Section 301.6011-2 is amended
by revising paragraph (b)(1) to read as fol-
lows:
§ 301.6011-2 Required use of electronic
form.
* * * * *
(b) * * *
(1) If the use of Form 1042-S, Form
1094 series, Form 1095-B, Form 1095-
C, Form 1097-BTC, Form 1098, Form
1098-C, Form 1098-E, Form 1098-Q,
Form 1098-T, Form 1098-VLI, Form
1099 series, Form 3921, Form 3922,
Form 5498 series, Form 8027, or Form
W-2G is required by the applicable reg-
ulations or revenue procedures for the
purpose of making an information return,
the information required by the form must
be submitted electronically, except as oth-
erwise provided in paragraph (c) of this
section. Returns filed electronically must
be made in accordance with applicable
revenue procedures, publications, forms,
or instructions.
* * * * *
Par. 6. Section 301.6721-1 is amended
by:
1. Revising paragraphs (h)(3)(xxvi)
and (xxvii);
2. Adding paragraph (h)(3)(xxviii); and
3. Adding paragraph (j)(2)(iii).
The additions and revision read as fol-
lows:
§ 301.6721-1 Failure to file correct
information returns.
* * * * *
(h) * * *
(3) * * *
(xxvi) Section 6050Y (relating to
returns relating to certain life insurance
contract transactions);
(xxvii) Section 6050Z (relating to
reports relating to long-term care pre-
mium statements); or
(xxviii) Section 6050AA (relating to
returns relating to qualified passenger
vehicle loan interest received in trade or
business from individuals).
* * * * *
(j) * * *
(2) * * *
(iii) Paragraph (h)(3)(xxviii) of this
section applies with respect to information
returns required to be filed after December
31, 2024.
Par. 7. Section 301.6722-1 is amended
by:
1. Revising paragraphs (e)(2)(xxxvii)
and (xxxviii);
2. Adding paragraph (e)(2)(xxxix); and
3. Adding paragraph (g)(2)(iii).
The additions and revision read as fol-
lows:
§ 301.6722-1 Failure to furnish correct
payee statements.
* * * * *
(e) * * *
(2) * * *
(xxxvii) Section 6226(a)(2) (regarding
statements relating to alternative to pay-
ment of imputed underpayment by a part-
nership) or under any other provision of
this title 26 that provides for the applica-
tion of rules similar to section 6226(a)(2);
(xxxviii) Section 6050Z (relating to
reports relating to long-term care pre-
mium statements); or
(xxxix) Section 6050AA (relating to
returns relating to qualified passenger
vehicle loan interest received in trade or
business from individuals).
* * * * *
(g) * * *
(2) * * *
(iii) Paragraph (e)(2)(xxxix) of this
section applies with respect to payee
statements required to be furnished after
December 31, 2024, and before January 1,
2029.
Frank J. Bisignano,
Chief Executive Officer.
Approved: July 27, 2026.
Kevin M. Salinger,
Acting Assistant Secretary of the
Treasury (Tax Policy).
(Filed by the Office of the Federal Register Septem-
ber 4, 2026, 8:45 a.m., and published in the issue of
the Federal Register for September 8, 2026, 91 FR
57214)

September 21, 2026 406 Bulletin No. 2026–39
Part III
26 CFR 601.204: Changes in Accounting Periods
and in Methods of Accounting
(Also: Part I, §§ 174, 174A, 446, 460; 1.446-1,
1.460-4)
Rev. Proc. 2026-32
SECTION 1. PURPOSE
This revenue procedure modifies sec-
tion 7 of Rev. Proc. 2025-23, 2025-24
I.R.B. 1476, as modified by Rev. Proc.
2025-28, 2025-38 I.R.B. 393, with respect
to the procedures under § 446 of the Inter-
nal Revenue Code (Code)
1
and § 1.446-
1(e) for obtaining automatic consent of the
Commissioner of Internal Revenue (Com-
missioner) to change methods of account-
ing for research or experimental expendi-
tures (i) to comply with § 174, as in effect
after amendment by § 13206(a) of Public
Law 115-97, 131 Stat. 2054 (Dec. 22,
2017), commonly known as the Tax Cuts
and Jobs Act (TCJA), and prior to amend-
ment by § 70302(b)(1) of Public Law 119-
21, 139 Stat. 189, 239 (July 4, 2025), com-
monly known as the One, Big, Beautiful
Bill Act (OBBBA), and (ii) to comply with
§§ 174 and 174A, as amended and enacted
by the OBBBA, respectively.
This revenue procedure also modifies
section 19 of Rev. Proc. 2025-23 with
respect to the procedures under § 446 and
§ 1.446-1(e) for obtaining automatic con-
sent of the Commissioner to change meth-
ods of accounting for contracts entered
into in taxable years beginning after July
4, 2025, to comply with § 460(e), as
amended by the OBBBA.
SECTION 2. BACKGROUND
.01 Certain references used in section 2
of this revenue procedure.
(1) References to § 70302 of the
OBBBA. All references hereinafter in
section 2 of this revenue procedure to
“OBBBA § 70302” refer to provisions of
§ 70302 of the OBBBA.
(2) References to § 70430 of the
OBBBA. All references hereinafter in
section 2 of this revenue procedure to
“OBBBA § 70430” refer to provisions of
§ 70430 of the OBBBA.
(3) References to § 174. All references
hereinafter in section 2 of this revenue
procedure to “TCJA § 174” refer to § 174,
as in effect after amendment by § 13206(a)
of the TCJA, and prior to amendment by
OBBBA § 70302(b)(1). All references
hereinafter in section 2 of this revenue
procedure to “§ 174” refer to § 174 as
amended by OBBBA § 70302(b)(1).
(4) References to research or exper-
imental expenditures. All references
hereinafter in section 2 of this revenue
procedure to “specified research or exper-
imental expenditures” and “SRE expen-
ditures” refer to research or experimental
expenditures paid or incurred in taxable
years beginning after December 31, 2021,
and before January 1, 2025, under TCJA
§ 174. All references hereinafter in section
2 of this revenue procedure to “domestic
research or experimental expenditures
under TCJA § 174” refer to SRE expendi-
tures other than SRE expenditures attrib-
utable to foreign research (within the
meaning of § 41(d)(4)(F)).
.02 Treatment of research or experi-
mental expenditures under TCJA § 174.
(1) In general. For expenditures paid or
incurred in taxable years beginning after
December 31, 2021, TCJA § 174 requires
taxpayers to charge SRE expenditures to
capital account and allows amortization
deductions of such capitalized expendi-
tures ratably over a 5-year period in the
case of SRE expenditures attributable to
domestic research, or a 15-year period in
the case of SRE expenditures attributable
to foreign research (within the meaning of
§ 41(d)(4)(F)), beginning with the mid-
point of the taxable year in which such
expenditures are paid or incurred. The
procedures in sections 7.01 and 7.03 of
Rev. Proc. 2025-23, as modified by this
revenue procedure, provide automatic
changes in method of accounting for
SRE expenditures under TCJA § 174 for
amounts paid or incurred in taxable years
beginning before January 1, 2025.
(2) Treatment of foreign research or
experimental expenditures under § 174.
OBBBA § 70302(b)(1) amended TCJA
§ 174 to provide that § 174 applies only
to foreign research or experimental expen-
ditures and that such expenditures con-
tinue to be charged to capital account and
amortized ratably over a 15-year period
beginning with the midpoint of the taxable
year in which such expenditures are paid
or incurred. Under § 174(b), as amended
by OBBBA § 70302(b)(1)(B), “foreign
research or experimental expenditures”
are research or experimental expenditures
that are paid or incurred by the taxpayer
during a taxable year in connection with
the taxpayer’s trade or business that are
attributable to foreign research (within
the meaning of § 41(d)(4)(F)). OBBBA
§ 70302(e)(1) provides that the OBBBA
amendments to TCJA § 174 apply to
amounts paid or incurred in taxable years
beginning after December 31, 2024.
(3) Treatment of domestic research or
experimental expenditures under § 174A.
OBBBA § 70302(a) amended part VI of
subchapter B of chapter 1 of the Code
by adding § 174A applicable to taxable
years beginning after December 31, 2024.
Section 174A(a) provides that, notwith-
standing § 263, a deduction is allowed
for any domestic research or experimen-
tal expenditures that are paid or incurred
by the taxpayer during the taxable year.
Section 174A(b) provides that, for pur-
poses of § 174A, the term “domestic
research or experimental expenditures”
means research or experimental expendi-
tures paid or incurred by the taxpayer in
connection with the taxpayer’s trade or
business other than such expenditures that
are attributable to foreign research (within
the meaning of § 41(d)(4)(F)). Section
174A(c)(1) allows a taxpayer to make an
election, in the case of domestic research
or experimental expenditures that would
(but for § 174A(a)) be chargeable to capi-
tal account but not chargeable to property
of a character that is subject to the allow-
ance under § 167 (relating to allowance
for depreciation, etc.) or § 611 (relating
to allowance for depletion), to charge
such expenditures to capital account and
amortize such expenditures ratably over a
1
Unless otherwise specified, all “section” or “§” references are to sections of the Code or the Income Tax Regulations (26 CFR part 1).

Bulletin No. 2026–39 407 September 21, 2026
period of not less than 60 months, begin-
ning with the month in which the taxpayer
first realizes benefits from such expendi-
tures. Under § 174A(c)(1), such election
is made in accordance with regulations or
other guidance provided by the Secretary
of the Treasury or the Secretary’s delegate
(Secretary). Section 174A(c)(2) provides
that the election described in § 174A(c)
(1) may be made for any taxable year, but
only if made no later than the time pre-
scribed by law for filing the return for
such taxable year (including extensions
thereof). The procedures in section 6 of
Rev. Proc. 2025-28 provide guidance on
making an election under § 174A(c) for
expenditures paid or incurred in taxable
years beginning after December 31, 2024.
OBBBA § 70302(e)(1) provides that, gen-
erally, the amendments made by OBBBA
§ 70302 to add § 174A to the Code apply
to amounts paid or incurred in taxable
years beginning after December 31, 2024.
.03 Treatment of Certain Construction
Contracts under § 460.
(1) Section 460 in general. Section
460(a) generally requires taxpayers to use
the percentage-of-completion method to
determine taxable income from a long-
term contract. Section 460(f)(1) defines a
“long-term contract” as any contract for
the manufacture, building, installation,
or construction of property if such con-
tract is not completed within the taxable
year in which such contract is entered
into. Under § 460(e), the requirement to
use the percentage-of-completion method
and comply with associated rules does
not apply to certain types of construction
contracts (exempt construction contracts).
Section 460(e)(3) defines a “construction
contract” as any contract for the building,
construction, reconstruction, or rehabilita-
tion of, or the installation of any integral
component to, or improvements of, real
property.
(2) Treatment of home construction
contracts, residential construction con-
tracts, and other construction contracts
prior to OBBBA.
(a) Exempt construction contracts.
Prior to amendment by the OBBBA,
§ 460(e)(1)(A) exempted taxpayers
from the requirement to use the percent-
age-of-completion method for home con-
struction contracts. Section 460(e)(1)(B)
exempted taxpayers (other than a tax shel-
ter prohibited from using the cash receipts
and disbursements method of account-
ing under § 448(a)(3)) from the require-
ment to use the percentage-of-completion
method for any other construction con-
tract if (i) the taxpayer estimated at the
time the contract was entered into that the
contract would be completed within the
2-year period beginning on the contract
commencement date, and (ii) the taxpayer
met the gross receipts test of § 448(c) for
the taxable year in which the contract was
entered into (small taxpayer exception).
(b) Home construction contracts. Sec-
tion 460(e)(4)(A), as previously contained
in § 460(e)(5)(A) prior to amendment by
the OBBBA, defines the term “home con-
struction contract” as any construction
contract if 80 percent of the estimated
total contract costs (as of the close of the
taxable year in which the contract was
entered into) are reasonably expected to
be attributable to the building, construc-
tion, reconstruction, or rehabilitation of
(i) dwelling units in buildings contain-
ing four or fewer units and (ii) improve-
ments to real property directly related to
the dwelling units and located on the site
of the dwelling units. For purposes of
§ 460(e)(4)(A)(i), as previously contained
in § 460(e)(5)(A)(i) prior to amendment
by the OBBBA, each townhouse or row-
house is treated as a separate building.
Taxpayers were permitted to account for
home construction contracts using any
exempt contract method under § 1.460-
4(c). Permissible exempt contract meth-
ods include the percentage-of-completion
method, the exempt-contract percent-
age-of-completion-method (as described
in § 1.460-4(c)(2)), the completed contract
method (as described in § 1.460-4(d)),
and any other permissible method. Under
§ 460(e)(1), taxpayers were required to
apply § 263A to home construction con-
tracts not accounted for under the percent-
age-of-completion method unless (i) the
taxpayer estimated at the time the contract
was entered into that the contract would be
completed within the 2-year period begin-
ning on the contract commencement date,
and (ii) the taxpayer met the gross receipts
test of § 448(c) for the taxable year in
which the contract was entered into.
(c) Residential construction contracts.
Section 460(e)(4)(B), as previously con-
tained in § 460(e)(5)(B) prior to amend-
ment by the OBBBA, defines the term
“residential construction contract” as
any contract that would be a home con-
struction contract but for the limit on the
number of dwelling units in a building.
Under § 460(e)(4), prior to its repeal by
the OBBBA, taxpayers with residential
construction contracts that were not home
construction contracts were permitted to
account for such contracts using the per-
centage-of-completion/capitalized-cost
method under which the percent-
age-of-completion method was used for
70 percent of contract income and contract
costs and an exempt contract method was
used for 30 percent of contract income and
contract costs.
(2) OBBBA amendments to § 460(e).
The OBBBA did not modify the defini-
tions of home construction contract or
residential construction contract under
§ 460(e). OBBBA § 70430(a)(1)(A)
amended § 460(e)(1)(A) to extend the
home construction contract exception
to the requirement to use the percent-
age-of-completion method to apply to all
residential construction contracts. Simi-
larly, OBBBA § 70430(a)(1)(B) amended
§ 460(e)(1) to extend the requirement
to apply § 263A to a home construction
contract that is not accounted for under
the percentage-of-completion method to
apply to all residential construction con-
tracts unless (i) the taxpayer estimates at
the time the contract is entered into that
the contract will not be completed within
the 2-year period beginning on the con-
tract commencement date (3-year period
beginning on the contract commencement
date for residential construction contracts
that are not home construction contracts),
and (ii) the taxpayer meets the gross
receipts test of § 448(c) for the taxable
year in which the contract is entered into.
OBBBA § 70430(a)(2) removed § 460(e)
(4) from the Code, thereby eliminating
the ability to use the percentage-of-com-
pletion/capitalized-cost method for res-
idential construction contracts. OBBBA
§ 70430(c) provides that the amendments
to § 460(e) are effective for contracts
entered into in taxable years beginning
after July 4, 2025.
.04 Procedural guidance under Rev.
Proc. 2025-28.
(1) Revenue Procedure 2025-28 was
released on August 28, 2025, to provide

September 21, 2026 408 Bulletin No. 2026–39
procedures for making certain elections
under OBBBA § 70302(f) with respect to
domestic research or experimental expen-
ditures. Rev. Proc. 2025-28 also modifies
procedures under § 446 and § 1.446-1(e)
for obtaining automatic consent to change
methods of accounting for research or
experimental expenditures under TCJA
§ 174 and §§ 174 and 174A.
(2) Section 7 of Rev. Proc. 2025-28
modifies section 7 of Rev. Proc. 2025-23
in three ways. First, section 7.01 of Rev.
Proc. 2025-23 is modified to provide
a change in method of accounting for
domestic research or experimental expen-
ditures under TCJA § 174. Second, section
7.02 of Rev. Proc. 2025-23 is modified to
provide a change in method of account-
ing for domestic research or experimen-
tal expenditures under § 174A and to
make certain transition method changes
under the OBBBA. Third, section 7.03 of
Rev. Proc. 2025-23 is added to provide a
change in method of accounting for for-
eign SRE expenditures under TCJA § 174
and foreign research or experimental
expenditures under § 174.
.05 Changing methods of accounting
under § 446(e).
(1) In general. Except as otherwise
expressly provided in the Code and the reg-
ulations thereunder, § 446(e) and § 1.446-
1(e)(2) require a taxpayer to secure the con-
sent of the Commissioner before changing
a method of accounting for Federal income
tax purposes. Section 1.446-1(e)(3)(i)
provides, in part, that except as otherwise
provided under the authority of § 1.446-
1(e)(3)(ii), to secure the Commissioner’s
consent to a taxpayer’s change in method
of accounting the taxpayer generally must
file a Form 3115, Application for Change
in Accounting Method, with the Commis-
sioner during the taxable year in which
the taxpayer desires to make the change
in method of accounting. Section 1.446-
1(e)(3)(ii) authorizes the Commissioner
to prescribe administrative procedures
under which taxpayers will be permitted
to change their method of accounting. The
administrative procedures prescribe those
terms and conditions necessary to obtain
the Commissioner’s consent to effect the
change and to prevent amounts from being
duplicated or omitted.
(2) Current guidance on changing
methods of accounting. Rev. Proc. 2015-
13, 2015-5 I.R.B. 419, as clarified and
modified by Rev. Proc. 2015-33, 2015-24
I.R.B. 1067, and as modified by Rev. Proc.
2021-34, 2021-35 I.R.B. 337, Rev. Proc.
2021-26, 2021-22 I.R.B. 1163, Rev. Proc.
2017-59, 2017-48 I.R.B. 543, and sec-
tion 17.02(b) and (c) of Rev. Proc. 2016-
1, 2016-1 I.R.B. 1, sets forth the general
administrative procedures by which a
taxpayer may obtain the automatic con-
sent of the Commissioner to change a
method of accounting described in the List
of Automatic Changes. Rev. Proc. 2025-
23 contains the current List of Automatic
Changes.
(3) Changes in method of accounting
for research or experimental expenditures
under TCJA § 174, § 174, and § 174A.
(a) A change in the treatment of SRE
expenditures to comply with TCJA § 174
is a change in method of accounting to
which §§ 446(e) and 481, and the corre-
sponding regulations, apply. Similarly, a
change in a taxpayer’s treatment of for-
eign or domestic research or experimen-
tal expenditures to comply with § 174
or § 174A, respectively, or to use certain
transition options provided in OBBBA
§ 70302(f), is a change in method of
accounting to which §§ 446(e) and 481,
and the corresponding regulations, apply.
(b) A taxpayer that changes its method
of accounting to comply with TCJA § 174,
§ 174, or § 174A must use the accounting
method change procedures in Rev. Proc.
2015-13 or its successor.
(c) Section 3.01 and .02 of this reve-
nue procedure modify section 7.01 of
Rev. Proc. 2025-23 (relating to a change
in method of accounting for domestic
research or experimental expenditures
under TCJA § 174) as follows:
(i) To provide that, if a taxpayer previ-
ously changed to the recovery of unamor-
tized amount method described in section
7.02(2)(f) of Rev. Proc. 2025-23 for a
prior taxable year, the taxpayer’s § 481(a)
adjustment for a change under section
7.01 of Rev. Proc. 2025-23 must reflect
application of the taxpayer’s recovery of
unamortized amount method;
(ii) To provide that, if a taxpayer makes
both a change under section 7.01 and
section 7.02(2)(f) of Rev. Proc. 2025-23
for its first taxable year beginning after
December 31, 2024, the § 481(a) adjust-
ment period for any net positive § 481(a)
adjustment resulting from the change
under section 7.01 of Rev. Proc. 2025-23
is the same amortization period elected
by the taxpayer under its recovery of
unamortized amount method (that is, the
net positive § 481(a) adjustment is taken
into account either in full in the first tax-
able year beginning after December 31,
2024, or ratably over the 2-taxable year
period beginning with the first taxable
year beginning after December 31, 2024);
(iii) To provide that, if a taxpayer pre-
viously made a change under section
7.02(2)(f) of Rev. Proc. 2025-23 for a tax-
able year prior to its year of change for a
change under section 7.01 of Rev. Proc.
2025-23, the § 481(a) adjustment period
for any net positive § 481(a) adjustment
resulting from the change under section
7.01 of Rev. Proc. 2025-23 is taken into
account over the amortization period
remaining under the taxpayer’s recovery
of unamortized amount method; and
(iv) To extend the waiver of the eli-
gibility rules in section 5.01(d) and (f)
of Rev. Proc. 2015-13 for any change in
method of accounting described in section
7.01(1)(a) of Rev. Proc. 2025-23 for any
taxable year beginning before 2028.
(d) Section 3.03 of this revenue proce-
dure modifies section 7.02 of Rev. Proc.
2025-23 (relating to a change in method of
accounting for domestic research or exper-
imental expenditures under the OBBBA,
including certain transition options) to
extend the waiver of the eligibility rules in
section 5.01(d) and (f) of Rev. Proc. 2015-
13 for any change in method of account-
ing described in section 7.02(3) of Rev.
Proc. 2025-23 for any taxable year begin-
ning before 2028.
(e) Section 3.04 and .05 of this reve-
nue procedure modify section 7.03 of Rev.
Proc. 2025-23 (relating to a change in
method of accounting for foreign research
or experimental expenditures) as follows:
(i) To remove the limitation on the
applicability of a change in method of
accounting for foreign research or experi-
mental expenditures to comply with § 174
that currently limits such change to tax-
able years beginning before January 1,
2026; and
(ii) To extend the waiver of the eligibil-
ity rules in section 5.01(d) and (f) of Rev.
Proc. 2015-13 for any change in method
of accounting described in section 7.03(1)

Bulletin No. 2026–39 409 September 21, 2026
(a) of Rev. Proc. 2025-23 for any taxable
year beginning before 2028.
(4) Changes in method of accounting
for residential construction contracts
under OBBBA.
(a) A change from the percent-
age-of-completion method described in
§ 1.460-4(b) or the percentage-of-com-
pletion/capitalized-cost method described
in § 1.460-4(e) to an exempt contract
method described in § 1.460-4(c) for res-
idential construction contracts to comply
with § 460(e)(1)(A) is a change in method
of accounting to which §§ 446(e) and
481, and the corresponding regulations,
apply. Similarly, a change to start or stop
capitalizing costs under § 263A for resi-
dential construction contracts to comply
with § 460(e)(1) is a change in method of
accounting to which §§ 446(e) and 481,
and the corresponding regulations, apply.
(b) A taxpayer that changes its method
of accounting to comply with § 460(e)(1)
or to start or stop capitalizing costs under
§ 263A pursuant to § 460(e)(1) must use
the accounting method change procedures
in Rev. Proc. 2015-13 (or its successor).
(c) Section 4.01 of this revenue proce-
dure modifies section 19.01 of Rev. Proc.
2025-23 to allow a taxpayer to obtain
automatic consent to stop capitalizing
costs under § 263A for residential con-
struction contracts that meet the require-
ments of § 460(e)(1)(B)(i) and (ii).
(d) Section 4.02 of this revenue pro-
cedure adds section 19.03 of Rev. Proc.
2025-23, to allow a taxpayer to obtain
automatic consent to change its method
of accounting for residential construc-
tion contracts that are entered into in
taxable years beginning after July 4,
2025, (1) from the percentage-of-com-
pletion method of accounting or the per-
centage-of-completion/capitalized-cost
method of accounting to an exempt con-
tract method of accounting, or (2) to start
capitalizing costs under § 263A for con-
tracts that do not meet the requirements of
§ 460(e)(1)(B)(i) and (ii).
SECTION 3. MODIFICATION OF
SECTION 7 OF REV. PROC. 2025-23
.01 Modification of section 7.01(3)(a)
of Rev. Proc. 2025-23. Section 7.01(3)(a)
of Rev. Proc. 2025-23 is modified to read
as follows:
(a) Modified § 481(a) adjustment and
cut-off.
(i) In general. Except as provided in
section 7.01(3)(a)(ii) of this revenue pro-
cedure, the change under section 7.01(1)
(a) of this revenue procedure is made with
a modified § 481(a) adjustment that takes
into account only expenditures paid or
incurred in taxable years beginning after
December 31, 2021, and before January 1,
2025. If the taxpayer previously changed
to the recovery of unamortized amounts
method described in section 7.02(2)(f)
of this revenue procedure for a prior tax-
able year, the § 481(a) adjustment for the
change under this section 7.01 must reflect
application of the taxpayer’s recovery of
unamortized amount method.
(ii) Exception for negative modified
§ 481(a) adjustment. If a change described
in section 7.01(3)(a)(i) of this revenue
procedure results in a modified § 481(a)
adjustment that is negative, the taxpayer
may instead choose to implement the
change on a cut-off basis.
(iii) Section 481(a) adjustment period.
(A) Concurrent change to the recov-
ery of unamortized amount method. If a
taxpayer makes both a change under this
section 7.01 and a change to the recovery
of unamortized amount method described
in section 7.02(2)(f) of this revenue pro-
cedure for its first taxable year beginning
after December 31, 2024, the § 481(a)
adjustment period for any net positive
§ 481(a) adjustment for the change under
this section 7.01 is the same amortization
period elected by the taxpayer under the
recovery of unamortized amount method;
that is, the net positive § 481(a) adjust-
ment is either taken into account in full
in the first taxable year beginning after
December 31, 2024, or ratably over the
2-taxable year period beginning with the
first taxable year beginning after Decem-
ber 31, 2024.
(B) Previous change to the recov-
ery of unamortized amount method. If
the taxpayer previously changed to the
recovery of unamortized amounts method
described in section 7.02(2)(f) of this rev-
enue procedure for a prior taxable year,
any net positive § 481(a) adjustment for
the change under this section 7.01 is taken
into account over the amortization period
that remains under the taxpayer’s recov-
ery of unamortized amount method.
.02 Modification of section 7.01(5) of
Rev. Proc. 2025-23. Section 7.01(5) of
Rev. Proc. 2025-23 is modified to read as
follows:
(5) Certain eligibility rules inapplica-
ble.
(a) In general. The eligibility rules in
section 5.01(1)(d) and (f) of Rev. Proc.
2015-13, 2015-5 I.R.B. 419, do not apply
to a change described in section 7.01(1)(a)
of this revenue procedure for any taxable
year beginning before January 1, 2028.
(b) Changes made in successive tax-
able years. A taxpayer may make a change
described in section 7.01(1)(a) of this rev-
enue procedure for which it has used an
impermissible method of accounting for
only one taxable year (that is, for which
it has used an impermissible method of
accounting in the taxable year prior to the
year of change).
.03 Modification of section 7.02(7) of
Rev. Proc. 2025-23. Section 7.02(7) of
Rev. Proc. 2025-23 is modified to read as
follows:
(7) Certain eligibility rules inapplica-
ble. The eligibility rules in section 5.01(1)
(d) and (f) of Rev. Proc. 2015-13, 2015-5
I.R.B. 419, do not apply to a change
described in section 7.02(3) of this reve-
nue procedure for any taxable year begin-
ning before January 1, 2028.
.04 Modification of section 7.03(1)(a)
of Rev. Proc. 2025-23. Section 7.03(1)(a)
of Rev. Proc. 2025-23 is modified to read
as follows:
(1) Description of change.
(a) In general. This change applies to a
taxpayer (applicant) that wants to change
its method of accounting for foreign SRE
expenditures or foreign research or exper-
imental expenditures, as applicable, paid
or incurred in taxable years beginning
after December 31, 2021, to:
(i) comply with TCJA § 174 for expen-
ditures paid or incurred in taxable years
beginning before January 1, 2025;
(ii) rely on interim guidance provided
in section 3, 4, 5, 6, or 7 of Notice 2023-
63, 2023-39 I.R.B. 919, as modified by
Notice 2024-12, 2024-5 I.R.B. 616; or
(iii) comply with the changes made to
§ 174 by the OBBBA for expenditures
paid or incurred in taxable years begin-
ning after December 31, 2024.
.05 Modification of section 7.03(5) of
Rev. Proc. 2025-23. Section 7.03(5) of

September 21, 2026 410 Bulletin No. 2026–39
Rev. Proc. 2025-23 is modified to read as
follows:
(5) Certain eligibility rules inapplica-
ble.
(a) In general. The eligibility rules in
section 5.01(1)(d) and (f) of Rev. Proc.
2015-13, 2015-5 I.R.B. 419, do not apply
to a change described in section 7.03(1)
(a) of this revenue procedure made by a
taxpayer for any taxable year beginning
before January 1, 2028.
(b) Changes made in successive tax-
able years. A taxpayer may make a change
described in section 7.03(1)(a) of this rev-
enue procedure for which it has used an
impermissible method of accounting for
only one taxable year (that is, for which
the taxpayer has used an impermissible
method of accounting in the taxable year
prior to the year of change).
SECTION 4. MODIFICATION OF
SECTION 19 OF REV. PROC. 2025-23
.01 Section 19.01 is modified to read
as follows:
.01 Small business taxpayer exceptions
from requirement to account for certain
long-term construction contracts under
§ 460 or to capitalize costs under § 263A
for certain contracts.
(1) Description of change. This change
applies to a taxpayer that wants to change
its method of accounting:
(a) For exempt construction con-
tracts described in § 460(e)(1)(B), from
the percentage-of-completion method of
accounting described in § 1.460-4(b) to
an exempt contract method of accounting
described in § 1.460-4(c);
(b) For contracts entered into in taxable
years beginning on or before July 4, 2025,
to stop capitalizing costs under § 263A for
home construction contracts described in
§ 460(e)(1)(A), as in effect prior to amend-
ment by Public Law 119-21, 139 Stat. 189
(July 4, 2025), commonly known as the
One, Big, Beautiful Bill Act (OBBBA),
that meet the requirements of § 460(e)(1)
(B)(i) and (ii); or
(c) For contracts entered into in taxable
years beginning after July 4, 2025, to stop
capitalizing costs under § 263A for resi-
dential construction contracts described
in § 460(e)(1)(A), as amended by the
OBBBA, that meet the requirements of
§ 460(e)(1)(B)(i) and (ii).
(2) Inapplicability. This change does
not apply in the first taxable year in which
a taxpayer enters into a particular type
of contract for which the taxpayer may
adopt a permissible method of account-
ing. For example, the change described
in section 19.01(1)(a) of this revenue
procedure does not apply in the first tax-
able year in which the taxpayer enters
into a nonresidential long-term con-
struction contract that meets the require-
ments of § 460(e)(1)(B). In such case,
the adoption of a permissible exempt
contract method of accounting described
in § 1.460-4(c) for such contract is not
a change in method of accounting under
§ 446(e) and § 1.446-1(e)(2). See Rev.
Rul. 92-28, 1992-1 C.B. 153.
(3) Manner of making change. This
change is made on a cut-off basis and
applies only to contracts entered into on or
after the first day of the year of change that
are subject to the method change. Accord-
ingly, a § 481(a) adjustment is neither per-
mitted nor required.
(4) Reduced filing requirement. A tax-
payer is required to complete only the fol-
lowing information on Form 3115 (Rev.
December 2022) to make this change:
(a) The identification section of page 1
(above Part I);
(b) The signature section at the bottom
of page 1;
(c) Part I;
(d) Part II, all lines except line 16;
(e) Part IV, line 25; and
(f) Schedule D, Part I.
(5) Certain eligibility rules inapplica-
ble. The eligibility rules in section 5.01(1)
(d) and (f) of Rev. Proc. 2015-13 do not
apply to a change described in section
19.01(1)(c) of this revenue procedure for
the taxpayer’s first or second taxable year
beginning after July 4, 2025.
(6) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change under this section
19.01 is “236.”
(7) Contact information. For further
information regarding changes under this
section, contact Michael Finn at (202)
317-4718 (not a toll-free number).
.02 Section 19.03 of Rev. Proc. 2025-
23 is added to read as follows:
.03 Certain residential construction
contracts excepted from the requirement
under § 460 and subject to capitalization
under § 263A.
(1) Description of change. This change
applies to a taxpayer that wants to change
its method of accounting for residen-
tial construction contracts (as defined in
§ 460(e)(4)(B)) that are entered into in
taxable years beginning after July 4, 2025:
(a) From the percentage-of-comple-
tion method of accounting described in
§ 1.460-4(b) or the percentage-of-comple-
tion/capitalized-cost method of account-
ing described in § 1.460-4(e) to an exempt
contract method of accounting described
in § 1.460-4(c); or
(b) To start capitalizing costs under
§ 263A for contracts that do not meet the
requirements of § 460(e)(1)(B)(i) and (ii).
(2) Inapplicability. This change does
not apply in the first taxable year in which
a taxpayer enters into a particular type of
contract for which the taxpayer may adopt
a permissible method of accounting. For
example, the change described in section
19.03(1)(a) of this revenue procedure does
not apply in the first taxable year in which
a taxpayer enters into a residential con-
struction contract as defined in § 460(e)
(4)(B). In such cases, the adoption of a
permissible exempt contract method of
accounting described in § 1.460-4(c) for
such contracts is not a change in method
of accounting under § 446(e) and § 1.446-
1(e)(2).
(3) Manner of making change. This
change is made on a cut-off basis and
applies only to contracts entered into on or
after the first day of the year of change that
are subject to the method change. Accord-
ingly, a § 481(a) adjustment is neither per-
mitted nor required.
(4) Reduced filing requirement. A tax-
payer is required to complete only the fol-
lowing information on Form 3115 (Rev.
December 2022) to make this change:
(a) The identification section of page 1
(above Part I);
(b) The signature section at the bottom
of page 1;
(c) Part I;
(d) Part II, all lines except line 16;
(e) Part IV, line 25; and
(f) Schedule D, Part I.
(5) Transition rule. If, on or before
September 21, 2026, a taxpayer filed a
Federal income tax return for a taxable
year beginning after July 4, 2025, the tax-

Bulletin No. 2026–39 411 September 21, 2026
payer is deemed to have complied with
the general procedures under § 446(e),
§ 1.446-1(e), and this section 19.03 to
change its method of accounting for con-
tracts described in section 19.03(1) of this
revenue procedure if the taxpayer prop-
erly applied the methods of accounting
provided in section 19.03(1)(a) or (b),
respectively, of this revenue procedure for
such taxable year.
(6) Certain eligibility rules inapplica-
ble. The eligibility rules in section 5.01(1)
(d) and (f) of Rev. Proc. 2015-13 do not
apply to a change described in this section
19.03 for the taxpayer’s first or second
taxable year beginning after July 4, 2025.
(7) Designated automatic accounting
method change number. The designated
automatic accounting method change
number for a change under this section
19.03 is “275.”
(8) Contact information. For further
information regarding changes under this
section, contact Michael Finn at (202)
317-4718 (not a toll-free number).
SECTION 5. EFFECT ON OTHER
DOCUMENTS
This revenue procedure modifies sec-
tions 7 and 19 of Rev. Proc. 2025-23.
SECTION 6. EFFECTIVE DATE
.01 In general. Except as otherwise
provided in this section 6, sections 7,
19.01, and 19.03 of Rev. Proc. 2025-23,
as modified by this revenue procedure, are
effective for a Form 3115 filed after Sep-
tember 4, 2026.
.02 Transition rule for taxpayers that
properly file the duplicate copy of Form
3115 on or before November 15, 2026,
for a change described in sections 7 and
19.01 of Rev. Proc. 2025-23, prior to mod-
ification by this revenue procedure.
(1) In general. If, on or before Novem-
ber 15, 2026, a taxpayer properly files
the duplicate copy of a Form 3115 for a
change described in section 7 or 19.01 of
Rev. Proc. 2025-23, prior to modification
by this revenue procedure, the Form 3115
is not subject to the effective date provided
in section 6.01 of this revenue procedure.
(2) Option to implement change as
described in sections 7 and 19.01 of Rev.
Proc. 2025-23, as modified by this revenue
procedure. If, on or before November 15,
2026, a taxpayer properly files the dupli-
cate copy of a Form 3115 for a change in
method of accounting described in section
7 or 19.01 of Rev. Proc. 2025-23, prior to
modification by this revenue procedure,
that continues to be eligible for the auto-
matic change procedures under section 7
or 19.01 of Rev. Proc. 2025-23, as modi-
fied by this revenue procedure, but has not
filed its timely filed (including extensions)
original Federal income tax return for the
year of change implementing the change,
the taxpayer may choose to implement the
change as described in either (1) section 7
or 19.01 of Rev. Proc. 2025-23, prior to
modification by this revenue procedure, or
(2) section 7 or 19.01 of Rev. Proc. 2025-
23, as modified by this revenue procedure,
but not both.
(a) Procedure to implement change as
described in section 7 or 19.01 of Rev.
Proc. 2025-23, prior to modification by
this revenue procedure. A taxpayer who
meets the requirements of section 6.02(2)
of this revenue procedure and chooses
to implement the change as described in
section 7 or 19.01 of Rev. Proc. 2025-23,
prior to modification by the revenue pro-
cedure, is not required to resubmit a dupli-
cate copy of the Form 3115 to the IRS in
Ogden, UT. However, if requested by the
Director, the taxpayer must provide writ-
ten substantiation that the duplicate copy
of the Form 3115 was filed on or before
November 15, 2026, pursuant to section
6.03(1)(a)(i)(B) of Rev. Proc. 2015-13.
Such written substantiation may include
proof of mailing or faxing, as appropriate,
of the duplicate copy of the Form 3115.
(b) Procedure to implement the change
as described in section 7 or 19.01 of Rev.
Proc. 2025-23, as modified by this reve-
nue procedure. A taxpayer who meets the
requirements of section 6.02(2) of this
revenue procedure and chooses to imple-
ment the change as described in section
7 or 19.01 of this Rev. Proc. 2025-23, as
modified by this revenue procedure, must
resubmit a duplicate copy (with signature)
of the Form 3115 to the IRS in Ogden, UT,
for the year of change under this revenue
procedure, pursuant to the requirements
of section 6.03(1)(a)(i)(B) of Rev. Proc.
2015-13. The resubmitted duplicate copy
must include the following statement
on the top of page 1 of the Form 3115:
“FILED UNDER REV. PROC. 2026-32,
AS PROVIDED IN SECTION 6.02(2)(b)
OF REV. PROC. 2026-32”. For purposes
of the eligibility rules in section 5 of Rev.
Proc. 2015-13, the duplicate copy of the
resubmitted Form 3115 will be considered
filed as of the date the taxpayer originally
filed the duplicate copy of the Form 3115
requesting the change under Rev. Proc.
2025-23, prior to modification by this
revenue procedure. This section 6.02(2)
(b) does not extend the date the taxpayer
must file either the resubmitted duplicate
copy or original Form 3115 under sec-
tion 6.03(1)(a) of Rev. Proc. 2015-13. If
requested by the Director, the taxpayer
must provide written substantiation that
the duplicate copy of the Form 3115
requesting the change under Rev. Proc.
2025-23, prior to modification by this
revenue procedure, was filed on or before
November 15, 2026, pursuant to section
6.03(1)(a)(i)(B) of Rev. Proc. 2015-13.
Such written substantiation may include
proof of mailing or faxing, as appropriate,
of the duplicate copy of the Form 3115.
.03 Limited time period to convert a
Form 3115 filed under the non-automatic
change procedures in Rev. Proc. 2015-13.
(1) If, before September 21, 2026,
a taxpayer properly filed a Form 3115
under the non-automatic change proce-
dures in Rev. Proc. 2015-13 requesting
the Commissioner’s consent for a change
in method of accounting described in
section 7, 19.01, or 19.03 of Rev. Proc.
2025-23, as modified by this revenue
procedure, and the Form 3115 is pend-
ing with the national office on Septem-
ber 21, 2026, the taxpayer may choose to
make the change in method of accounting
under the automatic change procedures
in Rev. Proc. 2015-13 if the taxpayer is
otherwise eligible to use the automatic
method changes described in section 7,
19.01, or 19.03 of Rev. Proc. 2025-23,
as modified by this revenue procedure,
and the automatic change procedures in
Rev. Proc. 2015-13. The taxpayer must
notify the national office contact person
for the Form 3115 (if unknown, fax the
notification to 855-576-2341 or send
the notification to the attention of Man-
agement Assistant (OA), CC:ITA:B07,
Room 4136, at the address specified in
section 9.08(6) of Rev. Proc. 2026-1,
2026-1 I.R.B. 1 (or any successor)), of

September 21, 2026 412 Bulletin No. 2026–39
the taxpayer’s intent to make the change
in method of accounting under the auto-
matic change procedures in Rev. Proc.
2015-13 before the later of (a) October
21, 2026, or (b) the issuance of a letter
ruling granting or denying consent for
the change. The notification should indi-
cate that the taxpayer chooses to convert
the Form 3115 to the automatic change
procedures in Rev. Proc. 2015-13. If
the taxpayer timely notifies the national
office that it chooses to convert the Form
3115 to the automatic change procedures
in Rev. Proc. 2015-13, the national office
will send a letter to the taxpayer acknowl-
edging its request and will return the user
fee submitted with the Form 3115.
(2) A taxpayer converting a Form
3115 to the automatic change procedures
in Rev. Proc. 2015-13 for a change in
method of accounting described in section
7, 19.01, or 19.03 of Rev. Proc. 2025-23,
as modified by this revenue procedure,
must resubmit a Form 3115 that conforms
to the automatic change procedures, with
a copy of the national office letter sent
acknowledging the taxpayer’s request
attached, to the IRS in accordance with
section 9.06 of Rev. Proc. 2026-1 (or its
successor), by the earlier of (a) the 30th
calendar day after the date of the national
office’s letter acknowledging the taxpay-
er’s request or (b) the date the taxpayer is
required to file the duplicate copy of the
Form 3115 under section 6.03(1)(a)(i)(B)
of Rev. Proc. 2015-13. See section 6.03(3)
of Rev. Proc. 2015-13 regarding addi-
tional required copies of Form 3115.
(3) For purposes of the eligibility rules
in section 5 of Rev. Proc. 2015-13, the
duplicate copy of the timely resubmitted
Form 3115 will be considered filed as of
the date the taxpayer originally filed the
converted Form 3115 under the non-au-
tomatic change procedures in Rev. Proc.
2015-13. This section 6.03 does not
extend the date the taxpayer must file the
original (converted) Form 3115 under
section 6.03(1)(a)(i)(A) of Rev. Proc.
2015-13.
(4) A Form 3115 filed under the non-au-
tomatic change procedures in Rev. Proc.
2015-13 before September 21, 2026, for a
change in method of accounting described
in sections 7, 19.01 and 19.03 of Rev. Proc.
2025-23, as modified by this revenue pro-
cedure, will be disregarded for purposes
of the prior five-year change rules in sec-
tion 5.04 and 5.05 of Rev. Proc. 2015-13
if the taxpayer converts the Form 3115 to
the automatic change procedures pursuant
to this section 6.03.
SECTION 7. PAPERWORK
REDUCTION ACT
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (PRA) generally
requires that a Federal agency obtain the
approval of the Office of Management and
Budget (OMB) before collecting infor-
mation from the public, whether such
collection of information is mandatory,
voluntary, or required to obtain or retain
a benefit. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the Office of Management
and Budget.
The collections of information in this
revenue procedure are in section 3. This
information is necessary and will be
used to determine whether the taxpayer
properly changed to an exempt contract
method for exempt construction contracts
under § 460 and properly changed to start
or stop capitalizing costs to exempt con-
struction contracts under § 263A.
These collection requirements are
included in the OMB Control Number
1545-0074 for individual filers, 1545-
0123 for business filers, 1545-0092 for
trust and estate filers, and 1545-0047 for
tax-exempt filers, in accordance with the
PRA (44 U.S.C. 3507).
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Michael Finn from the Office
of Associate Chief Counsel (Income
Tax & Accounting). For further infor-
mation regarding a change under § 174
or § 174A, please contact Bruce Chang
from the Office of Associate Chief Coun-
sel (Income Tax & Accounting) at (202)
317-4870 (not a toll-free number). For
further information regarding this revenue
procedure or a change under § 460, please
contact Mr. Finn at (202) 317-4718 (not a
toll-free number).

Bulletin No. 2026–39 413 September 21, 2026
Part IV
Deletions From Cumulative
List of Organizations,
Contributions to Which are
Deductible Under Section
170 of the Code
Announcement 2026-16
Table of Contents
The Internal Revenue Service has
revoked its determination that the organi-
zations listed below qualify as organiza-
tions described in sections 501(c)(3) and
170(c)(2) of the Internal Revenue Code of
1986.
Generally, the IRS will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the IRS is not pre-
cluded from disallowing a deduction for
any contributions made after an organiza-
tion ceases to qualify under section 170(c)
(2) if the organization has not timely filed
a suit for declaratory judgment under sec-
tion 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declar-
atory judgment has been timely filed,
contributions from individuals and orga-
nizations described in section 170(c)(2)
that are otherwise allowable will con-
tinue to be deductible. Protection under
section 7428(c) would begin on August
27, 2026, and would end on the date the
court first determines the organization is
not described in section 170(c)(2) as more
particularly set for in section 7428(c)(1).
For individual contributors, the maximum
deduction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were
the basis for revocation.
Name Of OrganizationEffective Date of RevocationLocation
Outreach International Global Ministries Inc01/01/2022Orlando, FL
Aamha Wurzbach Apartmetns Inc01/01/2022Santo Antonio, TX
Hamrick Community Foundation01/01/2023Akron, OH
S&S Associates Family Learning Center01/01/2021Levittown, PA
Gaaays in Spaaace10/01/2021Philadelphia, PA
Tuscarora High School PTSA07/01/2022Frederick, MD
Marcella Community Club01/01/2023Rockaway, NJ
Living Rock Family Outreach Inc01/01/2022Granville, OH
Safe Surgery Initiative Inc03/01/2022Buckeye, AZ
For the Fun of Fit Inc01/01/2023Fresno, CA
Women Economic Development Center01/01/2021Saint Paul, MN
James Cory Ministries Inc01/01/2022Pinellas Park, FL

September 21, 2026 414 Bulletin No. 2026–39
Notice of Proposed
Rulemaking
Pro Rata Share of Subpart
F Income, Tested Income,
or Tested Loss
REG-115646-25
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations relating to the deter-
mination of a United States shareholder’s
pro rata share of subpart F income, tested
income, or tested loss of a controlled for-
eign corporation. The proposed regula-
tions would affect shareholders of foreign
corporations, including United States
shareholders of controlled foreign corpo-
rations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by October 26, 2026.
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic submis-
sions via the Federal eRulemaking Por-
tal at www.regulations.gov (indicate IRS
and REG-115646-25) by following the
online instructions for submitting com-
ments. Requests for a public hearing must
be submitted as prescribed in the “Com-
ments and Requests for a Public Hearing”
section. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availability
any comment submitted to the IRS’s pub-
lic docket. Send paper submissions to:
CC:PA:01:PR (REG-115646-25), room
5503, Internal Revenue Service, PO Box
7604, Ben Franklin Station, Washington,
D.C. 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Dylan J. Steiner at (202)
317-6934; concerning submissions of
comments and requests for a public
hearing, contact the Publications and
Regulations Section of the Office of
Associate Chief Counsel (Procedure and
Administration) by email at publichear-
ings@irs.gov (preferred) or by tele-
phone at (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Authority
This document contains proposed
additions and amendments to 26 CFR
part 1 (proposed regulations) under sec-
tions 951 and 951A and certain other
provisions of the Internal Revenue Code
(Code) relating to the determination
of a United States shareholder’s pro
rata share of subpart F income, tested
income, or tested loss of a controlled
foreign corporation. The proposed reg-
ulations also include guidance regard-
ing the transition rule (transition rule)
in section 70354(c)(2) of Public Law
119-21, 139 Stat. 72 (July 4, 2025),
commonly known as the One, Big,
Beautiful Bill Act (OBBBA). The pro-
posed regulations are issued pursuant to
the express delegations of authority in
section 951(a)(4) and section 70354(c)
(2) of the OBBBA. The proposed reg-
ulations are also issued pursuant to the
express delegation of authority in sec-
tion 7805(a).
Background
I. Scope
This Background describes the rules
for determining a United States sharehold-
er’s pro rata share of subpart F income,
tested income, or tested loss, as relevant,
as well as certain other related provisions.
Any term used but not defined in this pre-
amble has the meaning given to it in the
proposed regulations.
II. Pro Rata Share Rules
A. Rules before OBBBA
Former section 951(a)(1)(A), as in
effect before amendments made by the
OBBBA,
1
generally required a United
States shareholder (U.S. shareholder) (as
defined in section 951(b)) of a foreign
corporation to include in gross income
its pro rata share of the corporation’s
subpart F income (as defined in section
952) for a taxable year of the corpora-
tion if the corporation was a controlled
foreign corporation (CFC) (as defined
in section 957(a)) at any time during the
taxable year and the shareholder owned
stock of the corporation on the last day
of the taxable year on which the corpora-
tion was a CFC (last relevant day). For
this purpose, ownership of stock was
determined under section 958(a) and thus
included stock owned directly and stock
owned indirectly through foreign corpo-
rations and other foreign entities (includ-
ing certain domestic entities to the extent
treated as foreign entities under §1.958-
1(d)(1)).
2
Under former section 951(a)
(1)(B), a U.S. shareholder was generally
also required to include in gross income
its amount determined under section 956
for the taxable year of the foreign corpo-
ration.
For purposes of former section 951(a)
(1)(A), a U.S. shareholder’s pro rata share
of a CFC’s subpart F income for a tax-
able year of the CFC was calculated by
first determining the amount described
in former section 951(a)(2)(A). This
amount, which was determined based on
the U.S. shareholder’s proportionate share
of a hypothetical distribution by the CFC,
represented subpart F income (unreduced
by distributions during the taxable year)
allocable to stock of the CFC that the
U.S. shareholder owned on the last rele-
vant day. See §1.951-1(b) and (e). This
amount was limited under former section
951(a)(2)(A) based on the portion of the
taxable year during which the foreign cor-
poration was a CFC. The amount deter-
mined under former section 951(a)(2)(A)
was then reduced for certain distributions
1
All references to former provisions under section 951 or 951A in this preamble are to the versions of those provisions as in effect before the amendments made by the OBBBA.
2
For purposes of this preamble, a reference to stock ownership means stock owned within the meaning of section 958(a).

Bulletin No. 2026–39 415 September 21, 2026
under former section 951(a)(2)(B) to
arrive at the U.S. shareholder’s pro rata
share of the CFC’s subpart F income. For-
mer section 951(a)(2)(B) addressed cases
in which stock of a CFC owned by a U.S.
shareholder on the last relevant day was
acquired by the U.S. shareholder during
the CFC’s taxable year by generally
reducing the U.S. shareholder’s pro rata
share of the CFC’s subpart F income by
the amount of dividends received by any
other person during the taxable year with
respect to the acquired stock (but limited
that reduction based on the portion of the
CFC’s taxable year during which the U.S.
shareholder did not own the stock of the
CFC).
Former section 951A(a) required a
U.S. shareholder of a CFC to include in
gross income its global intangible low-
taxed income (GILTI inclusion amount).
See §1.951A-1(b). A U.S. shareholder’s
GILTI inclusion amount was determined
by taking into account the shareholder’s
pro rata share of tested items (as defined
in §1.951A-1(f)(5)) of CFCs in which the
shareholder owned stock, such as tested
income, tested loss, and qualified busi-
ness asset investment. See §1.951A-1(c).
A U.S. shareholder’s pro rata share of a
CFC’s tested items was determined in the
same manner as a U.S. shareholder’s pro
rata share of a CFC’s subpart F income
under former section 951(a)(2), subject
to certain modifications. See section
951A(e)(1) and §1.951A-1(d).
B. OBBBA revisions
1. Overview
The OBBBA amended sections 951(a)
and 951A for taxable years of foreign
corporations beginning after December
31, 2025. The OBBBA also provided the
transition rule for certain taxable years
before the amendments to sections 951(a)
and 951A apply.
2. Revised Section 951(a)
As amended by the OBBBA, section
951(a)(1)(A) requires a U.S. shareholder
of a foreign corporation to include in
gross income the U.S. shareholder’s
pro rata share of the foreign corpora-
tion’s subpart F income if the foreign
corporation is a CFC at any time during
the foreign corporation’s taxable year
(a CFC year) and the U.S. shareholder
owns stock of the foreign corporation
on any day during the CFC year. Thus,
unlike pre-OBBBA law, a section 951(a)
(1)(A) inclusion is not limited to U.S.
shareholders that own stock in the CFC
on the last relevant day. However, the
OBBBA retains the last relevant day rule
in section 951(a)(1)(B), under which a
U.S. shareholder is generally required
to include in gross income its amount
determined under section 956.
For purposes of section 951(a)(1)
(A), the OBBBA replaced the hypothet-
ical distribution and reduction rules for
determining a U.S. shareholder’s pro
rata share of subpart F income under for-
mer sections 951(a)(2)(A) and (B) with
an approach that is instead based on the
subpart F income attributable to the U.S.
shareholder’s ownership of stock of the
foreign corporation during the CFC year.
Specifically, section 951(a)(2) provides
that a U.S. shareholder’s pro rata share of
a CFC’s subpart F income is the portion
of such income that is attributable to the
stock of the foreign corporation owned
by the shareholder and any period of the
CFC year during which (i) the share-
holder owned such stock, (ii) the share-
holder was a U.S. shareholder of the cor-
poration, and (iii) the corporation was a
CFC.
The OBBBA also modified the time at
which amounts determined under sections
951(a)(1)(A) and (B) are included in gross
income by a U.S. shareholder. Under sec-
tion 951(a)(3), any amount required to be
included in gross income by a U.S. share-
holder under section 951(a)(1)(A) or (B)
with respect to a CFC year is included in
gross income for the U.S. shareholder’s
taxable year that includes the last day on
which the shareholder owns stock in the
CFC during such CFC year.
Section 951(a)(4) provides that the
Secretary shall prescribe such regulations
or other guidance as may be necessary
or appropriate to carry out the purposes
of section 951(a), including regulations
or other guidance allowing taxpayers to
elect, or requiring taxpayers, to close the
taxable year of a CFC upon a direct or
indirect disposition of stock of the corpo-
ration.
3. Revised Section 951A
As amended by the OBBBA, section
951A(a) requires each person that is a
U.S. shareholder of a CFC for any taxable
year of the U.S. shareholder to include in
gross income the U.S. shareholder’s net
CFC tested income for the taxable year.
Section 951A(b)(1) provides that net CFC
tested income means, with respect to any
U.S. shareholder for any taxable year of
the U.S. shareholder, the excess (if any)
of (i) the aggregate of the U.S. sharehold-
er’s pro rata share of the tested income of
each CFC with respect to which the share-
holder is a U.S. shareholder for the taxable
year of the U.S. shareholder, over (ii) the
aggregate of the U.S. shareholder’s pro
rata share of the tested loss of each CFC
with respect to which the shareholder is
a U.S. shareholder for the taxable year of
the U.S. shareholder.
Section 951A(c) provides that the pro
rata shares of tested income and tested
loss referred to in section 951A(b)(1)
are determined under the rules of section
951(a)(2) in the same manner as section
951(a)(2) applies to subpart F income and
are taken into account in the taxable year
of the U.S. shareholder determined under
section 951(a)(3).
4. Transition Rule
For certain taxable years before the
amendments to sections 951(a) and 951A
made by the OBBBA apply, a U.S. share-
holder determines its pro rata share of
subpart F income and tested items under
the transition rule. The transition rule pro-
vides that certain dividends are not treated
as dividends for purposes of applying for-
mer section 951(a)(2)(B), except to the
extent provided by the Secretary.
A dividend is subject to the transition
rule if the dividend is (i) paid or deemed
paid on or before June 28, 2025, and during
the taxable year of a CFC that includes
such date, provided the U.S. shareholder
described in section 951(a) did not own
(within the meaning of section 958(a)) the
stock of the CFC during the portion of the
taxable year on or before June 28, 2025,
or (ii) paid or deemed paid after June 28,
2025, and before a foreign corporation’s
first taxable year beginning after Decem-
ber 31, 2025. See section 70354(c)(2)(A)

September 21, 2026 416 Bulletin No. 2026–39
of the OBBBA. Any dividend subject to
the transition rule is not treated as a divi-
dend for purposes of applying former sec-
tion 951(a)(2)(B) if the dividend does not
increase the taxable income of a United
States person subject to Federal income
tax for the taxable year (including by rea-
son of a dividends received deduction, an
exclusion from gross income, or an exclu-
sion from subpart F income). See section
70354(c)(2)(B) of the OBBBA.
On December 4, 2025, the Treasury
Department and the IRS released Notice
2025-75, 2025-52 I.R.B. 867 (transition
rule notice), describing rules expected to
be included in forthcoming proposed reg-
ulations regarding the application of the
transition rule. The transition rule notice
describes rules addressing the meaning of
dividends paid or deemed paid by a CFC
and the determination of whether a divi-
dend does not increase the taxable income
of a United States person subject to Fed-
eral income tax.
III. Other Provisions
A. Section 951B
The OBBBA added section 951B,
which generally provides that sections
951 through 965 (other than sections
951A, 951(b), and 957) apply to any for-
eign controlled United States shareholder
(FCUSS) of a foreign controlled foreign
corporation (FCFC) by substituting “for-
eign controlled United States shareholder”
for “United States shareholder” each place
it appears and by substituting “foreign
controlled foreign corporation” for “con-
trolled foreign corporation” each place it
appears. See section 951B(a)(1). Section
951A applies to an FCUSS by treating
each reference to a “United States share-
holder” in such section as including a ref-
erence to an FCUSS, and by treating each
reference to a “controlled foreign corpora-
tion” in such section as including a refer-
ence to an FCFC. See section 951B(a)(2).
Section 951B(b) provides that an
FCUSS is any United States person that
would be a U.S. shareholder with respect
to a foreign corporation if section 951(b)
were applied by substituting “more than
50 percent” for “10 percent or more,”
and section 958(b) were applied with-
out regard to section 958(b)(4). Section
951B(c) provides that an FCFC is a for-
eign corporation, other than a CFC, which
would be a CFC if section 957(a) were
applied by substituting “foreign controlled
United States shareholders” for “United
States shareholders,” and section 958(b)
were applied without regard to section
958(b)(4).
B. Section 960
Section 901(a) generally provides
that a taxpayer choosing to credit foreign
income taxes is allowed a credit for cer-
tain foreign income taxes paid or accrued
by the taxpayer plus, in the case of a cor-
poration, the taxes deemed to have been
paid by the corporation under section 960.
Section 960(a) provides that, if a
domestic corporation that is a U.S.
shareholder of a CFC includes any item
of income under section 951(a)(1), the
domestic corporation is deemed to have
paid so much of the CFC’s foreign income
taxes as are properly attributable to such
item of income. Section 960(d) generally
provides that if any amount is includible
in the gross income of a domestic corpora-
tion under section 951A, the domestic cor-
poration is deemed to pay a percentage of
the foreign income taxes paid or accrued
by its CFCs with respect to their tested
income.
C. Section 245A and §1.245A-5(e) and (f)
Section 245A(a) allows a domestic
corporation that is a U.S. shareholder
a 100-percent deduction for the for-
eign-source portion of a dividend received
from a specified 10-percent owned foreign
corporation (section 245A deduction).
See also sections 964(e)(4) and 1248(j)
(generally permitting the section 245A
deduction in connection with the sale or
exchange of stock of a CFC). A specified
10-percent owned foreign corporation
(SFC) is defined as any foreign corpora-
tion (other than a passive foreign invest-
ment company as defined in section 1297)
with respect to which a domestic corpora-
tion is a U.S. shareholder.
Section 954 generally provides that a
dividend received by a CFC is included
in the CFC’s foreign personal holding
company income (as defined in section
954(c)) and, thus, in the determination
of the CFC’s subpart F income. Under
section 954(c)(6), however, a dividend
received by a CFC from a related CFC
is not included in the CFC’s foreign per-
sonal holding company income if certain
requirements are met (section 954(c)(6)
exception).
Under §1.245A-5(e), a section 245A
shareholder (defined as a domestic cor-
poration that is a U.S. shareholder with
respect to an SFC and that owns directly or
indirectly stock of the SFC) is not allowed
a section 245A deduction for any dividend
received from an SFC to the extent of the
extraordinary reduction amount. Addi-
tionally, §1.245A-5(f) provides that, if an
upper-tier CFC receives a dividend from
a lower-tier CFC in the same taxable year
that an extraordinary reduction occurs
with respect to the lower-tier CFC, then
the section 954(c)(6) exception applies
only to the extent the dividend exceeds
the tiered extraordinary reduction amount.
In general, an extraordinary reduc-
tion amount is, with respect to a dividend
received by a controlling section 245A
shareholder (as defined in §1.245A-5(i)
(2)) from a CFC during a taxable year of
the CFC in which an extraordinary reduc-
tion occurs with respect to the controlling
section 245A shareholder’s ownership of
the CFC, the lesser of (i) the amount of
the dividend, and (ii) the amount equal to
the sum of the controlling section 245A
shareholder’s pre-reduction pro rata share
of the CFC’s subpart F income and tested
income for the taxable year, reduced, but
not below zero, by the prior extraordinary
reduction amount. A pre-reduction pro
rata share generally reflects the amount of
subpart F income and tested income that
the shareholder would have included in
income, absent the extraordinary reduc-
tion. An extraordinary reduction gener-
ally occurs where a controlling section
245A shareholder transfers more than
10 percent of the CFC’s stock during the
CFC’s taxable year or where the share-
holder’s ownership of the CFC otherwise
decreases by more than 10 percent by the
end of the taxable year.
An election may be made to close a
CFC’s taxable year if an extraordinary
reduction occurs with respect to a con-
trolling section 245A shareholder and
there would be an extraordinary reduction
amount or tiered extraordinary reduction

Bulletin No. 2026–39 417 September 21, 2026
amount greater than zero. If the election is
made, no amount is considered an extraor-
dinary reduction amount or tiered extraor-
dinary reduction amount with respect to
the controlling section 245A shareholder.
Instead, the CFC’s taxable year closes for
all purposes of the Code and for all share-
holders of the CFC.
Explanation of Provisions
I. Scope
The proposed regulations would pro-
vide rules under sections 951 and 951A
that determine a U.S. shareholder’s pro
rata share of a CFC’s subpart F income,
tested income, or tested loss. The pro-
posed regulations would also modify
information reporting regulations under
section 6038 and the applicability date of
certain regulations under sections 245A
and 1502.
II. Section 951 Regulations
A. Overview
The proposed regulations under sec-
tion 951 would provide rules to deter-
mine a U.S. shareholder’s pro rata share
of a CFC’s subpart F income that reflect
the changes to section 951(a) made by the
OBBBA. The proposed regulations would
also provide rules that require or permit
the closing of a foreign corporation’s tax-
able year in certain circumstances for all
purposes of the Code.
B. Income inclusion rule
The proposed regulations would
require each U.S. shareholder of a foreign
corporation that owns stock in the foreign
corporation at any time during a taxable
year of the foreign corporation that is a
CFC year to include in gross income the
U.S. shareholder’s pro rata share of the
foreign corporation’s subpart F income
for the CFC year. See proposed §1.951-
1(b)(1). This amount is included in gross
income in the U.S. shareholder’s taxable
year that includes the last day on which
the shareholder owns stock in the foreign
corporation during the CFC year. The
determination of the amount of a U.S.
shareholder’s pro rata share of subpart F
income of a CFC for a CFC year is dis-
cussed in part II.E of this Explanation of
Provisions.
The proposed regulations would also
provide a rule for section 956 inclusions
under section 951(a)(1)(B). See proposed
§1.951-1(b)(2). Because the amendments
made by the OBBBA to section 951 gen-
erally retain the same approach to deter-
mining inclusions under section 951(a)(1)
(B), this rule is consistent with the regu-
lations under former section 951(a)(1)(B).
However, as with inclusions of subpart F
income under section 951(a)(1)(A), the
proposed regulations would provide that
amounts required to be included in gross
income under section 951(a)(1)(B) are
included in the U.S. shareholder’s taxable
year that includes the last day on which
the shareholder owns stock in the foreign
corporation during the CFC year, which
may accelerate the taxable year of the
inclusion relative to former section 951(a)
(1)(B). Further, as discussed in part II.D
of this Explanation of Provisions, the clos-
ing of a foreign corporation’s taxable year
under the proposed regulations may affect
the calculation of amounts under section
956 and a U.S. shareholder’s inclusion
under section 951(a)(1)(B).
C. Changes in ownership of CFC stock
As revised in the OBBBA, a U.S.
shareholder’s pro rata share of a CFC’s
subpart F income (as well as tested income
or tested loss) is the amount attributable to
the stock of the CFC owned by the U.S.
shareholder and the periods of the CFC
year during which the U.S. shareholder
owned such stock while the foreign corpo-
ration was a CFC. The Treasury Depart-
ment and the IRS considered various
recommendations for implementing the
OBBBA’s revisions to the pro rata share
rules. For example, the Treasury Depart-
ment and the IRS considered a suggestion
to address changes in ownership of stock
of a CFC by permitting taxpayers to elect
a per diem approach with exceptions for
extraordinary items or an interim closing
of the books approach, and to provide tax-
payers an election to close the taxable year
of CFCs in certain circumstances com-
parable to the election permitted under
§1.245A-5(e). The Treasury Department
and the IRS also considered a suggestion
to provide for both elective and manda-
tory closings with respect to the taxable
year of a CFC, depending on the amount
of ownership shift in a given transaction,
and to otherwise address changes in own-
ership of stock of a CFC by implementing
a ratable approach to determining a U.S.
shareholder’s pro rata share.
In general, in cases where there is no
change in the ownership of stock of a CFC
during its taxable year, a U.S. sharehold-
er’s pro rata share under the proposed reg-
ulations would be the same as determined
under the existing rules in §1.951-1(e)
(see part II.E of this Explanation of Pro-
visions). However, to address changes
in ownership of stock of a CFC, and
largely consistent with a recommendation
received, the proposed regulations would
generally apply a daily proration approach
to allocating subpart F income, tested
income, or tested loss to U.S. shareholders
and, in certain cases, would require or per-
mit a closing of the taxable year.
The Treasury Department and the
IRS are of the view that other suggested
approaches to address changes in owner-
ship of stock of a CFC, such as an interim
closing of the foreign corporation’s books
or a special allocation of extraordinary
items, may, in certain cases, be complex,
administratively burdensome, or lead to
inappropriate results (for example, when
the earnings and profits (E&P) limitation
under section 952(c) applies). Rules in
other contexts that adopt such approaches
in allocating various items of income,
gain, deduction, loss, and credit attrib-
utable to a taxpayer’s ownership period
differ from the pro rata share rules in that
sections 951 and 951A require the alloca-
tion of subpart F income, tested income,
or tested loss, each of which is a single,
net amount determined at the foreign cor-
poration level with respect to its taxable
year. Cf. §1.706-4 (providing various
rules, including a proration approach,
interim closing method, and extraordi-
nary item exception, where a partner’s
interest in a partnership varies during its
taxable year) and §1.1502-76(b) (permit-
ting the ratable allocation of a year’s items
(other than extraordinary items) between
the periods ending and beginning with a
corporation becoming or ceasing to be a
member of a consolidated group). The
statutory language in section 951(a)(1)

September 21, 2026 418 Bulletin No. 2026–39
(A) requires this result by referring to the
pro rata share of “the corporation’s sub-
part F income for the CFC year,” which,
in using the term defined in section 952,
means the pro rata share of the sum of the
amounts described in section 952(a) and
not the pro rata share of specific items
that comprise subpart F income. See also
section 951A(c)(1) (providing that a U.S.
shareholder’s pro rata share of a CFC’s
tested income or tested loss, each defined
in section 951A(b)(2) as a net amount
for the CFC’s taxable year, is determined
under the rules of section 951(a)(2) in the
same manner as such section applies to
subpart F income).
The proposed regulations would
require a closing of a foreign corpora-
tion’s taxable year only in circumstances
where the change in ownership of stock
of a foreign corporation results in the
foreign corporation becoming or ceasing
to be a CFC (subject to certain modifi-
cations for determining CFC status that
generally are intended to prevent avoid-
ance of the rule). See part II.D.2 of this
Explanation of Provisions. In those
cases, the provision’s requirement to
determine the subpart F income, tested
income, or tested loss attributable to the
ownership period of a U.S. shareholder
is appropriately carried out by confining
the analysis to the period in which the
relevant earnings of the foreign corpo-
ration are subject to U.S. taxation under
sections 951 through 965. The closing
of the foreign corporation’s taxable year
in such cases prevents items of income,
gain, deduction, or loss incurred while
the foreign corporation’s earnings are not
subject to the subpart F provisions of the
Code from affecting the determination of
a U.S. shareholder’s pro rata share under
section 951 or 951A. Additionally, the
required closing of the foreign corpora-
tion’s taxable year may mitigate poten-
tial compliance burdens associated with
obtaining information relating to the for-
eign corporation while it is owned and
controlled by foreign persons.
In other cases involving changes in
the ownership of stock of a foreign cor-
poration during a CFC year, the proposed
regulations would generally apply a daily
proration approach. See part II.E of this
Explanation of Provisions. The Treasury
Department and the IRS are of the view
that this approach, which allocates sub-
part F income (as well as tested income or
tested loss) proportionately based on the
number of days in the CFC year, is consis-
tent with the statute’s requirement to attri-
bute an overall income amount to periods
of ownership. See also §§1.1248-2 and
1.1248-3 (applying a similar daily pro-
ration approach for purposes of deter-
mining E&P attributable to foreign cor-
poration stock owned by a United States
person during certain periods). However,
for certain changes in the ownership of
stock of a CFC involving unrelated per-
sons that generally result in shifts of own-
ership of more than 50 percentage points,
the proposed regulations would provide
an election to close the CFC’s taxable
year. This election permits taxpayers
to achieve the accuracy, certainty, and
reduced compliance burdens afforded by
closing the taxable year in lieu of apply-
ing the daily proration approach to the
entire taxable year. See part II.D.3 of this
Explanation of Provisions. Contrary to
certain recommendations that an elective
closing be available upon less substan-
tial transfers of ownership, the proposed
regulations would limit elective closings
to these circumstances, as a greater than
50 percentage point shift in ownership
generally indicates that a seller or selling
group has relinquished control of the CFC
and therefore has a heightened interest in
closing the CFC’s taxable year so as to
avoid the effect of the new controlling
shareholder or shareholders’ actions on
the determination of their pro rata share.
In these cases, the seller typically does not
remain involved in the CFC’s activities
after relinquishing control, and an inabil-
ity to close the taxable year could require
the buyer and seller to coordinate in
terms of tax compliance and controversy
defense with respect to that year, poten-
tially necessitating complex contractual
provisions. Further, the potential benefit
afforded by a closing of the CFC’s taxable
year in cases of less significant changes in
ownership would likely be outweighed by
the resulting compliance and administra-
tive burden, and the additional flexibility
to close the taxable year of a CFC could
lead to improper manipulation or abuse
if it was available for minor changes in
ownership or transfers involving related
persons.
D. Determination of CFC year
1. In General
A U.S. shareholder’s pro rata share of a
foreign corporation’s subpart F income is
determined by reference to a CFC year of
the foreign corporation. The determina-
tion of a CFC year of a foreign corporation
is made after the application of rules in the
proposed regulations that would require or
permit the closing of the taxable year of a
foreign corporation in certain cases where
there is a change in the ownership of stock
of the foreign corporation.
2. Mandatory Closing of Taxable Year of
Foreign Corporation
The proposed regulations would pro-
vide that a foreign corporation closes its
taxable year if there is a status change
event, which occurs if a foreign corpora-
tion becomes or ceases to be a CFC. See
proposed §1.951-1(d)(1). If there is a sta-
tus change event, the taxable year of the
foreign corporation closes for all purposes
of the Code and, thus, the closing applies
to all shareholders of the foreign corpo-
ration regardless of whether a particular
shareholder’s ownership of stock in the
foreign corporation changes.
The taxable year of the foreign cor-
poration closes as of the end of the day
on which the status change event occurs,
which is the last day that the foreign cor-
poration is or is not a CFC (unless the tax-
able year otherwise closes as of such date
under another provision of the Code, for
example, as a result of a section 338(g)
election). See proposed §1.951-1(d)(1)
(ii). Thus, for example, if a domestic
corporation owns all the stock of a for-
eign corporation (which uses a calendar
taxable year) and sells all the stock of the
foreign corporation to a nonresident alien
individual on June 30, the status change
event would occur on June 30, the date the
foreign corporation ceases to be a CFC,
and the taxable yefar of the foreign corpo-
ration would close as of the end of the day
on June 30. See also proposed §1.951-1(f)
(regarding the ownership period of foreign
corporation stock) discussed in part II.F of
this Explanation of Provisions.
The proposed regulations would pro-
vide additional rules for domestic part-

Bulletin No. 2026–39 419 September 21, 2026
nerships (including certain S corporations
treated as partnerships by operation of sec-
tion 1373(a)) and options to acquire stock
in determining whether there is a status
change event that requires the closing of
a foreign corporation’s taxable year. See
proposed §1.951-1(d)(1)(iii). Specifically,
solely for this purpose, in determining
whether a foreign corporation is a CFC
when stock of a foreign corporation is
owned through a domestic partnership, the
rule in §1.958-1(d)(1) would apply without
regard to the exceptions in §1.958-1(d)(2)
(i) and (ii) (and, thus, a domestic partner-
ship would not be treated as owning stock
of a foreign corporation within the mean-
ing of section 958(a)). A similar rule would
disregard the constructive ownership of
stock of a foreign corporation by reason
of an option to acquire such stock under
section 318(a)(4) and §1.958-2(e). These
rules are generally intended to ensure that,
while the requirement to close the taxable
year of a foreign corporation is based on
the CFC status of the foreign corporation,
the CFC status of the foreign corporation
for this purpose is determined by reference
to the U.S. shareholders of the foreign cor-
poration that are subject to income inclu-
sions under sections 951 and 951A. Thus,
for example, if a domestic corporation sells
all the stock of a foreign corporation that is
a CFC to a domestic partnership, and not
more than 50 percent of the stock of the
foreign corporation is owned after the sale,
in the aggregate, by partners of the domes-
tic partnership that are U.S. shareholders in
the foreign corporation, the sale results in a
status change event of the foreign corpora-
tion because, for this purpose, the foreign
corporation ceases to be a CFC. Similarly,
if a domestic partnership sells all the stock
of a foreign corporation to a domestic cor-
poration, and not more than 50 percent of
the stock of the foreign corporation was
owned before the sale, in the aggregate,
by partners of the domestic partnership
that were U.S. shareholders in the foreign
corporation, the sale also results in a status
change event because, for this purpose, the
foreign corporation becomes a CFC.
3. Election to Close Taxable Year of
Foreign Corporation
Under the proposed regulations, the
controlling section 958(a) U.S. sharehold-
ers of a CFC may elect to close the CFC’s
taxable year if a significant ownership
variance occurs with respect to the CFC
and the taxable year does not otherwise
close on that date. See proposed §1.951-
1(d)(2). As with the mandatory closing
of a foreign corporation’s taxable year
described in part II.D.2 of this Explana-
tion of Provisions, if the election is made,
the taxable year of the CFC closes for all
shareholders of the foreign corporation
and for all purposes of the Code as of the
end of the day on which the significant
ownership variance occurs.
The determination of whether there is a
significant ownership variance is based on
the total change in ownership of CFC stock
by section 958(a) U.S. shareholders result-
ing from all specified transfers that occur
pursuant to the same plan during what
would be the taxable year of a CFC absent
an elective closing (default taxable year).
A significant ownership variance gener-
ally occurs if the specified transfers result
in a decrease by more than 50 percentage
points in section 958(a) shareholder owner-
ship. See proposed §1.951-1(d)(2)(ii)(A).
For this purpose, a specified transfer gen-
erally includes a change in the ownership
of the stock of a CFC resulting from a sale,
exchange, or other disposition of stock of a
foreign corporation or a partnership inter-
est, as well as an issuance of stock or a part-
nership interest.
Because a significant ownership vari-
ance looks to all specified transfers that
occur pursuant to the same plan during the
same default taxable year of a CFC, the
proposed regulations are intended to make
the election available for transactions
undertaken by multiple section 958(a)
U.S. shareholders or that involve multiple
specified transfers over the course of the
CFC’s default taxable year. For example,
the proposed regulations would permit an
elective closing of a CFC’s taxable year if
multiple section 958(a) U.S. shareholders
that separately do not own more than 50
percent of the stock of a CFC together sell
more than 50 percent of the stock of the
CFC pursuant to the same plan on differ-
ent days during the CFC’s default taxable
year.
If there are multiple specified trans-
fers that occur pursuant to the same plan
on different days in a default taxable year
of a CFC, the significant ownership vari-
ance occurs on the day that the last such
specified transfer occurs. See proposed
§1.951-1(d)(2)(ii)(A). This is the case
regardless of the day on which there has
been a more than 50-percent decrease in
the ownership percentage of one or more
section 958(a) U.S. shareholders of the
CFC. For example, assume US1 and US2,
both domestic corporations, own 60 per-
cent and 40 percent of the stock of CFC,
respectively. CFC uses a calendar taxable
year. On June 30, US1 sells all its stock of
CFC (60 percent) to US3, also a domestic
corporation that is not related to US1 or
US2, and pursuant to the same plan, US2
sells all its stock in CFC (40 percent) to
US3 on September 1. In that case, the
significant ownership variance occurs on
September 1, the date of US2’s sale, and,
if an election is made, the taxable year of
CFC closes on that date.
The Treasury Department and the IRS
are of the view that the elective closing
of the taxable year of a CFC should be
restricted with respect to specified trans-
fers among related parties because, in
those cases, the change in economic own-
ership of CFC stock is less meaningful or
possibly absent. Likewise, there is less
reason, from an accuracy and burden-re-
duction standpoint, to provide an elective
closing in the case of a transfer between
related persons, and the availability of the
election may lead to inappropriate manip-
ulation (for example, transactions may be
undertaken solely for purposes of clos-
ing a CFC’s taxable year). Accordingly,
the proposed regulations would gener-
ally provide that, in determining whether
there is a significant ownership variance
with respect to a CFC, the percentage of
ownership of stock of the CFC owned by
section 958(a) U.S. shareholders is not
treated as decreasing to the extent there is
an increase in the percentage of ownership
of stock of the CFC by a related United
States person. See proposed §1.951-1(d)
(2)(ii)(C)(1). For similar reasons, the
proposed regulations would not take into
account certain transfers in connection
with reorganizations described in section
368(a)(1)(F) for this purpose. See pro-
posed §1.951-1(d)(2)(ii)(C)(2).
The section 958(a) U.S. shareholders of
a CFC are the U.S. shareholders that own
stock of the CFC. For purposes of mak-
ing the election to close a CFC’s taxable

September 21, 2026 420 Bulletin No. 2026–39
year, the controlling section 958(a) U.S.
shareholders are all the section 958(a)
U.S. shareholders of a CFC whose own-
ership of stock of the CFC decreases in a
significant ownership variance. In certain
cases, there may be only one controlling
section 958(a) U.S. shareholder that
makes the election (for example, if a U.S.
shareholder owns all the stock of a CFC).
A domestic partnership is not treated as
owning stock of a CFC for this purpose
and therefore cannot be a section 958(a)
U.S. shareholder or a controlling section
958(a) U.S. shareholder. See §1.958-1(d).
To make the election, the controlling
section 958(a) U.S. shareholders and each
U.S. shareholder (if any) of the CFC that
owns stock of the CFC on any date during
the CFC’s taxable year on or before the
date of the significant ownership variance
must enter into a written, binding agree-
ment that all parties agree to the election.
Each party to this binding agreement must
be able to present the agreement to the IRS
for inspection upon request. No binding
agreement is required, however, if there is
only one controlling section 958(a) U.S.
shareholder and no other relevant U.S.
shareholders of the CFC. Additionally,
for this purpose, a U.S. shareholder that
acquires stock of the CFC on the date of
the significant ownership variance is not
considered as owning that stock on that
date and therefore is not required to enter
the binding agreement unless the share-
holder otherwise was a U.S. shareholder
on or before that date. See proposed
§1.951-1(f). The proposed regulations
would prescribe additional procedural
requirements for making the election,
including the requirement to provide cer-
tain information in a statement that must
be submitted to the IRS. See proposed
§1.951-1(d)(2)(iv). The proposed regu-
lations would also provide a consistency
requirement, under which, if a significant
ownership variance occurs with respect to
multiple CFCs pursuant to a plan or series
of related transactions, an election to close
a CFC’s taxable year may be made only if
the election is made with respect to all the
CFCs. See proposed §1.951-1(d)(2)(vi).
4. Allocation of Foreign Income Taxes
The proposed regulations would pro-
vide a rule for allocating certain foreign
income taxes that accrue during the period
that would have been the foreign corpo-
ration’s taxable year if not for the manda-
tory or elective closing. A mandatory or
elective closing of a foreign corporation’s
taxable year can result in the foreign cor-
poration’s foreign taxable year spanning
multiple short U.S. taxable years. How-
ever, the foreign income tax with respect
to that foreign taxable year would accrue
only in the U.S. taxable year in which the
foreign taxable year ends. See §1.905-1(d)
(1)(i). The proposed regulations would
address this issue by requiring an alloca-
tion of a portion of the foreign income
tax that accrues in the CFC’s U.S. taxable
year following the closing date to the U.S.
taxable year ending with the closing. See
proposed §1.951-1(d)(3)(i). The portion
of the foreign income tax allocated to the
U.S. taxable year ending with the closing
is determined based on the portion of the
foreign taxable income attributable to the
period of the foreign taxable year ending
with the closing using the closing of the
books method described in §1.1502-76(b).
For example, if a foreign corporation that
uses a calendar taxable year for both U.S.
and foreign income tax purposes has its
U.S. taxable year close on June 30 as a
result of a mandatory or elective closing
and the foreign corporation earned 50 per-
cent of its foreign taxable income from
January to June 30, 50 percent of the for-
eign income tax that accrues on December
31 (at the end of the foreign corporation’s
foreign taxable year and during its U.S.
taxable year following the June 30 clos-
ing) would be allocated to its U.S. taxable
year ending with the closing (January 1 to
June 30).
5. Taxable Years of Partnerships Owned
by Foreign Corporations
In the case of a foreign corporation that
owns an interest in a partnership, gener-
ally, the partnership’s taxable year would
not close for any purpose of the Code
solely as a result of the foreign corpora-
tion’s taxable year closing. Therefore,
if the partnership’s taxable year begins
before a status change event or significant
ownership variance (for which an election
is made) and ends after the early closing of
the foreign corporation’s taxable year, the
foreign corporation would include its dis-
tributive share of the partnership’s items
arising in that partnership taxable year
entirely in the foreign corporation’s short
taxable year following the status change
event or significant ownership variance.
By contrast, a concurrent closing of the
partnership’s taxable year would require
the partnership’s items to be allocated
between the foreign corporation’s short
taxable year ending on the day of the sta-
tus change event or significant ownership
variance and the following short taxable
year. Because this requirement to allocate
partnership items between periods that
are pre- and post-sale of stock of the for-
eign corporation would require a seller to
obtain information from a buyer to deter-
mine the foreign corporation’s distributive
share of partnership items includible in
the foreign corporation’s first short tax-
able year, the proposed regulations would
not provide for a closing of the partner-
ship’s taxable year with respect to the for-
eign corporation.
The Treasury Department and the
IRS welcome comments as to whether a
closing of a foreign corporation’s taxable
year as a result of a status change event
or significant ownership variance should
be treated as a deemed disposition of the
foreign corporation’s entire interest in a
partnership for purposes of section 706,
and therefore result in a closing of the
partnership’s taxable year with respect
to the foreign corporation partner. Cf.
§§1.706-1(c)(2)(i) and (iii), 1.1362-3(c)
(1), 1.1377-1(b)(3)(iv), and 1.1502-76(b)
(2)(vi) (in certain cases, treating an early
closing of a corporate partner’s taxable
year as a deemed disposition of the part-
ner’s entire interest in the partnership and
therefore resulting in treating the partner-
ship taxable year as closing with respect
to that partner).
E. Determination of pro rata share of
subpart F income
1. In General
The proposed regulations would pro-
vide rules for determining a U.S. share-
holder’s pro rata share of a CFC’s subpart
F income for a CFC year. This determi-
nation is made after the determination of
the subpart F income of the CFC for the
CFC year in accordance with section 952

Bulletin No. 2026–39 421 September 21, 2026
and other applicable provisions, such as
the E&P limitation, the chain deficit rules,
and the recapture rules.
In general, the proposed regulations
would apply a daily proration approach
for purposes of determining the amount of
a CFC’s subpart F income that is attributed
to the period during which a U.S. share-
holder owns stock of a foreign corporation
while it is a CFC during the CFC year.
See part II.E.2 of this Explanation of Pro-
visions. The proposed regulations would
provide additional rules for applying this
daily proration approach in circumstances
involving multiple classes of stock of a
foreign corporation and changes in the
number of shares of outstanding stock of a
foreign corporation during the CFC year.
See parts II.E.3 and 4 of this Explanation
of Provisions.
2. Single Class of Foreign Corporation
Stock
Under the proposed regulations, if at
all times during the CFC year the CFC
has only a single class of stock outstand-
ing and there is no change in the num-
ber of outstanding shares of stock of the
CFC, a U.S. shareholder’s pro rata share
of subpart F income of a CFC would be
determined based on the percentage of
stock of the CFC the U.S. shareholder
owned (that is, the number of shares the
U.S. shareholder owned over the number
of outstanding shares of the CFC) and the
percentage of the CFC year during which
the shareholder owned the stock of the
foreign corporation while it was a U.S.
shareholder and the foreign corporation
was a CFC. See proposed §1.951-1(e)(2)
(i).
Thus, for example, if two U.S. share-
holders (US1 and US2) each owned 50
percent of the single class of stock of
a CFC for an entire CFC year, each of
US1’s and US2’s pro rata shares of the
CFC’s subpart F income for the CFC year
is equal to the proportionate amount of
subpart F income attributable to the stock
of the CFC the U.S. shareholder owned
(that is, 50 percent of CFC’s subpart F
income). As an additional example, if
US1 instead transfers all of its stock of a
CFC to another U.S. shareholder (US3)
during the CFC year, each of US1 and
US3’s pro rata share of the CFC’s subpart
F income for the CFC year is equal to the
proportionate amount of subpart F income
attributable to the stock multiplied by the
percentage of days during the CFC year
on which the U.S. shareholder owned the
stock of the CFC. See proposed §1.951-
1(e)(4)(iii) (Example 2).
The computation prescribed in the
proposed regulations is made separately
with respect to CFC year blocks, which
are those shares of a class of stock of the
CFC that a U.S. shareholder owned for
the same period within the CFC year (for
example, if the U.S. shareholder acquired
or disposed of a portion of its shares of
the class of stock of the CFC during the
CFC year). See proposed §1.951-1(e)
(2)(i)(B). A U.S. shareholder’s pro rata
share of subpart F income of the CFC for
the CFC year is equal to the total of the
amounts determined for each of its CFC
year blocks. See proposed §1.951-1(e)(4)
(iii) (Example 2).
3. Multiple Classes of Foreign
Corporation Stock
The proposed regulations would pro-
vide additional rules to address cases in
which a foreign corporation has multi-
ple classes of stock outstanding during
a CFC year. In general, the proposed
regulations would adopt the hypotheti-
cal distribution analysis under existing
§1.951-1(e) for purposes of determining
the subpart F income that is allocated
among the classes of stock of a foreign
corporation. Thus, to determine a U.S.
shareholder’s pro rata share of a CFC’s
subpart F income for a CFC year, the
subpart F income is first allocated to the
classes of stock of the CFC in the same
proportion as the amount of allocable
earnings and profits that would be dis-
tributed to each class of stock in a hypo-
thetical distribution of the CFC’s alloca-
ble earnings and profits on the last day
of the CFC year (hypothetical distribu-
tion). See proposed §1.951-1(e)(2)(ii).
After the subpart F income is allocated
to a class of stock, a U.S. shareholder
determines its pro rata share of subpart
F income with respect to each class of
stock using the daily proration approach
described in part II.E.2 of this Explana-
tion of Provisions. See proposed §1.951-
1(e)(4)(iv) (Example 3).
For example, if, for the entirety of a
CFC year, one U.S. shareholder (US1)
owned all the common stock of a CFC and
another U.S. shareholder (US2) owned all
the preferred stock of the CFC, the hypo-
thetical distribution applies to allocate the
subpart F income of the CFC to the pre-
ferred and common stock. Each of US1
and US2’s pro rata share of the CFC’s
subpart F income for the CFC year is then
equal to the proportionate amount of sub-
part F income allocated to each class of
stock of the foreign corporation that is
attributable to the stock of the CFC the
U.S. shareholder owned (thus, US1’s pro
rata share is equal to all of the subpart F
income allocated to the common stock
and US2’s pro rata share is equal to all
of the subpart F income allocated to the
preferred stock). As an additional exam-
ple, if US2 instead transfers all of its stock
of the CFC (that is, the preferred stock)
to another U.S. shareholder (US3) during
the CFC year, each of US2 and US3’s pro
rata share of the CFC’s subpart F income
for the CFC year is equal to the subpart
F income allocated to the preferred stock
of the CFC as determined under the hypo-
thetical distribution, multiplied by the
percentage of days during the CFC year
on which the U.S. shareholder owned the
preferred stock of the CFC. See proposed
§1.951-1(e)(4)(iv) (Example 3).
4. Changes in Number of Outstanding
Shares of Foreign Corporation
The proposed regulations would pro-
vide additional rules to address cases in
which there are changes in the number of
shares of stock of a foreign corporation
outstanding during the year, for example,
as a result of a redemption or issuance of
stock of the foreign corporation during a
CFC year. In general, the proposed regu-
lations would adopt an approach based on
the average number of shares outstanding
of the foreign corporation during the CFC
year. See also §1.1248-3(c)(2) (applying
a similar share averaging approach for
purposes of determining E&P attributable
to stock of a foreign corporation).
If the number of shares outstanding
within a class of stock of a CFC varies
during the CFC year, the proposed regu-
lations would provide that the daily pro-
ration approach described in part II.E.2 of

September 21, 2026 422 Bulletin No. 2026–39
this Explanation of Provisions is applied
with respect to a class of stock by sub-
stituting a weighted average share count
for the number of the CFC’s shares out-
standing during the CFC year when deter-
mining the U.S. shareholder’s percentage
of ownership of the stock of the foreign
corporation. See proposed §1.951-1(e)
(2)(iii)(A). The weighted average share
count is equal to the sum of the number of
shares outstanding on each day of the CFC
year divided by the number of days in the
CFC year. See proposed §1.951-1(e)(4)
(v) (Example 4).
If there is more than one class of stock
of a CFC outstanding during the CFC year
and the number of shares within a class of
stock varies during the CFC year, then the
hypothetical distribution described in part
II.E.3 of this Explanation of Provisions is
based on the allocable earnings and prof-
its that would be distributed to a class of
shares if a weighted average share count
was outstanding on the last day of the
CFC year. See proposed §1.951-1(e)(2)
(iii)(B) and (4)(v) (Example 4).
F. Ownership period of foreign
corporation stock
Section 1.951-1(f) provides that, for
purposes of sections 951 through 964, the
holding period of an asset (including stock
of a CFC) is determined by excluding the
day on which such asset is acquired and
including the day on which such asset is
disposed of. The proposed regulations
would clarify that this rule applies in deter-
mining the period when stock of a foreign
corporation is owned. Thus, for example,
if a U.S. shareholder sells all the stock of a
CFC to another U.S. shareholder, the sell-
ing U.S. shareholder is treated as owning
the stock of the CFC through the end of
the day of the sale, and the acquiring U.S.
shareholder is treated as owning the stock
of the CFC as of the beginning of the day
immediately after the sale.
III. Section 951A Regulations
A. Pro rata share of tested income or
tested loss
The proposed regulations would revise
§1.951A-1 to coordinate the determi-
nation of a U.S. shareholder’s pro rata
share of a CFC’s tested income or tested
loss with the rules provided in proposed
§1.951-1, including the determination of a
foreign corporation’s CFC year under the
rules for mandatory and elective closings
of a foreign corporation’s taxable year.
See proposed §1.951A-1(d). The pro-
posed regulations would generally retain
the rules relating to the allocation of tested
loss to preferred stock but modify those
provisions to apply for purposes of the
hypothetical distribution described in pro-
posed §1.951-1(e)(2)(ii). See proposed
§1.951A-1(d)(2)(ii) and (3). The exam-
ples under §1.951A-1 would also be mod-
ified to illustrate the pro rata share rules
in the proposed regulations. See proposed
§1.951A-1(d)(2)(iii) and (3)(iv).
B. Section 951A inclusion rules
The proposed regulations would revise
§1.951A-1 to incorporate other amend-
ments to section 951A in the OBBBA. In
particular, the proposed regulations would
provide that, under section 951A as revised
by the OBBBA, a U.S. shareholder is
required to include in gross income its net
CFC tested income inclusion amount, and
the proposed regulations would prescribe
the rule for determining this amount. See
proposed §1.951A-1(b) and (c). The pro-
posed regulations would also remove the
rules for determining a U.S. sharehold-
er’s pro rata share of qualified business
asset investment, tested interest expense,
and tested interest income. The Treasury
Department and the IRS anticipate pro-
posing additional changes to the regula-
tions under section 951A to conform with
the amendments made in the OBBBA in a
separate guidance project.
IV. Information Reporting under Section
1.6038-2
Section 6038(a)(1) provides that every
United States person that controls (within
the meaning of section 6038(e)(2)) any
foreign business entity must furnish with
respect to that entity such information
as the Secretary may prescribe related to
the items listed in section 6038(a)(1)(A)
through (E) and any other information that
is similar or related in nature to such listed
information or which the Secretary deter-
mines to be appropriate to carry out the
provisions of the Code. Section 1.6038-
2(f) sets forth information that may be
required to be provided on Form 5471.
The proposed regulations would mod-
ify the information described in §1.6038-
2(f)(8) regarding the outstanding stock of
a foreign corporation to reflect the amend-
ments made by the OBBBA to sections
951 and 951A. See proposed §1.6038-
2(f)(8). Additionally, as revised, proposed
§1.6038-2(f) would provide that returns
on Form 5471, Information Return of U.S.
Persons With Respect To Certain Foreign
Corporations, must contain information
prescribed by Form 5471 (or successor
form) and that such information may
include, but is not limited to, the informa-
tion set forth in §1.6038-2(f). This revi-
sion clarifies that additional information
may be required on Form 5471 that is not
described by regulation, consistent with
section 6038(a)(1).
V. Related Provisions
A. Section 951B
As described in part III.A of the Back-
ground, pursuant to section 951B(a)(1),
section 951 applies to FCUSSs and FCFCs
by replacing references to “United States
shareholder” with “foreign controlled
United States shareholder” and references
to “controlled foreign corporation” with
“foreign controlled foreign corporation.”
Additionally, under section 951B(a)(2),
section 951A applies to an FCUSS by
treating references to a “United States
shareholder” as including a reference to
an FCUSS and by treating each reference
to a “controlled foreign corporation” as
including a reference to an FCFC.
Pursuant to the application of section
951B, the proposed regulations under
sections 951 and 951A would apply to
FCUSSs and FCFCs in the same manner.
Thus, the proposed regulations under sec-
tion 951 would apply by substituting ref-
erences to “United States shareholder” for
“foreign controlled United States share-
holder” and references to “controlled for-
eign corporation” for “foreign controlled
foreign corporation.” The proposed reg-
ulations under section 951A would apply
by treating each reference to a “United
States shareholder” as including a refer-
ence to an FCUSS and by treating each

Bulletin No. 2026–39 423 September 21, 2026
reference to a “controlled foreign corpora-
tion” as including a reference to an FCFC.
Because the proposed regulations
would apply the same rules under sections
951 and 951A to FCUSSs and FCFCs pur-
suant to section 951B, the election to close
the taxable year of a foreign corporation
under proposed §1.951-1(d)(2) would
not be available to FCUSSs with respect
to an FCFC because such shareholders
cannot own the requisite percentage of
stock of an FCFC (more than 50 percent
of the vote or value) for a significant own-
ership variance to occur. The mandatory
closing of a foreign corporation’s taxable
year under proposed §1.951-1(d)(2), how-
ever, is required if a foreign corporation
becomes or ceases to be an FCFC for the
same reasons described in part II.C of
this Explanation of Provisions. The man-
datory closing of a foreign corporation’s
taxable year would include cases in which
a CFC becomes an FCFC or an FCFC
becomes a CFC to ensure the proper oper-
ation of section 951B.
B. Section 960
These proposed regulations would
not make any changes to the regulations
under section 960. While the determina-
tion of a corporate U.S. shareholder’s pro
rata share of a CFC’s subpart F income,
tested income, or tested loss has changed,
the regulations under section 960 should
continue to operate appropriately to deter-
mine the foreign income taxes deemed
paid by a domestic corporation as a result
of its inclusions under sections 951(a)(1)
and 951A.
VI. Effect on Other Regulations
A. Section 1.1502-80(j)
Section 1.1502-80(j) provides that, in
determining the amount described in for-
mer section 951(a)(2)(B) that is attribut-
able to distributions of previously taxed
earnings and profits to which section
959(b) applies, members of a consoli-
dated group (as defined in §1.1502-1(h))
are treated as a single U.S. shareholder
for purposes of determining the part of
the year during which such shareholder
did not own the stock described in for-
mer section 951(a)(2)(A). Following the
revisions to section 951 in the OBBBA,
for taxable years of foreign corporations
that begin after December 31, 2025, for-
mer section 951(a)(2)(B) does not apply
in determining a U.S. shareholder’s pro
rata share of subpart F income or tested
income. As a result, to the extent former
section 951(a)(2)(B) is no longer relevant,
§1.1502-80(j) is no longer necessary to
address the application of former section
951(a)(2)(B) within a consolidated group
with respect to distributions to which
section 959(b) applies. Accordingly, the
proposed regulations would amend the
applicability date in §1.1502-80(j)(3) to
clarify that §1.1502-80(j) applies only to
the extent former section 951(a)(2)(B) is
applicable.
B. Section 1.245A-5(e) and (f)
The Treasury Department and the
IRS are of the view that, because of the
revisions to sections 951 and 951A in
the OBBBA, the extraordinary reduction
rules in §1.245A-5(e) and (f) are no lon-
ger necessary. Accordingly, under the
proposed regulations, the extraordinary
reduction rules would not apply for tax-
able years of foreign corporations begin-
ning after December 31, 2025. See pro-
posed §1.245A-5(k)(3). The proposed
regulations would also modify §1.245A-
5(d) (limitation on the section 954(c)(6)
exception with respect to extraordinary
disposition accounts for lower-tier CFCs)
to reflect the revisions to section 951 in
the OBBBA. See proposed §1.245A-5(d)
(1)(ii).
C. Section 1248 regulations
In general, under section 1248(a), if a
United States person that satisfies certain
ownership requirements recognizes gain
on a sale or exchange of stock in a foreign
corporation, then the gain is included in
the gross income of such person as a div-
idend to the extent of the E&P of the for-
eign corporation attributable to the stock
that accumulated while the United States
person held the stock and the corporation
was a CFC, taking into account E&P of
certain lower-tier foreign corporations
but excluding previously taxed earnings
and profits. For this purpose, regulations
under section 1248 provide rules for
determining E&P attributable to stock in
a foreign corporation in simple and com-
plex cases. See §§1.1248-2 and 1.1248-
3. The rules addressing complex cases
incorporate the principles of §1.951-1(e)
(2) and (3) for purposes of allocating
E&P to multiple classes of stock of a for-
eign corporation. See §1.1248-3(c)(4)
and (d)(6).
The determination of a U.S. sharehold-
er’s pro rata share of a CFC’s subpart F
income, tested income, or tested loss
under the proposed regulations is intended
to be consistent with the manner in which
E&P is attributed to stock of a foreign
corporation under the rules prescribed in
regulations under section 1248. The Trea-
sury Department and the IRS, however,
are studying the regulations under section
1248 and revisions to those regulations
may be proposed in a separate guidance
project. Comments are requested on the
extent to which revisions to the regula-
tions under section 1248 are necessary to
coordinate with the proposed regulations
under sections 951 and 951A.
D. Proposed regulations on previously
taxed earnings and profits
On December 2, 2024, the Treasury
Department and the IRS published pro-
posed regulations under sections 959 and
961 and certain other provisions of the
Code regarding previously taxed earnings
and profits (89 FR 95362) (2024 proposed
PTEP regulations). The 2024 proposed
PTEP regulations contain certain rules
premised on former section 951 and also
proposed revisions to the regulations
under section 951. The Treasury Depart-
ment and the IRS intend to modify the
2024 proposed PTEP regulations to reflect
the amendments to sections 951 and 951A
in the OBBBA and the rules in these pro-
posed regulations in a separate guidance
project.
VII. Transition Rule
A. Application
The proposed regulations would pro-
vide rules for the application of the transi-
tion rule that are consistent with the rules
described in the transition rule notice. See
proposed §1.951-4.

September 21, 2026 424 Bulletin No. 2026–39
For example, the proposed regula-
tions would provide as a general rule
that certain dividends are not treated as
dividends for purposes of applying for-
mer section 951(a)(2)(B) to the extent
the dividend does not increase the tax-
able income of a United States person
subject to Federal income tax. See pro-
posed §1.951-4(b). As described in sec-
tion 3.04 of the transition rule notice, this
general rule would apply by reference to
the specific shares of stock of the CFC
with respect to which a dividend was
paid or deemed paid, and for which a
U.S. shareholder would otherwise reduce
its pro rata share under former section
951(a)(2)(B) absent the application of
the transition rule. Accordingly, if a U.S.
shareholder acquires shares of stock in a
CFC after June 28, 2025, dividends paid
with respect to those shares on or before
June 28, 2025, and during the taxable
year of the CFC that includes such date,
are subject to the transition rule even if
the U.S. shareholder owned other shares
in the CFC on or before June 28, 2025.
The proposed regulations would also
define dividends paid or deemed paid,
United States person subject to Federal
income tax, and taxable income for pur-
poses of the transition rule. See proposed
§1.951-4(c) through (e).
In addition, the proposed regulations
would provide rules for determining
whether a dividend increases taxable
income. See proposed §1.951-4(f). The
proposed regulations would provide that
all applicable provisions of the Code, and
the regulations thereunder, are applied
before applying, and without regard to, the
transition rule. Therefore, for example, to
the extent a dividend paid to a controlling
domestic shareholder before an extraor-
dinary reduction would be ineligible for
the dividends received deduction under
section 245A(a) after applying section
245A and §1.245A-5 without regard to
the transition rule, the dividend would be
treated as increasing the taxable income
of a United States person subject to Fed-
eral income tax. The proposed regulations
would provide an example demonstrat-
ing this result and the consequences that
would follow under section 245A.
Finally, the proposed regulations would
include the rules on partnerships and S
corporations generally described in the
transition rule notice, including a safe har-
bor in the context of certain publicly held
partnerships. See proposed §1.951-4(g).
B. Substantiation requirement
Under section 3.03(4) of the transition
rule notice, a U.S. shareholder that reduces
its pro rata share of subpart F income or
tested income under former section 951(a)
(2)(B) as a result of a dividend subject
to the transition rule must determine and
document that the dividend increased the
taxable income of a United States person
subject to Federal income tax. The U.S.
shareholder is required to provide a state-
ment to the IRS that describes why the
U.S. shareholder is entitled to treat such
amount as a dividend for purposes of
former section 951(a)(2)(B) and how the
U.S. shareholder determined such amount
increased the taxable income of a United
States person subject to Federal income
tax.
A commenter on the transition rule
notice asserted that the requirement that
a U.S. shareholder must determine and
document that the dividend increased the
taxable income of a United States person
subject to Federal income tax is ambig-
uous and potentially onerous. The com-
menter noted that the transition rule notice
does not explain what level of analysis,
substantiation, or third-party information
is required to demonstrate that a dividend
resulted in an increase to taxable income
and indicated that this information would
be difficult to obtain for transactions that
have already closed. The commenter rec-
ommended that the Treasury Department
and the IRS eliminate or significantly pare
back the requirement where the dividend
is required by law to be included in the
gross income of a United States person
and where no exclusion or deduction could
reasonably apply. Alternatively, the com-
menter suggested adopting a per se rule or
safe harbor under which the requirement
does not apply to dividends received by
certain United States persons for whom
inclusion in taxable income is manda-
tory under the Code and, for all other sit-
uations, provide that Federal income tax
principles must be analyzed and indicate
the type of documentation that is sufficient
to demonstrate that the dividend increased
taxable income.
The Treasury Department and the IRS
are of the view that the substantiation
requirement described in the transition
rule notice properly requires taxpayers
to establish that they are correctly cal-
culating their pro rata share of subpart F
income or tested income when applying
the transition rule, while adequately pre-
scribing the degree of detail taxpayers
must provide. The Treasury Department
and the IRS are also of the view that a per
se rule or safe harbor rule is not appropri-
ate. For example, in the case of a dividend
paid or deemed paid to a United States
person for whom inclusion in taxable
income is mandatory under the Code (for
example, an individual who is a United
States citizen), information supporting the
determination that the dividend recipient
is such a person would satisfy the sub-
stantiation requirement. Additionally, a
specific description of the types of docu-
mentation that taxpayers must provide for
substantiation purposes would be overly
restrictive. Accordingly, the proposed
regulations do not adopt the commenter’s
recommendations and would include the
substantiation requirement described in
the transition rule notice. See proposed
§1.951-4(h).
VIII. Applicability Dates
The Treasury Department and the IRS
expect to finalize the proposed regulations
by January 4, 2027. Under section 7805(b)
(2), the proposed regulations under sec-
tions 951, 951A, and 6038 are generally
proposed to apply to taxable years of for-
eign corporations beginning after Decem-
ber 31, 2025, and to taxable years of U.S.
shareholders for which such taxable years
of those foreign corporations are relevant.
See proposed §§1.951-1(i)(1), 1.951A-
7(a), and 1.6038-2(m).
Under section 70354(c) of the OBBBA,
the amendments to the pro rata share rules
of section 951(a) made by section 70354(a)
of the OBBBA are made effective “for tax-
able years of foreign corporations begin-
ning after December 31, 2025.” However,
under section 70323(c) of the OBBBA,
the amendments to section 951A made by
section 70323(a) of the OBBBA, requir-
ing a U.S. shareholder to include in gross
income its net CFC tested income instead
of its GILTI inclusion amount, are made

Bulletin No. 2026–39 425 September 21, 2026
effective “for taxable years beginning after
December 31, 2025,” which the Treasury
Department and the IRS believe is best
interpreted as referring to the taxable years
of a U.S. shareholder. Therefore, in the
case of a foreign corporation whose tax-
able year begins after December 31, 2025,
but ends with or within a taxable year of a
U.S. shareholder that begins on or before
December 31, 2025, former section 951A
applies with respect to the U.S. share-
holder, with the U.S. shareholder’s pro
rata shares of the CFC’s tested items deter-
mined under section 951(a)(2) as amended
by the OBBBA. Proposed §1.951A-7(c)
would therefore provide that, in this fact
pattern, the U.S. shareholder applies the
former version of §1.951A-1 (which pro-
vides for the calculation and inclusion of
the U.S. shareholder’s GILTI inclusion
amount rather than net CFC tested income)
with respect to the CFC, but must take into
account the amendments to section 951(a)
(2) made by the OBBBA in determining
the U.S. shareholder’s pro rata share of any
tested item.
As revised in the proposed regulations,
§§1.245A-5(e) and (f) and 1.1502-80(j)
would not apply with respect to taxable
years of foreign corporations beginning
after December 31, 2025. See proposed
§§1.245A-5(k)(3) and 1.1502-80(j)(3).
Under section 7805(b)(2), the pro-
posed regulations regarding the transition
rule would apply to taxable years of a for-
eign corporation that either include June
28, 2025, or begin after June 28, 2025, but
before the foreign corporation’s first tax-
able year beginning after December 31,
2025. See proposed §1.951-4(i).
Taxpayers may rely on all aspects of
the proposed regulations before the date
the proposed regulations are finalized,
provided a taxpayer and its related parties
(within the meaning of sections 267(b)
and 707(b)(1)) follow the rules in their
entirety and in a consistent manner.
Special Analyses
I. Regulatory Planning and Review —
Economic Analysis
The Office of Management and Budget’s
(OMB) Office of Information and Regula-
tory Analysis has determined that this pro-
posed regulation is not significant and is
not subject to review under section 6(b) of
Executive Order 12866. Therefore, a reg-
ulatory impact assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (PRA) generally
requires that a Federal agency obtain the
approval of the OMB before collecting
information from the public, whether such
collection of information is mandatory,
voluntary, or required to obtain or retain
a benefit. An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control number
assigned by the OMB.
The collections of information in these
proposed regulations contain reporting
and recordkeeping requirements that
enable the IRS to verify that a taxpayer
is reporting the correct amount of taxable
income. The collections of information
will be used by the IRS for tax compliance
purposes. The likely respondents are indi-
viduals, businesses, and other for-profit
institutions.
The collections of information in the
proposed regulations are in proposed
§§1.951-1(d)(2)(i) and (iv), 1.951-4(h),
and 1.6038-2(f)(8).
The collections of information in
proposed §1.951-1(d)(2)(i) and (iv) are
elective for controlling section 958(a)
U.S. shareholders electing to close a
CFC’s taxable year if a significant own-
ership variance occurs. The collection of
information in proposed §1.951-1(d)(2)
(i) is satisfied by the controlling section
958(a) U.S. shareholders providing notice
regarding the election to United States
persons that own stock of a CFC during
the taxable year that ends on the day on
which the CFC’s taxable year is treated as
closing under proposed §1.951-1(d)(2),
other than those persons required to enter
into the binding agreement. The collec-
tion of information in proposed §1.951-
1(d)(2)(iv) is satisfied by all controlling
section 958(a) U.S. shareholders filing the
“Elective Section 951 Year-Closing State-
ment” with a timely filed original Federal
income tax return (including extensions)
for the taxable year that includes the day
the CFC’s taxable year is treated as clos-
ing under proposed §1.951-1(d)(2).
The collection of information in pro-
posed §1.951-4(h)(2) is mandatory for
certain United States persons that are enti-
tled to treat certain dividend amounts as
a dividend for purposes of former section
951(a)(2)(B) as described in proposed
§1.951-4(h)(2). The collection of infor-
mation is satisfied by a United States per-
son attaching a statement to Form 5471
that describes how the United States per-
son determined that the dividend increased
the taxable income of a United States per-
son that is subject to Federal income tax
for the taxable year, applying the rules in
proposed §1.951-4.
The collection of information in pro-
posed §1.6038-2(f)(8) is mandatory for
U.S. shareholders. The collection of
information is satisfied by completing
Schedules A and B relating to the out-
standing stock of a CFC and changes in
direct and indirect ownership of the CFC
as described in or as prescribed by Form
5471 and its instructions.
These reporting requirements will be
included within OMB Control Numbers
1545-0123 for business filers, 1545-0074
for individual filers, 1545-0092 for trust
and estate filers and 1545-0047 for tax
exempt filers in accordance with the PRA
procedures under 5 CFR 1320.10.
The recordkeeping requirements
include that taxpayers keep books of
account and records that are adequate to
permit verification that the reduction in
the taxpayer’s pro rata share under for-
mer section 951(a)(2)(B) was appropri-
ate and that the taxpayer is reporting the
correct amount of taxable income. The
recordkeeping requirements also include
that certain taxpayers enter into a bind-
ing agreement with other shareholders as
described in part II.D.3 of the Explanation
of Provisions.
All recordkeeping requirements will be
included within OMB Control Numbers
1545-0123 for business filers, 1545-0074
for individual filers, 1545-0092 for trust
and estate filers, and 1545-0047 for tax
exempt filers in accordance with the PRA
procedures under 5 CFR 1320.10.
III. Regulatory Flexibility Act
When an agency issues a rulemaking
proposal, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) (RFA) requires the

September 21, 2026 426 Bulletin No. 2026–39
agency to prepare and make available
for public comment an initial regulatory
flexibility analysis that will describe the
impact of the proposed rule on small enti-
ties. See 5 U.S.C. 603(a). Section 605
of the RFA provides an exception to this
requirement if the agency certifies that the
proposed rulemaking will not have a sub-
stantial economic impact on a substantial
number of small entities. A small entity
is defined as a small business, small non-
profit organization, or small governmental
jurisdiction. See U.S.C. 601(3) through
(6).
It is hereby certified that the proposed
regulations will not have a significant eco-
nomic impact on a substantial number of
small entities. The Treasury Department
and the IRS have determined that the reg-
ulations may affect a substantial number
of small entities but do not expect that the
proposed regulations will have a signifi-
cant economic impact on affected small
entities within the meaning of sections
601(3) through (6) of the RFA. The pro-
posed regulations provide guidance on
issues regarding sections 951 and 951A
and related provisions but do not change
the economic impact of the existing regu-
lations or impose any new costs on small
entities. The proposed regulations would
modify some existing reporting require-
ments as discussed in part II of this Spe-
cial Analyses, but the modifications are
not expected to impose significant costs
on any entities. Notwithstanding this cer-
tification, the Treasury Department and
the IRS welcome comments from the pub-
lic about the impact of these regulations
on small entities.
IV. Submission to the Small Business
Administration
Pursuant to section 7805(f) of the
Code, the proposed regulations have been
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on small
businesses.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Man-
dates Reform Act of 1995 requires that
agencies assess anticipated costs and
benefits and take certain other actions
before issuing a final rule that includes
any Federal mandate that may result in
expenditures in any one year by a State,
local, or Tribal government, in the aggre-
gate, or by the private sector, of $100
million in 1995 dollars, updated annu-
ally for inflation. In 2026, that thresh-
old is approximately $214 million. The
proposed regulations do not include
any Federal mandate that may result in
expenditures by State, local, or Tribal
governments, or by the private sector in
excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Execu-
tive order. The proposed regulations do
not have federalism implications, do not
impose substantial direct compliance
costs on State and local governments, and
do not preempt State law within the mean-
ing of the Executive order.
Comments and Requests for a Public
Hearing
Consideration will be given to com-
ments that are submitted timely to the IRS
as prescribed in the preamble under the
“ADDRESSES” section. In addition to
the comments specifically requested in the
Explanation of Provisions, the Treasury
Department and the IRS request com-
ments on all aspects of the proposed regu-
lations. Any comments submitted will be
made available at www.regulations.gov or
upon request.
A public hearing will be scheduled
if requested in writing by any person
who timely submits written comments.
Requests for a public hearing are encour-
aged to be made electronically. If a public
hearing is scheduled, notice of the date
and time for the public hearing will be
published in the Federal Register. Public
hearings will be conducted in person with
a telephonic option for individuals who
wish to attend or testify at the hearing by
telephone. Hearings will be made acces-
sible to people with disabilities.
Statement of Availability of IRS
Documents
Any IRS Revenue Procedures, Reve-
nue Rulings, Notices, or other guidance
cited in this document are published in
the Internal Revenue Bulletin (or Cumu-
lative Bulletin) and are available from the
Superintendent of Documents, U.S. Gov-
ernment Publishing Office, Washington,
DC 20402, or by visiting the IRS website
at www.irs.gov.
Drafting Information
The principal author of these regula-
tions is James R. Kostura, Office of Asso-
ciate Chief Counsel (International). How-
ever, other personnel from the IRS and the
Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by revising the entry
for §1.951-1 and adding entries in numer-
ical order for §1.951-4 and §1.951A-1 to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.951-1 also issued under 26
U.S.C. 951, 951(a)(4), and 7701(a).
Section 1.951-4 also issued under sec-
tion 70354(c)(2), Pub. L. 119-21, 139
Stat. 72.
Section 1.951A-1 also issued under 26
U.S.C. 951(a)(4) and 951A.
* * * * *
Par. 2. Section 1.245A-5 is amended by:
1. Revising the last sentence of para-
graph (a);

Bulletin No. 2026–39 427 September 21, 2026
2. Revising paragraph (d)(1)(ii);
3. Revising the second sentence of
paragraph (j)(3)(ii)(D);
4. Revising paragraph (k)(1); and
5. Adding paragraphs (k)(3) and (4).
The revisions and additions read as fol-
lows:
§1.245A-5 Limitation of section
245A deduction and section 954(c)(6)
exception.
(a) * * * Paragraph (k) of this section
provides the applicability date of this sec-
tion, including a rule that provides that the
extraordinary reduction rules described in
paragraphs (e) and (f) of this section do
not apply to taxable periods of foreign
corporations beginning after December
31, 2025.
* * * * *
(d) * * *
(1) * * *
(ii) The percentage of the upper-tier
CFC’s subpart F income that would be
included in a United States shareholder’s
income under section 951(a) with respect
to the upper-tier CFC’s taxable year, deter-
mined without regard to the application of
section 954(c)(6).
* * * * *
(j) * * *
(3) * * *
(ii) * * *
(D) * * * The percentage of CFC1’s
subpart F income for its taxable year
that would be included in a United States
shareholder’s income is 100%. * * *
* * * * *
(k) Applicability date—(1) In general.
Except as provided in paragraphs (k)(3)
and (4) of this section, this section applies
to taxable periods of a foreign corporation
ending on or after June 14, 2019, and to
taxable periods of section 245A share-
holders in which or with which such tax-
able periods end.
* * * * *
(3) Phaseout of extraordinary reduc-
tion rules. Paragraphs (b)(2)(ii), (e), and
(f) of this section do not apply to taxable
periods of foreign corporations beginning
after December 31, 2025.
(4) Modification of extraordinary dis-
position rules. Paragraphs (d)(1)(ii) and
(j)(3)(ii)(D) of this section apply to taxable
periods of foreign corporations beginning
after December 31, 2025, and to taxable
periods of section 245A shareholders in
which or with which such taxable peri-
ods end. For rules that apply to taxable
periods of foreign corporations begin-
ning on or before December 31, 2025, see
§1.245A-5 as contained in 26 CFR part 1
edition revised as of April 1, 2026.
Par. 3. Section 1.901-2 is amended by
revising paragraph (f)(6) to read as fol-
lows:
§1.901-2 Income, war profits, or excess
profits tax paid or accrued.
* * * * *
(f) * * *
(6) Allocation of foreign income taxes
in connection with certain elections and
status change events. For rules relating
to the allocation of foreign income taxes
in connection with elections made pursu-
ant to section 336(e), see § 1.336-2(g)(3)
(ii). For rules relating to the allocation of
foreign income taxes in connection with
elections made pursuant to section 338,
see § 1.338-9(d). For rules relating to
the allocation of foreign income taxes in
connection with elections made pursuant
to § 1.245A-5(e)(3)(i), see § 1.245A-5(e)
(3)(i)(B) (applicable to taxable periods
of foreign corporations beginning before
December 31, 2025). For rules relating
to the allocation of foreign income taxes
in connection with an election pursuant to
§ 1.951-1(d)(2) or a status change event
under § 1.951-1(d)(1), see § 1.951-1(d)
(3).
* * * * *
Par. 4. Section 1.951-1 is amended by:
1. Revising paragraphs (a), (b), (d)
through (f), and (h); and
2. Adding paragraph (i).
The revisions and addition read as fol-
lows:
§1.951-1 Amounts included in gross
income of United States shareholders.
(a) Scope. This section sets forth the
rules for determining amounts included
in the gross income of a United States
shareholder under section 951(a). Para-
graph (b) of this section provides the
general rule for amounts required to be
included in gross income under section
951(a)(1)(A) and (B). Paragraph (c) of
this section is reserved. Paragraph (d) of
this section provides rules that require or
permit the closing of the taxable year of
a foreign corporation, which, if applica-
ble, are necessary to determine the CFC
year with respect to which a United States
shareholder determines its pro rata share
of subpart F income. Paragraph (e) of this
section prescribes the rules for determin-
ing a United States shareholder’s pro rata
share of subpart F income for a CFC year.
Paragraph (f) of this section provides a
rule for determining the holding period of
an asset (including stock of a controlled
foreign corporation). Paragraph (g) of this
section defines United States shareholder.
Paragraph (h) of this section provides
additional definitions. Paragraph (i) of
this section provides applicability dates.
For rules applying this section to foreign
controlled United States shareholders and
foreign controlled foreign corporations,
see section 951B (generally replacing ref-
erences in this section to the term “United
States shareholder” with the term “foreign
controlled United States shareholder” and
the term “controlled foreign corporation”
with the term “foreign controlled foreign
corporation”).
(b) In general—(1) Section 951(a)(1)
(A) inclusions. Each United States share-
holder of a foreign corporation that owns
stock in the foreign corporation on any
day during a CFC year of the foreign cor-
poration must, for the United States share-
holder’s taxable year that includes the last
day on which the shareholder owns stock
in the foreign corporation during the CFC
year, include in gross income the United
States shareholder’s pro rata share (deter-
mined under paragraph (e) of this section)
of the foreign corporation’s subpart F
income for the CFC year.
(2) Section 951(a)(1)(B) inclusions.
Each United States shareholder of a for-
eign corporation that owns stock in the
foreign corporation on the last day of a
CFC year on which the foreign corpora-
tion is a controlled foreign corporation
must, for the United States shareholder’s
taxable year that includes the last day on
which the shareholder owns stock in the
foreign corporation during the CFC year,
include in gross income the amount deter-
mined under section 956 with respect to
the United States shareholder for the CFC
year, but only to the extent not excluded

September 21, 2026 428 Bulletin No. 2026–39
from gross income under section 959(a)
(2).
(3) Personal holding company deter-
mination. For purposes of determining
whether a United States shareholder that
is a domestic corporation is a personal
holding company under section 542 and
§1.542-1, the character of the amount
includible in gross income of such
domestic corporation under this para-
graph (b) is determined as if such amount
were realized directly by such domestic
corporation from the source from which
it is realized by the controlled foreign
corporation.
(4) Cross references. See §1.957-2(a)
for a special limitation on the amount of
subpart F income in the case of a con-
trolled foreign corporation described
in section 957(b) (involving insurance
income). See section 970(a) and §1.970-1
for rules that reduce subpart F income of
controlled foreign corporations that are
export trade corporations.
* * * * *
(d) Certain taxable year determina-
tions—(1) Required closing of foreign
corporation’s taxable year—(i) In gen-
eral. If a status change event occurs with
respect to a foreign corporation, the tax-
able year of the foreign corporation closes
for all purposes of the Internal Revenue
Code (and, therefore, as to all sharehold-
ers of the foreign corporation) under this
paragraph (d)(1) as of the end of the day
on which the status change event occurs,
unless the taxable year otherwise closes as
of such day under another provision of the
Internal Revenue Code.
(ii) Status change event. A status
change event occurs if a foreign corpora-
tion becomes or ceases to be a controlled
foreign corporation. For purposes of
paragraph (d)(1)(i) of this section, in the
case of a foreign corporation becoming a
controlled foreign corporation, the status
change event occurs on the last day that
the foreign corporation is not a controlled
foreign corporation, and in the case of a
foreign corporation ceasing to be a con-
trolled foreign corporation, the status
change event occurs on the last day that
the foreign corporation is a controlled for-
eign corporation.
(iii) Special rules for domestic partner-
ships and options. Solely for purposes of
determining whether a status change event
occurs with respect to a foreign corpora-
tion—
(A) §1.958-1(d)(1) is applied without
regard to the exceptions in §1.958-1(d)(2)
(i) and (ii), and
(B) Section 318(a)(4) and §1.958-2(e)
do not apply.
(2) Elective closing of controlled for-
eign corporation’s taxable year—(i) In
general. If a significant ownership vari-
ance occurs with respect to a controlled
foreign corporation, all the controlling
section 958(a) U.S. shareholders of the
controlled foreign corporation may elect
to close the controlled foreign corpora-
tion’s taxable year for all purposes of the
Internal Revenue Code (and, therefore,
as to all shareholders of the controlled
foreign corporation) under this para-
graph (d)(2) as of the end of the day on
which the significant ownership variance
occurs, unless the taxable year otherwise
closes as of such day under another pro-
vision of the Internal Revenue Code. If
the election is made, all persons that own
stock of the controlled foreign corpora-
tion (regardless of whether they are con-
trolling section 958(a) U.S. shareholders)
must file their respective Federal income
tax returns and information returns consis-
tently with the election. The closing of the
controlled foreign corporation’s taxable
year is treated as a change in taxable year
for purposes of the notice requirement
in §1.964-1(c)(3)(iii), treating the con-
trolling section 958(a) U.S. shareholders
as the controlling domestic shareholders
of the foreign corporation for this purpose.
The notice described in §1.964-1(c)(3)(iii)
must be provided to all United States per-
sons that own stock of the controlled for-
eign corporation during the taxable year
that ends on the day on which the con-
trolled foreign corporation’s taxable year
closes under this paragraph (d)(2), other
than those persons required to enter into
the binding agreement described in para-
graph (d)(2)(iv)(B) of this section.
(ii) Significant ownership variance—
(A) In general. A significant ownership
variance occurs if, taking into account all
specified transfers that occur pursuant to
the same plan during the same taxable year
of a controlled foreign corporation (such
taxable year determined without regard
to this paragraph (d)(2)), the percentage
of the outstanding stock of the controlled
foreign corporation owned by one or more
section 958(a) U.S. shareholders of the
controlled foreign corporation decreases,
in the aggregate, by more than 50 percent-
age points (by vote or value), as compared
to the percentage of stock of the controlled
foreign corporation owned by those sec-
tion 958(a) U.S. shareholders immediately
before the first such specified transfer. For
purposes of paragraph (d)(2)(i) of this sec-
tion, the significant ownership variance
occurs on the day that the last specified
transfer taken into account in the signifi-
cant ownership variance occurs.
(B) Specified transfer. A specified
transfer is—
(1) A sale, exchange, or any other dis-
position of one or more shares of stock of
a foreign corporation or of a partnership
interest by the same person on the same
date, including a redemption of stock
within the meaning of section 317(b) or
a change in a partner’s interest in a part-
nership as a result of a distribution or
redemption, or
(2) An issuance of one or more shares
of stock of a foreign corporation, an issu-
ance of a partnership interest, or a change
in a partner’s interest in a partnership as
a result of a contribution of property or
services to the partnership, in each case
occurring on the same date.
(C) Special rules for related persons
and certain reorganizations. Solely for
purposes of applying paragraph (d)(2)(ii)
(A) of this section—
(1) The total percentage of the out-
standing stock of the controlled foreign
corporation owned by one or more section
958(a) U.S. shareholders is not treated as
decreasing to the extent that, taking into
account all the specified transfers referred
to in paragraph (d)(2)(ii)(A) of this sec-
tion, a United States person that is a
related person, immediately following the
last such specified transfer, with respect to
any section 958(a) U.S. shareholder whose
percentage of ownership of stock of the
controlled foreign corporation decreased
(determined without regard to this para-
graph (d)(2)(ii)(C)(1)), has an increase in
its percentage of ownership of stock of the
controlled foreign corporation; and
(2) The transferor corporation and
the resulting corporation (as defined
in §1.368-2(m)(1)) in a reorganization

Bulletin No. 2026–39 429 September 21, 2026
described under section 368(a)(1)(F) are
treated as the same corporation.
(iii) Certain United States sharehold-
ers—(A) Section 958(a) U.S. sharehold-
ers. The section 958(a) U.S. shareholders
of a controlled foreign corporation are the
United States shareholders that own stock
of the controlled foreign corporation.
(B) Controlling section 958(a) U.S.
shareholders. The controlling section
958(a) U.S. shareholders of a controlled
foreign corporation are the section 958(a)
U.S. shareholders (or, if applicable, single
section 958(a) U.S. shareholder) whose
percentage of ownership of stock of the
controlled foreign corporation decreases
as part of a significant ownership variance.
(iv) Time and manner of making elec-
tion—(A) Election by controlling section
958(a) U.S. shareholders. An election
pursuant to this paragraph (d)(2) is made
and effective if each controlling section
958(a) U.S. shareholder files the statement
described in paragraph (d)(2)(v) of this
section with its timely filed original Fed-
eral income tax return (including exten-
sions) for the taxable year that includes the
day the controlled foreign corporation’s
taxable year closes under this paragraph
(d)(2). If a controlling section 958(a) U.S.
shareholder is a member of a consolidated
group (within the meaning of §1.1502-
1(h)), the agent for the group (within the
meaning of §1.1502-77(c)(1)) makes the
election by filing the statement described
in paragraph (d)(2)(v) of this section on
behalf of such member.
(B) Binding agreement. Before the fil-
ing of the statement described in paragraph
(d)(2)(v) of this section, all the controlling
section 958(a) U.S. shareholders and all
other section 958(a) U.S. shareholders of
the controlled foreign corporation (if any)
that own stock of the controlled foreign
corporation on any day of the controlled
foreign corporation’s taxable year up to
and including the day that the significant
ownership variance occurs must enter into
a written, binding agreement requiring
the controlling section 958(a) U.S. share-
holders to make the election described in
this paragraph (d)(2). Each party to this
binding agreement must be able to pres-
ent the agreement to the Internal Revenue
Service for inspection upon request. No
binding agreement is required under this
paragraph (d)(2)(iv)(B) if there is a sin-
gle controlling section 958(a) U.S. share-
holder and there is no other section 958(a)
U.S. shareholder of the controlled foreign
corporation that owns stock of the con-
trolled foreign corporation on any day of
the controlled foreign corporation’s tax-
able year up to and including the day that
the significant ownership variance occurs.
In the case of a section 958(a) U.S. share-
holder that owns stock of the controlled
foreign corporation indirectly through one
or more partnerships, the partnership that
directly holds the stock of the controlled
foreign corporation may enter into the
binding agreement on behalf of the United
States shareholder partner provided that,
before the due date of the partner’s orig-
inal Federal income tax return, includ-
ing extensions, the partner delegated the
authority to the partnership to enter into
the binding agreement pursuant to a writ-
ten partnership agreement (within the
meaning of §1.704-1(b)(2)(ii)(h)).
(v) Form and content of statement.
The statement required by paragraph (d)
(2)(iv) of this section must be titled “Elec-
tive Section 951 Year-Closing Statement.”
The statement must—
(A) Identify (by name and tax iden-
tification number, if any) the controlled
foreign corporation, the controlling sec-
tion 958(a) U.S. shareholders, and each
other section 958(a) U.S. shareholder of
the controlled foreign corporation that is
party to the binding agreement referred to
in paragraph (d)(2)(iv)(B) of this section;
(B) Describe the significant ownership
variance to which the election applies and
provide the date on which the controlled
foreign corporation’s taxable year closes;
(C) State that each controlling section
958(a) U.S. shareholder and all other
section 958(a) U.S. shareholders of the
controlled foreign corporation described
in paragraph (d)(2)(iv)(B) of this section
have entered into a written, binding agree-
ment to elect to close the controlled for-
eign corporation’s taxable year in accor-
dance with paragraph (d)(2)(iv)(B) of this
section; and
(D) Be filed in the manner, if any, pre-
scribed by forms, publications, or other
guidance published in the Internal Reve-
nue Bulletin.
(vi) Consistency requirement. If sig-
nificant ownership variances occur with
respect to multiple controlled foreign cor-
porations pursuant to a plan or series of
related transactions, the election described
in this paragraph (d)(2) may be made only
if it is made with respect to each of the
controlled foreign corporations.
(3) Foreign income taxes—(i) Alloca-
tion to taxable years. If a foreign corpo-
ration’s taxable year closes under para-
graph (d)(1) or (d)(2) of this section and
the foreign corporation’s taxable year
under foreign law does not close at the
end of the date on which the foreign cor-
poration’s taxable year closes (the closing
date), a portion of the foreign income tax
with respect to such foreign taxable year
that accrues in the taxable year following
the closing date is allocated to the taxable
year ending with the closing date. The
allocation is made based on the portion of
the taxable income of the foreign corpo-
ration (as determined under foreign law)
for the foreign taxable year that is attribut-
able under the principles of §1.1502-76(b)
(without regard to §1.1502-76(b)(2)(ii))
to the period of the foreign taxable year
ending with the closing date. This para-
graph (d)(3) applies to all foreign income
taxes for which the foreign corporation
is the taxpayer under §1.901-2(f) (other
than withholding taxes as defined in sec-
tion 901(k)(1)(B)). Foreign income taxes
allocated to a taxable year under this para-
graph (d)(3) are treated as accrued by the
foreign corporation as of the close of that
taxable year for all purposes of the Internal
Revenue Code except for section 986(a).
(ii) Allocation and apportionment to
statutory and residual groupings. The
portion of the foreign income tax allo-
cated under paragraph (d)(3)(i) of this
section to the taxable year ending with the
closing date is allocated and apportioned
to statutory and residual groupings under
§1.861-20 by treating the foreign taxable
income attributed under paragraph (d)(3)
(i) of this section to the period of the for-
eign taxable year ending with the closing
date as the foreign income included in the
base on which the tax is imposed. The
portion of the foreign income tax that
remains in the taxable year following
the closing date is allocated and appor-
tioned to statutory and residual groupings
under §1.861-20 by treating the remain-
ing foreign taxable income as the foreign
income included in the base on which the
tax is imposed.

September 21, 2026 430 Bulletin No. 2026–39
(4) Examples. The following examples
illustrate the application of this paragraph
(d).
(i) Example 1: Status change event—(A) Facts.
FC is a foreign corporation with a calendar taxable
year. As of January 1 of Year 1, 100 percent of the
stock of FC is owned by USP, a domestic corpora-
tion. On June 30 of Year 1, USP sells all its stock in
FC to Individual A, a nonresident alien individual.
(B) Analysis. Under paragraph (f)(1) of this sec-
tion, USP owns the stock of FC through June 30 of
Year 1. Individual A owns the stock of FC on July
1 of Year 1. FC is therefore a controlled foreign
corporation through June 30 of Year 1 and is not a
controlled foreign corporation on July 1 of Year 1.
Under paragraph (d)(1)(ii) of this section, a status
change event occurs with respect to FC on June 30
of Year 1, which is the last day that FC is a controlled
foreign corporation. Therefore, under paragraph (d)
(1)(i) of this section, the taxable year of FC closes for
all purposes of the Internal Revenue Code as of the
end of the day on June 30 of Year 1.
(ii) Example 2: Significant ownership variance—
(A) Facts. The facts are the same as in paragraph
(d)(4)(i)(A) of this section (Example 1), except that
Individual A is a United States citizen. USP and
Individual A are not related persons.
(B) Analysis. Paragraph (d)(1) of this section
does not apply to the sale of stock of FC by USP
to Individual A because the sale does not result in
FC ceasing to be a controlled foreign corporation.
Under paragraph (d)(2)(ii)(B) of this section, the
sale of stock of FC by USP to Individual A is a spec-
ified transfer. Under paragraph (d)(2)(ii)(B) of this
section, USP is a section 958(a) U.S. shareholder of
FC prior to the sale. Under paragraph (f)(1) of this
section, USP owns the stock of FC through June 30
of Year 1, and Individual A owns the stock of FC on
July 1 of Year 1. Under paragraph (d)(2)(ii)(A) of
this section, USP’s sale of all the stock of FC to Indi-
vidual A results in a significant ownership variance
that occurs on June 30 of Year 1. A significant own-
ership variance occurs because, taking into account
the sale, the percentage of the outstanding stock of
FC owned by USP decreases, in the aggregate, by
more than 50 percentage points (by vote or value), as
compared to the percentage of stock of FC owned by
USP immediately before the sale (from 100 percent
to 0 percent). Under paragraph (d)(2)(iii)(B) of this
section, USP is the single controlling section 958(a)
U.S. shareholder of FC. Therefore, pursuant to para-
graph (d)(2)(i) of this section, USP may elect to close
the taxable year of FC for all purposes of the Internal
Revenue Code as of the end of the day on June 30
of Year 1.
(iii) Example 3: Transfer between related per-
sons—(A) Facts. The facts are the same as in
paragraph (d)(4)(ii)(A) of this section (Example 2),
except that USP and Individual A are related persons.
(B) Analysis. Paragraph (d)(1) of this section
does not apply to the sale of stock of FC by USP
to Individual A because the sale does not result in
FC ceasing to be a controlled foreign corporation.
Under paragraph (d)(2)(ii)(B) of this section, the
sale of stock of FC by USP to Individual A is a spec-
ified transfer. Under paragraph (d)(2)(iii)(A) of this
section, USP is a section 958(a) U.S. shareholder of
FC prior to the sale. Under paragraph (f)(1) of this
section, USP owns the stock of FC through June 30
of Year 1, and Individual A owns the stock of FC on
July 1 of Year 1. Under paragraph (d)(2)(ii)(C) of
this section, solely for purposes of applying para-
graph (d)(2)(ii)(A) of this section, the total percent-
age of the outstanding stock of FC owned by one or
more section 958(a) U.S. shareholders is not treated
as decreasing as a result of the sale because Individ-
ual A is a United States person that is a related per-
son, immediately following the sale, with respect to
USP, and the sale results in an increase in Individual
A’s percentage of ownership of stock of FC by 100
percent (entirely offsetting the 100 percent decrease
in USP’s percentage of ownership of stock of FC).
Therefore, the sale does not give rise to a significant
ownership variance and USP may not elect to close
the taxable year of FC.
(e) Pro rata share of subpart F income
defined—(1) Overview. This paragraph
(e) determines a United States sharehold-
er’s pro rata share of a controlled foreign
corporation’s subpart F income for a CFC
year. Paragraph (e)(2) of this section con-
tains the rules for determining a United
States shareholder’s pro rata share of sub-
part F income. Paragraph (e)(3) of this
section sets forth an anti-abuse rule, and
paragraph (e)(4) of this section contains
examples.
(2) In general. A United States share-
holder’s pro rata share of a controlled for-
eign corporation’s subpart F income for
a CFC year is the portion of the subpart
F income attributable to the stock of the
foreign corporation that the United States
shareholder owns during the period of
the CFC year in which the United States
shareholder owns the stock, the share-
holder is a United States shareholder of
the foreign corporation, and the foreign
corporation is a controlled foreign corpo-
ration, as determined under the rules of
this paragraph (e)(2).
(i) One class of stock with constant
number of shares outstanding—(A) Daily
proration. Subject to paragraph (e)(2)(i)
(B) of this section, if the controlled foreign
corporation has only one class of stock
outstanding at all times during the CFC
year and there is no change in the num-
ber of outstanding shares of the controlled
foreign corporation during the CFC year, a
United States shareholder’s pro rata share
of the controlled foreign corporation’s
subpart F income is equal to the subpart
F income of the controlled foreign corpo-
ration for the CFC year multiplied by the
product of—
(1) A fraction, the numerator of which
is the number of shares of the controlled
foreign corporation the United States
shareholder owned during the CFC year,
and the denominator of which is the num-
ber of shares of the controlled foreign
corporation outstanding for the CFC year,
and
(2) A fraction, the numerator of which
is the number of days the United States
shareholder owned the shares of the con-
trolled foreign corporation while a United
States shareholder of the foreign corpora-
tion and while the foreign corporation was
a controlled foreign corporation during the
CFC year, and the denominator of which
is the number of days in the CFC year.
(B) Stock with different ownership
periods during CFC year—(1) In general.
If a United States shareholder owns shares
in more than one CFC year block during
a CFC year (for example, because the
United States shareholder acquires or dis-
poses of a portion of its shares during the
CFC year), paragraph (e)(2)(i)(A) of this
section is applied separately to each CFC
year block, and the United States share-
holder’s pro rata share of the controlled
foreign corporation’s subpart F income for
the CFC year is equal to the total amount
determined with respect to all of its CFC
year blocks. See paragraph (e)(4)(iii) of
this section (Example 2).
(2) Definition of CFC year block. The
term CFC year block means a group of
shares within a class of stock of a con-
trolled foreign corporation that a United
States shareholder owns for the same
period during a CFC year.
(ii) More than one class of stock with
constant number of shares outstanding in
each class. If a controlled foreign corpo-
ration has more than one class of stock
outstanding during a CFC year and there
is no change in the number of outstanding
shares in any class of the controlled for-
eign corporation’s stock during the CFC
year, paragraph (e)(2)(i) of this section is
applied separately to each class of stock
after first allocating the controlled for-
eign corporation’s subpart F income for
the CFC year among the classes of stock.
For this purpose, the amount of subpart
F income for the CFC year allocated to a
class of stock of a controlled foreign cor-
poration is the amount that bears the same
ratio to the corporation’s subpart F income
for the CFC year as the amount of the cor-
poration’s allocable earnings and profits

Bulletin No. 2026–39 431 September 21, 2026
that would be distributed with respect to
the class of stock bears to the total amount
of the corporation’s allocable earnings
and profits that would be distributed with
respect to all the stock of the corporation
if all the allocable earnings and profits
of the corporation for the CFC year (not
reduced by actual distributions during the
year) were distributed (hypothetical distri-
bution) on the last day of the CFC year.
(A) Definition of allocable earnings
and profits. The term allocable earnings
and profits means, with respect to a con-
trolled foreign corporation for a CFC year,
the amount that is the greater of—
(1) The earnings and profits of the
corporation for the CFC year determined
under section 964, and
(2) The sum of the subpart F income
(as determined under section 952 after the
application of section 951A(b)(2)(B)(ii)
and §1.951A-6(b)) of the corporation for
the CFC year and the tested income of the
corporation for the CFC year.
(B) Hypothetical distribution analysis.
The amount of the controlled foreign cor-
poration’s allocable earnings and profits
distributed in the hypothetical distribution
with respect to each class of stock is deter-
mined based on the distribution rights of
the stock during the CFC year. Subject to
paragraphs (e)(2)(ii)(C) and (D), and (e)
(3), of this section, the distribution rights
of a class of stock are determined taking
into account all facts and circumstances
related to the economic rights and interest
in the allocable earnings and profits of the
corporation of each class, including the
terms of the class of stock, any agreement
among the shareholders and, if and to the
extent appropriate, the relative fair market
value of shares of stock. For purposes of
this paragraph (e)(2)(ii)(B), facts and cir-
cumstances do not include actual distribu-
tions (including distributions by redemp-
tion) or any amount treated as a dividend
under any other provision of subtitle A of
the Internal Revenue Code (for example,
under section 78, 356(a)(2), 367(b), or
1248) made during the CFC year.
(C) Special rules—(1) Redemptions,
liquidations, and returns of capital. No
amount of allocable earnings and profits is
distributed in the hypothetical distribution
with respect to a particular class of stock
based on the terms of the class of stock of
the controlled foreign corporation or any
agreement or arrangement with respect
thereto that would result in a redemption
(even if such redemption would be treated
as a distribution of property to which
section 301 applies pursuant to section
302(d)), a distribution in liquidation, or a
return of capital.
(2) Certain cumulative preferred stock.
If a controlled foreign corporation has
outstanding a class of redeemable pre-
ferred stock with cumulative dividend
rights and dividend arrearages on such
stock do not compound at least annually at
a rate that equals or exceeds the applicable
Federal rate (as defined in section 1274(d)
(1)) that applies on the date the stock is
issued for the term from such issue date to
the mandatory redemption date based on
a comparable compounding assumption
(the relevant AFR), the amount of the cor-
poration’s allocable earnings and profits
distributed in the hypothetical distribution
with respect to the class of stock may not
exceed the amount of dividends actually
paid during the CFC year with respect to
the class of stock plus the present value
at the end of the CFC year of the unpaid
current dividends with respect to the class
determined using the relevant AFR and
assuming the dividends will be paid at
the mandatory redemption date. For pur-
poses of this paragraph (e)(2)(ii)(C)(2), if
the class of preferred stock does not have
a mandatory redemption date, the manda-
tory redemption date is the date that the
class of preferred stock is expected to be
redeemed based on all facts and circum-
stances.
(3) Dividend arrearages. If there is an
arrearage in dividends for prior taxable
years with respect to a class of preferred
stock of a controlled foreign corporation,
an amount of the corporation’s allocable
earnings and profits is distributed in the
hypothetical distribution to the class of
preferred stock by reason of the arrearage
only to the extent the arrearage exceeds
the accumulated earnings and profits
of the controlled foreign corporation
remaining from prior CFC years begin-
ning after December 31, 1962, as of the
beginning of the CFC year, or the date on
which such stock was issued, whichever
is later (the applicable date). If there is
an arrearage in dividends for prior CFC
years with respect to more than one class
of preferred stock, the previous sentence
is applied to each class in order of prior-
ity, except that the accumulated earnings
and profits remaining after the applicable
date are reduced by the allocable earnings
and profits necessary to satisfy arrear-
ages with respect to classes of stock with
a higher priority. For purposes of this
paragraph (e)(2)(ii)(C)(3), the amount
of any arrearage with respect to stock
described in this paragraph (e)(2)(ii)(C)
(3) is determined in the same manner as
the present value of unpaid current divi-
dends on such stock under paragraph (e)
(2)(ii)(C)(2) of this section.
(D) Restrictions or other limitations on
distributions—(1) In general. A restric-
tion or other limitation on distributions
of an amount of earnings and profits by a
controlled foreign corporation is not taken
into account in determining the amount
of the corporation’s allocable earnings
and profits distributed in the hypothetical
distribution to a class of stock of the con-
trolled foreign corporation.
(2) Definition of restriction or other
limitation. For purposes of paragraph (e)
(2)(ii)(D)(1) of this section, a restriction or
other limitation on distributions includes
any limitation that has the effect of limit-
ing the distribution of an amount of earn-
ings and profits by a controlled foreign
corporation with respect to a class of stock
of the corporation, other than currency or
other restrictions or limitations imposed
under the laws of any foreign country as
provided in section 964(b).
(3) Exception for certain preferred
distributions. For purposes of paragraph
(e)(2)(ii)(D)(1) of this section, the right
to receive periodically a fixed amount
(whether determined by a percentage of
par value, a reference to a floating coupon
rate, a stated return expressed in terms of
a certain amount of U.S. dollars or foreign
currency, or otherwise) with respect to a
class of stock the distribution of which is
a condition precedent to a further distribu-
tion of earnings and profits that year with
respect to any class of stock (not includ-
ing a distribution in partial or complete
liquidation) is not a restriction or other
limitation on the distribution of earnings
and profits by a controlled foreign corpo-
ration.
(4) Illustrative list of restrictions
and limitations. Except as provided in
paragraph (e)(2)(ii)(D)(3) of this sec-

September 21, 2026 432 Bulletin No. 2026–39
tion, restrictions or other limitations on
distributions include, but are not limited
to—
(i) An arrangement that restricts the
ability of a controlled foreign corporation
to pay dividends on a class of stock of the
corporation until a condition or conditions
are satisfied (for example, until another
class of stock is redeemed);
(ii) A loan agreement entered into
by a controlled foreign corporation that
restricts or otherwise affects the ability to
make distributions on its stock until cer-
tain requirements are satisfied; or
(iii) An arrangement that conditions the
ability of a controlled foreign corporation
to pay dividends to its shareholders on the
financial condition of the corporation.
(iii) Changes in number of shares out-
standing. If the number of shares within
any class of stock of a controlled foreign
corporation outstanding on each day of a
CFC year changes (for example, because
of an issuance of new shares or a redemp-
tion of outstanding shares), a United States
shareholder’s pro rata share of subpart F
income is determined under the rules pro-
vided in paragraphs (e)(2)(i) and (ii) of
this section as modified by this paragraph
(e)(2)(iii).
(A) Weighted average share count. For
purposes of applying paragraph (e)(2)(i)
of this section, a United States sharehold-
er’s pro rata share of subpart F income
is determined by substituting a weighted
average share count for the number of the
controlled foreign corporation’s shares
outstanding during the CFC year, which is
equal to the sum of the number of shares
outstanding on each day of the CFC year
divided by the number of days in the CFC
year.
(B) Multiple classes of stock. For pur-
poses of applying paragraph (e)(2)(ii) of
this section, a controlled foreign corpo-
ration’s subpart F income for the CFC
year is allocated among classes of stock
based on the allocable earnings and prof-
its that would be distributed to a class of
stock in the hypothetical distribution if a
weighted average share count of the class
was outstanding on each day of the CFC
year and, thus, on the last day of the CFC
year when the hypothetical distribution
occurs.
(3) Transactions and arrangements
with a principal purpose of changing pro
rata shares. Appropriate adjustments
must be made to the allocation of alloca-
ble earnings and profits that would be dis-
tributed (without regard to this paragraph
(e)(3)) in a hypothetical distribution with
respect to any share of stock to disregard
the effect on the hypothetical distribution
of any transaction or arrangement that
is undertaken as part of a plan a princi-
pal purpose of which is the avoidance of
Federal income taxation by changing the
amount of allocable earnings and profits
that would be distributed in any hypotheti-
cal distribution with respect to such share.
This paragraph (e)(3) also applies for pur-
poses of the pro rata share rules described
in §1.951A-1(d) that reference this para-
graph (e).
(4) Examples. The following examples
illustrate the application of this paragraph
(e).
(i) Facts. Except as otherwise stated,
the following facts are assumed for pur-
poses of the examples:
(A) FC1 is a controlled foreign corpo-
ration.
(B) USP1 and USP2 are domestic cor-
porations that are United States sharehold-
ers of FC1.
(C) Individual A is a nonresident alien
individual, and FC2 is a foreign corpora-
tion that is not a controlled foreign corpo-
ration.
(D) All persons use the calendar year as
their taxable year.
(E) Year 1 has 365 days.
(F) Any ownership of stock of FC1 by
any shareholder is for all of Year 1.
(G) The common shareholders of FC1
are entitled to dividends when declared by
FC1’s board of directors.
(H) There are no accrued but unpaid
dividends with respect to preferred shares,
the preferred stock is not described in
paragraph (e)(2)(ii)(C)(2) of this section,
and common shares have positive liquida-
tion value.
(I) There are no other facts and circum-
stances related to the economic rights and
interest of any class of stock in the alloca-
ble earnings and profits of a foreign corpo-
ration, and no transaction or arrangement
was entered into as part of a plan a prin-
cipal purpose of which is the avoidance of
Federal income taxation.
(J) FC1 has neither tested income nor
tested loss.
(K) None of the transactions described
constitute a status change event or a sig-
nificant ownership variance.
(ii) Example 1: One class of stock with constant
number of shares outstanding—(A) Facts. FC1 has
outstanding 100 shares of one class of stock. USP1
owns 60 shares of FC1. USP2 owns 40 shares of
FC1. For Year 1, FC1 earns $100x of subpart F
income.
(B) Analysis. FC1 has one class of stock and the
number of shares outstanding does not change during
Year 1, which is a CFC year. Therefore, USP1’s and
USP2’s pro rata shares of FC1’s subpart F income
for the CFC year are determined under paragraph (e)
(2)(i) of this section. For Year 1, USP1’s pro rata
share of FC1’s subpart F income is $60x, which is
equal to $100x of subpart F income multiplied by the
product of two fractions. For the first fraction, the
numerator is the number of shares that USP1 owned
(60) and the denominator is the number of shares of
FC1 outstanding (100) (60 percent). For the second
fraction, the numerator is the number of days in the
CFC year that USP1 owned the shares while USP1
was a United States shareholder of FC1 and FC1
was a controlled foreign corporation (365) and the
denominator is the number of days in the CFC year
of FC1 (365) (100 percent). For Year 1, USP2’s pro
rata share of FC1’s subpart F income is $40x, which
is equal to $100x of subpart F income multiplied by
the product of two fractions. For the first fraction,
the numerator is the number of shares that USP2
owned (40) and the denominator is the number of
shares of FC1 outstanding (100) (40 percent). For
the second fraction, the numerator is the number of
days in the CFC year that USP2 owned the shares
while USP2 was a United States shareholder of FC1
and FC1 was a controlled foreign corporation (365)
and the denominator is the number of days in the
CFC year of FC1 (365) (100 percent).
(iii) Example 2: Single class of stock with con-
stant number of shares outstanding during the CFC
year, and a share transfer during the CFC Year—(A)
Facts. The facts are the same as in paragraph (e)
(4)(ii)(A) of this section (Example 1), except that on
June 30 of Year 1 USP2 sells 20 shares of FC1 to
Individual A.
(B) Analysis. The determination of USP1’s pro
rata share of the subpart F income of FC1 is the
same as in paragraph (e)(4)(ii)(B) of this section (the
analysis in Example 1). Under paragraph (e)(2)(i)
(B) of this section, USP2’s pro rata share of FC1’s
subpart F income is determined by reference to
the two separate CFC year blocks that USP2 owns
during the CFC year. USP2 owns 40 shares of FC1
from January 1

through June 30 of the CFC year (the
first CFC year block), and 20 shares of FC1 from
July 1 through December 31

of the CFC year (the
second CFC year block). USP2’s pro rata share of
subpart F income with respect to the first CFC year
block is $19.84x, which is equal to $100x of subpart
F income multiplied by the product of two fractions.
For the first fraction, the numerator is the number of
shares USP2 owned in the first CFC year block (40)
and the denominator is the number of shares of FC1
outstanding (100) (40 percent). For the second frac-
tion, the numerator is the number of days in the CFC
year that USP2 owned the shares in the first CFC year
block while USP2 was a United States shareholder of

Bulletin No. 2026–39 433 September 21, 2026
FC1 and FC1 was a controlled foreign corporation
(181) and the denominator is the number of days in
the CFC year (365) (49.6 percent). USP2’s pro rata
share of subpart F income with respect to the second
CFC year block is $10.08x, which is equal to $100x
of subpart F income multiplied by the product of two
fractions. For the first fraction, the numerator is the
number of shares USP2 owned in the second CFC
year block (20) and the denominator is the number
of shares of FC1 outstanding (100) (20 percent). For
the second fraction, the numerator is the number of
days in the CFC year that USP2 owned the shares in
the second CFC year block while USP2 was a United
States shareholder of FC1 and FC1 was a controlled
foreign corporation (184) and the denominator is
the number of days in the CFC year (365) (50.4 per-
cent). Accordingly, for Year 1, USP2’s pro rata share
of the subpart F income of FC1 is $29.92x ($19.84x
+ $10.08x).
(iv) Example 3: Common and preferred stock—
(A) Facts. FC1 has outstanding 70 shares of com-
mon stock and 30 shares of 4% nonparticipating,
voting preferred stock with a par value of $10x per
share. USP1 owns all the common shares. Individ-
ual A owns all the preferred shares. For Year 1, FC1
has $100x of earnings and profits and $50x of sub-
part F income.
(B) Analysis. FC1 has more than one class of
stock and the number of shares outstanding in each
class does not change during Year 1, which is a CFC
year. Therefore, USP1’s pro rata share of FC1’s sub-
part F income for the CFC year is determined under
paragraph (e)(2)(i) of this section after applying
the hypothetical distribution in paragraph (e)(2)(ii)
of this section to determine the amount of subpart
F income allocated to the common and preferred
stock of FC1. The distribution rights of the preferred
shares are not a restriction or other limitation within
the meaning of paragraph (e)(2)(ii)(D) of this sec-
tion. Under paragraph (e)(2)(ii) of this section, the
amount of FC1’s allocable earnings and profits dis-
tributed in the hypothetical distribution with respect
to Individual A’s preferred shares is $12x (0.04 ×
$10x × 30) and with respect to USP1’s common
shares is $88x ($100x - $12x). Accordingly, under
paragraph (e)(2)(ii) of this section, $6x of FC1’s
subpart F income is allocated to the preferred shares
($50x × ($12x/$100x)), and $44x of FC1’s subpart
F income is allocated to the common shares ($50x
× ($88x/$100x)) for Year 1. As a result, under para-
graph (e)(2)(i) of this section, because USP1 owned
all the common shares, USP1’s pro rata share of
FC1’s subpart F income is $44x for Year 1.
(v) Example 4: Mid-year redemption of pre-
ferred stock—(A) Facts. The facts are the same as in
paragraph (e)(4)(iv)(A) of this section (Example 3),
except on June 30 of Year 1, FC1 redeems 15 shares
of the preferred stock owned by Individual A.
(B) Analysis. The redemption of the 15 shares
of preferred stock of FC1 owned by Individual A is
not taken into account in determining the distribu-
tion rights of the preferred stock under paragraph (e)
(2)(ii)(B) of this section, and the distribution rights
of the preferred shares are not a restriction or other
limitation within the meaning of paragraph (e)(2)(ii)
(D) of this section. Under paragraph (e)(2)(ii) of this
section, the amount of FC1’s allocable earnings and
profits distributed in the hypothetical distribution
is determined based on the allocable earnings and
profits that would be distributed with respect to the
preferred shares if a weighted average share count of
preferred shares was outstanding on each day of the
CFC year and, thus, on the last day of the CFC year.
The weighted average share count of the preferred
shares is 22.44 ((15 × 365 + 15 × 181)/365). The
allocable earnings and profits that would be distrib-
uted to Individual A’s preferred shares based on the
weighted average share count is $8.98x (0.04 × $10x
× 22.44). The allocable earnings and profits that
would be distributed with respect to USP1’s com-
mon shares is $91.02x ($100x - $8.98x). Accord-
ingly, under paragraph (e)(2)(ii) of this section,
$45.51x of FC1’s subpart F income is allocated to
USP1’s common shares ($50x × ($91.02x/$100x)),
and USP1’s pro rata share of FC1’s subpart F income
under paragraph (e)(2)(i) of this section is $45.51 for
Year 1.
(vi) Example 5: Restriction based on cumulative
income—(A) Facts. FC1 has outstanding 10 shares
of common stock and 400 shares of 2% nonpartici-
pating, voting preferred stock with a par value of $1x
per share. USP1 owns all the common shares. FC2
owns all the preferred shares. USP1 and FC2 cause
the governing documents of FC1 to provide that no
dividends may be paid to the common shareholders
until FC1 cumulatively earns $100,000x of income.
For Year 1, FC1 has $50x of earnings and profits and
$50x of subpart F income.
(B) Analysis. The agreement restricting FC1’s
ability to pay dividends to common shareholders
until FC1 cumulatively earns $100,000x of income
is a restriction or other limitation within the meaning
of paragraph (e)(2)(ii)(D) of this section. Therefore,
the restriction is disregarded for purposes of deter-
mining the amount of FC1’s allocable earnings and
profits distributed in the hypothetical distribution to
a class of stock. The distribution rights of the pre-
ferred shares are not a restriction or other limitation
within the meaning of paragraph (e)(2)(ii)(D) of this
section. Under paragraph (e)(2)(ii) of this section,
the amount of FC1’s allocable earnings and prof-
its distributed in the hypothetical distribution with
respect to FC2’s preferred shares is $8x (0.02 × $1x
× 400) and with respect to USP1’s common shares is
$42x ($50x - $8x). Accordingly, under paragraphs
(e)(2)(i) and (ii) of this section, USP1’s pro rata share
of FC1’s subpart F income is $42x for Year 1 ($50x
× ($42x/$50x)).
(vii) Example 6: Redemption rights—(A) Facts.
FC1 has outstanding 40 shares of common stock and
10 shares of 4% nonparticipating, preferred stock
with a par value of $50x per share. Pursuant to the
terms of the preferred stock, FC1 has the right to
redeem the preferred stock at any time, in whole or
in part. FC2 owns all the preferred shares. USP1,
wholly owned by FC2, owns all the common shares.
Pursuant to the governing documents of FC1, no
dividends may be paid to the common shareholders
while the preferred stock is outstanding. For Year 1,
FC1 has $100x of earnings and profits and $100x of
subpart F income.
(B) Analysis. The agreement restricting FC1’s
ability to pay dividends to common sharehold-
ers while the preferred stock is outstanding is a
restriction or other limitation within the meaning of
paragraph (e)(2)(ii)(D) of this section. Therefore,
the restriction is disregarded for purposes of deter-
mining the amount of FC1’s allocable earnings and
profits distributed in the hypothetical distribution to
a class of stock. Under paragraph (e)(2)(ii)(C)(1)
of this section, no amount of allocable earnings and
profits is distributed in the hypothetical distribution
to the preferred shareholders in respect of FC1’s
right to redeem the preferred shares. This is the case
regardless of the restriction on paying dividends
to the common shareholders while the preferred
stock is outstanding, and regardless of the fact that
a redemption of FC2’s preferred shares would be
treated as a distribution to which section 301 applies
under section 302(d) (due to FC2’s constructive
ownership of the common shares). Thus, neither
the restriction on paying dividends to the common
shareholders while the preferred stock is outstand-
ing nor FC1’s redemption rights with respect to the
preferred shares affects the distribution of allocable
earnings and profits in the hypothetical distribution
to FC1’s shareholders. However, the distribution
rights of the preferred shares are not a restriction or
other limitation within the meaning of paragraph (e)
(2)(ii)(D) of this section. As a result, the amount of
FC1’s allocable earnings and profits distributed in
the hypothetical distribution with respect to FC2’s
preferred shares is $20x (0.04 × $50x × 10) and with
respect to USP1’s common shares is $80x ($100x
- $20x). Accordingly, under paragraphs (e)(2)(i)
and (ii) of this section, USP1’s pro rata share of
FC1’s subpart F income is $80x for Year 1 ($100x
× ($80x/$100x)).
(viii) Example 7: Shareholder owns common and
preferred stock—(A) Facts. FC1 has outstanding 40
shares of common stock and 60 shares of 6% non-
participating, nonvoting preferred stock with a par
value of $100x per share. USP1 owns 30 shares of
the common stock and 15 shares of the preferred
stock during Year 1. The remaining 10 shares of
common stock and 45 shares of preferred stock of
FC1 are owned by Individual A. For Year 1, FC1 has
$1,000x of earnings and profits and $500x of subpart
F income.
(B) Analysis. The right of the holder of the
preferred stock to receive 6% of par value is not
a restriction or other limitation within the mean-
ing of paragraph (e)(2)(ii)(D) of this section. The
amount of FC1’s allocable earnings and profits dis-
tributed in the hypothetical distribution with respect
to FC1’s preferred shares is $360x (0.06 × $100x ×
60) and with respect to its common shares is $640x
($1,000x - $360x). As a result, under paragraph
(e)(2)(ii) of this section, $180x of FC1’s subpart F
income is allocated to the preferred shares ($500x
× ($360x/$1,000x)) and $320x of FC1’s subpart F
income is allocated to the common shares ($500x
× ($640x/$1,000x)). Under paragraph (e)(2)(i) of
this section, USP1’s pro rata share of the subpart F
income of FC1 is $285x, of which $45x is attribut-
able to USP1’s preferred shares ($180x × 15/60 ×
365/365) and $240x is attributable to USP1’s com-
mon shares ($320x × 30/40 × 365/365).
(ix) Example 8: Subpart F income and tested
income—(A) Facts. FC1 has outstanding 700 shares
of common stock and 300 shares of 4% nonpartic-
ipating, voting preferred stock with a par value of
$100x per share. USP1 owns all the common shares.
USP2 owns all the preferred shares. For Year 1, FC1

September 21, 2026 434 Bulletin No. 2026–39
has $10,000x of earnings and profits, $2,000x of sub-
part F income, and $9,000x of tested income.
(B) Analysis—(1) Hypothetical distribution.
The allocable earnings and profits of FC1 deter-
mined under paragraph (e)(2)(ii)(A) of this section
are $11,000x, the greater of FC1’s earnings and prof-
its as determined under section 964 ($10,000x) or the
sum of FC1’s subpart F income and tested income
($2,000x + $9,000x). The amount of FC1’s allocable
earnings and profits distributed in the hypothetical
distribution with respect to USP2’s preferred shares
is $1,200x (0.04 × $100x × 300) and with respect
to USP1’s common shares is $9,800x ($11,000x -
$1,200x).
(2) Pro rata share of subpart F income. Under
paragraph (e)(2)(ii) of this section, $1,782x of FC1’s
subpart F income is allocated to the common shares
($2,000x × ($9,800x/$11,000x)) and $218x of FC1’s
subpart F income is allocated to the preferred shares
($2,000x × ($1,200x/$11,000x)). Accordingly,
under paragraph (e)(2)(i) of this section, for Year 1,
USP1’s pro rata share of FC1’s subpart F income is
$1,782x ($1,782x × 700/700 × 365/365), and USP2’s
pro rata share of FC1’s subpart F income is $218x
($218x 300/300 × 365/365).
(3) Pro rata share of tested income.
Under §1.951A-1(d)(2)(i) and paragraph
(e)(2)(ii) of this section, $8,018x of FC1’s
tested income is allocated to the common
shares ($9,000x × ($9,800x/$11,000x))
and $982x of FC1’s tested income is allo-
cated to the preferred shares ($9,000x ×
($1,200x/$11,000x)). Accordingly, under
§1.951A-1(d)(2)(i) and paragraph (e)
(2)(i) of this section, for Year 1, USP1’s
pro rata share of FC1’s tested income is
$8,018x ($8,018x × 700/700 × 365/365),
and USP2’s pro rata share of FC1’s tested
income is $982x ($982x × 300/300 ×
365/365).
(x) Example 9: Subpart F income and tested
loss—(A) Facts. The facts are the same as in para-
graph (e)(4)(ix)(A) of this section (Example 8),
except that for Year 1, FC1 has $8,000x of earnings
and profits, $10,000x of subpart F income (without
regard to the limitation in section 952(c)(1)(A)), and
$2,000x of tested loss. Under section 951A(b)(2)
(B)(ii) and §1.951A-6(b), the earnings and profits
of FC1 are increased for purposes of section 952(c)
(1)(A) by the amount of FC1’s tested loss. Accord-
ingly, after the application of section 951A(b)(2)(B)
(ii) and §1.951A-6(b), the subpart F income of FC1
is $10,000x.
(B) Analysis—(1) Pro rata share of subpart F
income. The allocable earnings and profits deter-
mined under paragraph (e)(2)(ii) of this section
are $10,000x, the greater of the earnings and prof-
its of FC1 determined under section 964 ($8,000x)
or the sum of FC1’s subpart F income and tested
income ($10,000x + $0). The amount of FC1’s
allocable earnings and profits distributed in the
hypothetical distribution with respect to USP2’s pre-
ferred shares is $1,200x (0.04 × $100x × 300) and
with respect to USP1’s common shares is $8,800x
($10,000x - $1,200x). Under paragraph (e)(2)(ii)
of this section, $1,200x of FC1’s subpart F income
is allocated to the preferred shares ($10,000x ×
($1,200x/$10,000x)) and $8,800x of FC1’s subpart F
income is allocated to the common shares ($10,000x
× ($8,800x/$10,000x)). Accordingly, under para-
graph (e)(2)(i) of this section, for Year 1, USP1’s
pro rata share of FC1’s subpart F income is $8,800x
($8,800x × 700/700 × 365/365) and USP2’s pro rata
share of FC1’s subpart F income is $1,200x ($1,200x
× 300/300 × 365/365).
(2) Pro rata share of tested loss. For purposes
of paragraph (e)(2)(ii) of this section, the allocable
earnings and profits determined under §1.951A-
1(d)(3)(i)(B) are $2,000x, the amount of FC1’s
tested loss. Under §1.951A-1(d)(3)(i)(C), the entire
$2,000x of tested loss is allocated in the hypothetical
distribution to USP1’s common shares. Accordingly,
under §1.951A-1(d)(3)(i)(A) and paragraph (e)(2)(i)
of this section, USP1’s pro rata share of the tested
loss is $2,000x.
(f) Determination of holding period—
(1) In general. For purposes of sections
951 through 964, the holding period of
an asset (including stock of a controlled
foreign corporation) is determined by
excluding the day on which the asset
is acquired and including the day on
which the asset is disposed of. Thus,
for example, in determining the period
that stock of a controlled foreign corpo-
ration is owned, the day on which the
stock is directly or indirectly acquired is
excluded and the day on which the stock
is directly or indirectly disposed of is
included.
(2) Example: Period of stock owner-
ship—(i) Facts. On June 30 of Year 1,
USP, a domestic corporation, acquires 70
of the 100 shares of the only class of stock
of FC, a foreign corporation, from Individ-
ual B, a nonresident alien individual who
until such time owns all 100 shares of FC.
USP sells 10 shares and 60 shares of stock
of FC on November 30 and December 31
of Year 1, respectively, to Individual B, a
nonresident alien individual.
(ii) Analysis. Under paragraph (f)(1)
of this section, FC is a controlled foreign
corporation for the period beginning July
1 of Year 1 and extending through Decem-
ber 31 of Year 1. As to the 10 shares of
stock sold on November 30 of Year 1,
USP owns the shares from July 1 of Year
1 through November 30 of Year 1. As to
the remaining 60 shares of stock, USP
owns the shares beginning July 1 of Year
1 through December 31 of Year 1.
* * * * *
(h) Definitions. The following defini-
tions apply for purposes of this section.
Allocable earnings and profits. The
term allocable earnings and profits has
the meaning provided in paragraph (e)(2)
(ii)(A) of this section.
CFC year. The term CFC year means
a taxable year of a foreign corporation in
which the foreign corporation is a con-
trolled foreign corporation at any time
during the taxable year.
CFC year block. The term CFC year
block has the meaning provided in para-
graph (e)(2)(i)(B)(2) of this section.
Controlled foreign corporation. The
term controlled foreign corporation has
the meaning provided in section 957(a)
(or, if applicable, section 957(b)).
Controlling section 958(a) U.S. share-
holders. The term controlling section 958(a)
U.S. shareholders has the meaning provided
in paragraph (d)(2)(iii)(B) of this section.
Hypothetical distribution. The term
hypothetical distribution has the meaning
provided in paragraph (e)(2)(ii) of this
section.
Own. The term own (or ownership or
owned), when used with respect to stock
of a foreign corporation, means to own
the stock directly or indirectly within the
meaning of section 958(a) and §1.958-1(a).
See also §1.958-1(d) (except as provided
in §1.958-1(d)(2), a domestic partnership
is not treated as owning stock of a foreign
corporation within the meaning of section
958(a) for purposes of section 951 and for
purposes of any provision that specifically
applies by reference to section 951 or the
regulations in this part under section 951,
and the domestic partnership is treated as a
foreign partnership under section 958(a)(2)
in determining the persons that own stock
of the foreign corporation within the mean-
ing of section 958(a)).
Related persons. The term related per-
sons means persons that are related within
the meaning of section 267(b), as applied
without regard to section 267(c)(3).
Section 958(a) U.S. shareholders. The
term section 958(a) U.S. shareholders has
the meaning provided in paragraph (d)(2)
(iii)(A) of this section.
Significant ownership variance. The
term significant ownership variance has
the meaning provided in paragraph (d)(2)
(ii) of this section.
Specified transfer. The term specified
transfer has the meaning provided in para-
graph (d)(2)(ii)(B) of this section.

Bulletin No. 2026–39 435 September 21, 2026
Status change event. The term status
change event has the meaning provided in
paragraph (d)(1)(ii) of this section.
Subpart F income. The term subpart F
income has the meaning provided in sec-
tion 952.
Tested income. The term tested income
has the meaning provided in section
951A(b)(2)(A).
Tested loss. The term tested loss has
the meaning provided in section 951A(b)
(2)(B)(i).
United States shareholder. The term
United States shareholder has the mean-
ing provided in paragraph (g) of this sec-
tion.
(i) Applicability date. This section
applies to taxable years of foreign cor-
porations beginning after December 31,
2025, and to taxable years of United States
shareholders for which such taxable years
of those foreign corporations are relevant.
For rules applicable to taxable years of for-
eign corporations beginning on or before
December 31, 2025, and to taxable years
of United States shareholders in which or
with which such taxable years end, see 26
CFR 1.951-1 as contained in 26 CFR part
1 edition revised as of April 1, 2026.
Par. 5. Section 1.951-4 is added to
read as follows:
§1.951-4 Transition rule for dividends.
(a) Scope. This section sets forth the
rules for applying the transition rule for
dividends in section 70354(c)(2) of Public
Law 119-21, 139 Stat. 72 (July 4, 2025)
(OBBBA). Paragraph (b) of this section
provides the general rule for dividends
subject to the transition rule. Paragraph
(c) of this section provides the meaning of
dividend paid or deemed paid. Paragraph
(d) of this section provides the meaning
of United States person subject to Federal
income tax. Paragraph (e) of this section
provides the meaning of taxable income.
Paragraph (f) of this section provides
rules for determining whether a dividend
increases taxable income. Paragraph (g)
of this section provides rules for the appli-
cation of this section to dividends paid or
deemed paid to partnerships. Paragraph
(h) of this section provides certain sub-
stantiation requirements for establish-
ing that a dividend increases the taxable
income of a United States person subject
to Federal income tax. Paragraph (i) of
this section provides the applicability date
for this section.
(b) Transition rule. For purposes of
this section, the term transition rule means
the rule provided in section 70354(c)(2)
of the OBBBA and this paragraph (b).
Under the transition rule, for purposes of
applying section 951(a)(2)(B), as in effect
before amendment by the OBBBA, a div-
idend paid or deemed paid by a controlled
foreign corporation with respect to stock
of the controlled foreign corporation is not
treated as a dividend to the extent that—
(1) Either—
(i) The dividend was paid or deemed
paid on or before June 28, 2025, during
the controlled foreign corporation’s tax-
able year that includes June 28, 2025, and
the United States shareholder that owned
(within the meaning of section 958(a))
that stock on the last day of that taxable
year did not own (within the meaning of
section 958(a)) that stock during the por-
tion of the taxable year ending on June 28,
2025; or
(ii) The dividend was paid or deemed
paid after June 28, 2025, and before the
controlled foreign corporation’s first tax-
able year beginning after December 31,
2025; and
(2) The dividend does not increase the
taxable income of a United States person
subject to Federal income tax.
(c) Dividend paid or deemed paid. For
purposes of this section, any amount that
would be treated, without regard to this
section, as a distribution received by a
person as a dividend under section 951(a)
(2)(B), as in effect before the amendments
to section 951(a) made by the OBBBA, is
treated as a dividend paid or deemed paid.
(d) United States person subject to
Federal income tax. For purposes of this
section, a United States person subject to
Federal income tax means—
(1) Any United States person (as
defined in section 7701(a)(30)), except for
a domestic partnership, an S corporation
(as defined in section 1361), a trust that is
a United States person described in section
7701(a)(30)(E) and treated as owned by a
person under sections 671 through 678, or
a bona fide resident (as defined in section
937(a)) of Guam, the Commonwealth of
the Northern Mariana Islands, or the U.S.
Virgin Islands; and
(2) Any nonresident alien individual
who elects to be treated as a resident of
the United States under section 6013(g) or
(h).
(e) Meaning of taxable income—(1) In
general. Except as provided in paragraph
(e)(2) of this section, for purposes of this
section, taxable income means taxable
income as defined in section 63.
(2) Exceptions—(i) Regulated invest-
ment companies. In the case of a reg-
ulated investment company (RIC) (as
defined in section 851) that satisfies the
requirements of section 852(a) for a tax-
able year in which the RIC receives, or is
deemed to receive, a dividend described
in paragraph (b)(1) of this section, tax-
able income means investment company
taxable income (as defined in section
852(b)).
(ii) Real estate investment trusts. In
the case of a real estate investment trust
(REIT) (as defined in section 856) that
satisfies the requirements of section
857(a) for a taxable year in which the
REIT receives, or is deemed to receive,
a dividend described in paragraph (b)(1)
of this section, taxable income means real
estate investment trust taxable income (as
defined in section 857(b)(2)).
(iii) Exempt organizations. In the case
of an organization exempt from taxation
under section 501(a), taxable income
means unrelated business taxable income
(as defined in section 512).
(f) Determining whether a dividend
increases taxable income—(1) In general.
For purposes of determining whether a
dividend paid or deemed paid increases
the taxable income of a United States
person subject to Federal income tax, all
applicable provisions of the Internal Rev-
enue Code, and the regulations thereunder,
are applied before applying, and without
regard to, the transition rule. Therefore,
the determination of whether a dividend
paid or deemed paid increases the taxable
income of a United States person subject
to Federal income tax is made after the
application of any exclusion that results
in the dividend not being included in the
person’s gross income or taxable income
and any dividends received deduction
that reduces the amount of the dividend
included in the person’s taxable income.
(2) Section 245A coordination exam-
ple. The following example illustrates the

September 21, 2026 436 Bulletin No. 2026–39
application of the rule in paragraph (f)(1)
of this section.
(i) Facts. US1, a domestic corporation
that is not a RIC, REIT, S corporation, or
organization exempt from taxation under
section 501(a), owns all the stock of CFC,
a foreign corporation. On March 1, 2025,
CFC pays a dividend of $100x to US1,
which, absent the application of §1.245A-
5(b), qualifies for the deduction under sec-
tion 245A(a). On July 1, 2025, USP1 sells
all its stock of CFC to US2, a domestic cor-
poration, which results in an extraordinary
reduction with respect to US1’s ownership
of CFC, within the meaning of §1.245A-
5(e)(1). If §1.245A-5 were applied before
and without regard to the transition rule,
US1’s pre-reduction pro rata share under
§1.245A-5(e)(2)(ii) would be $100x and
the entire dividend of $100x to US1 would
be an extraordinary reduction amount with
respect to US1, within the meaning of
§1.245A-5(e)(1). Additionally, the ineli-
gible amount with respect to US1 within
the meaning of §1.245A-5(b)(2), would
be $100x. US1, US2, and CFC all use a
calendar taxable year. US1’s reporting for
Federal income tax purposes is consistent
with §1.245A-5(e).
(ii) Analysis. Under paragraph (f)(1) of
this section, the determination of whether
the dividend of $100x increases the tax-
able income of US1, a United States per-
son subject to Federal income tax, is made
after the application of any exclusion that
results in the dividend not being included
in the person’s gross income or tax-
able income and any dividends received
deduction that reduces the amount of the
dividend included in the person’s taxable
income. Additionally, in determining
US1’s pre-reduction pro rata share under
§1.245A-5(e)(2)(ii), any decrease for
amounts taken into account by a U.S. tax
resident under §1.245A-5(e)(2)(ii)(B) is
determined by applying section 951(a)(2)
(B), as in effect before amendment by the
OBBBA, without regard to the transition
rule. Therefore, because the ineligible
amount with respect to US1 and the div-
idend paid to US1 would be $100x before
applying, and without regard to, the tran-
sition rule, the ineligible amount is $100x
and none of the dividend paid to US1 is
eligible for a section 245A deduction after
applying §1.245A-5(b). Accordingly,
the entire dividend of $100x is treated as
increasing the taxable income of a United
States person subject to Federal income
tax for purposes of this section. Addition-
ally, the election to close CFC’s taxable
year pursuant to §1.245A-5(e)(3)(i)(A) is
available to US1, provided the other con-
ditions described in §1.245A-5(e)(3)(i)
(A) are met.
(3) Generally applicable deductions.
The determination of the amount by
which a dividend paid or deemed paid
increases the taxable income of a United
States person subject to Federal income
tax is made without regard to decreases to
taxable income resulting from generally
applicable deductions of the United States
person that are not particular to the receipt
of a dividend, including deductions for—
(i) Depreciation under section 167;
(ii) Net operating losses under section
172;
(iii) Distributions under sections 651
and 661; and
(iv) Dividends paid under sections
852(b)(2)(D) and 857(b)(2)(B).
(4) Dividends paid to controlled for-
eign corporations—(i) In general. In the
case of a dividend paid or deemed paid
by a controlled foreign corporation to
another controlled foreign corporation,
for purposes of this section, the dividend
is treated as increasing the taxable income
of a United States person subject to Fed-
eral income tax to the extent the dividend
is taken into account in determining a
United States shareholder’s inclusion
under section 951(a)(1)(A) or 951A(a).
(ii) Inclusions under section 951(a)(1)
(A). For purposes of this paragraph (f)
(4), a dividend is taken into account in
determining a United States shareholder’s
inclusion under section 951(a)(1)(A) if
the dividend would give rise to an amount
includible in gross income by the United
States shareholder under section 951(a)(1)
(A), determined without regard to prop-
erly allocable deductions of the controlled
foreign corporation that received or is
deemed to receive the dividend (except
as provided in paragraph (f)(4)(iv) of this
section), the current earnings and profits
limitation under section 952(c)(1)(A),
qualified deficits under section 952(c)(1)
(B), or chain deficits under section 952(c)
(1)(A).
(iii) Inclusions under section 951A(a).
For purposes of this paragraph (f)(4), a
dividend is taken into account in deter-
mining a United States shareholder’s
inclusion under section 951A(a) if the
dividend would give rise to an amount
includible in gross income by the United
States shareholder under section 951A,
determined without regard to properly
allocable deductions of the controlled
foreign corporation that received or is
deemed to receive the dividend (except
as provided in paragraph (f)(4)(iv) of this
section), tested losses (as defined in sec-
tion 951A(c)(2)(B) before amendment by
the OBBBA) of any other controlled for-
eign corporation, or the net deemed tan-
gible income return of the United States
shareholder (as defined in section 951A(b)
(2) before amendment by the OBBBA).
(iv) High-taxed amounts. For purposes
of this paragraph (f)(4), any dividend
paid or deemed paid to a controlled for-
eign corporation that is excluded from the
controlled foreign corporation’s subpart F
income or tested income under the high-
tax exception or the high-tax exclusion
(see section 954(b)(4) and §1.951A-2(c)
(1)(iii)), is treated as not taken into account
in determining a United States sharehold-
er’s inclusion under section 951(a)(1)(A)
or 951A(a).
(g) Application to partnerships—(1) In
general. In the case of a dividend paid or
deemed paid to a partnership, the determi-
nation of whether the dividend increases
the taxable income of a United States
person subject to Federal income tax is
made by reference to the partners of the
partnership. Further, to the extent the div-
idend is included in the distributive share
of a partner that is itself a partnership, the
determination of whether the dividend
increases the taxable income of a United
States person subject to Federal income
tax is made by reference to the partners of
that partnership.
(2) Safe harbor for publicly held part-
nership interests—(i) In general. To the
extent a dividend paid or deemed paid by
a controlled foreign corporation is allo-
cated to a de minimis owner by reason of
owning an interest in a class of publicly
held interests in a domestic partnership,
the dividend is treated as increasing the
taxable income of a United States person
subject to Federal income tax.
(ii) Exception. Paragraph (g)(2)
(i) of this section does not apply if the

Bulletin No. 2026–39 437 September 21, 2026
domestic partnership has actual knowl-
edge of facts that allow the partnership
to determine that the de minimis owner
is not a United States person subject to
Federal income tax within the meaning
of paragraph (d) of this section or that
the dividend paid by the controlled for-
eign corporation does not increase the de
minimis owner’s taxable income within
the meaning of paragraphs (e) and (f) of
this section.
(iii) Meaning of de minimis owner. For
purposes of this paragraph (g)(2), the term
de minimis owner means any person that
owns no more than 5 percent of a class of
publicly held interests in a domestic part-
nership on each day of the taxable year of
the domestic partnership. In determining
whether a person is a de minimis owner, a
person is treated as owning an interest in
a class of publicly held interests if the per-
son owns the interest directly or by apply-
ing the rules of section 318(a), except that
section 318(a)(2)(C) and (a)(3)(C) are
applied for this purpose by substituting “5
percent” for “50 percent.”
(iv) Meaning of publicly held interest.
For purposes of this paragraph (g)(2),
publicly held interest means any class of
interests in a domestic partnership that is
regularly traded on an established securi-
ties market as defined in §1.7704-1(b), but
without regard to §1.7704-1(b)(3).
(h) Establishing extent to which a divi-
dend increases taxable income of a United
States person subject to Federal income
tax. A United States shareholder that
claims a reduction of its pro rata share of
subpart F income or tested income under
section 951(a)(2)(B), as a result of a div-
idend that is described in paragraph (b)
(1) of this section, must substantiate such
claim by attaching to Form 5471, Informa-
tion Return of U.S. Persons With Respect
To Certain Foreign Corporations (or
successors), a statement titled “Pro Rata
Share Transition Rule Statement” that—
(1) Provides the amount of each divi-
dend paid by the controlled foreign cor-
poration (with respect to the stock owned
by the United States shareholder filing the
return) that is described in paragraph (b)
(1) of this section but treated as a dividend
for purposes of applying section 951(a)(2)
(B),
(2) Describes why the United States
shareholder filing the return is entitled to
treat each such amount as a dividend for
purposes of section 951(a)(2)(B), and
(3) Describes how the United States
shareholder determined such amount
increased the taxable income of a United
States person subject to Federal income
tax under the rules of this section.
(i) Applicability date. This section
applies to taxable years of a foreign cor-
poration that either include June 28, 2025,
or begin after June 28, 2025, and before
the foreign corporation’s first taxable year
beginning after December 31, 2025.
Par. 6. Section 1.951A-1 is amended
by:
1. Revising paragraphs (a)(2) through
(e); and
2. Removing paragraph (f).
The revisions read as follows:
§1.951A-1 General provisions.
(a) * * *
(2) Scope. Paragraph (b) of this sec-
tion provides the general rule requiring
a United States shareholder to include in
gross income its net CFC tested income for
a U.S. shareholder inclusion year. Para-
graph (c) of this section provides rules for
determining the amount of a United States
shareholder’s net CFC tested income
for the U.S. shareholder inclusion year,
including a rule for the application of sec-
tion 951A and the section 951A regulations
to consolidated groups. Paragraph (d) of
this section provides rules for determin-
ing a United States shareholder’s pro rata
share of tested income and tested loss for
purposes of determining the United States
shareholder’s net CFC tested income.
Paragraph (e) of this section provides
additional definitions for purposes of this
section and the section 951A regulations.
For rules applying this section to foreign
controlled United States shareholders and
foreign controlled foreign corporations,
see section 951B (generally treating ref-
erences in this section to the term “United
States shareholder” as including the term
“foreign controlled United States share-
holder” and the term “controlled foreign
corporation” as including the term “for-
eign controlled foreign corporation”).
(b) Inclusion of net CFC tested income.
Each person who is a United States share-
holder of any controlled foreign corpora-
tion and owns stock of any such controlled
foreign corporation includes in gross
income in the U.S. shareholder inclusion
year the shareholder’s net CFC tested
income inclusion amount, if any, for the
U.S. shareholder inclusion year.
(c) Determination of net CFC tested
income inclusion amount—(1) In gen-
eral. Except as provided in paragraph (c)
(2) of this section, the term net CFC tested
income inclusion amount means, with
respect to a United States shareholder
and a U.S. shareholder inclusion year, the
excess (if any) of—
(i) The aggregate of the sharehold-
er’s pro rata share of the tested income
of each tested income CFC (as defined
in §1.951A-2(b)(1)) for a CFC inclusion
year, over
(ii) The aggregate of the shareholder’s
pro rata share of the tested loss of each
tested loss CFC (as defined in §1.951A-
2(b)(2)) for a CFC inclusion year.
(2) [Reserved]
(d) Determination of pro rata share—
(1) In general. For purposes of para-
graph (c)(1) of this section, each United
States shareholder that owns stock of a
controlled foreign corporation on any
day during a CFC inclusion year deter-
mines its pro rata share (if any) of tested
income or tested loss of the controlled for-
eign corporation for the U.S. shareholder
inclusion year that includes the last day on
which the United States shareholder owns
stock in the controlled foreign corporation
during the CFC inclusion year. In no case
may the sum of the pro rata share of tested
income or tested loss of a controlled for-
eign corporation for a CFC inclusion year
allocated to stock under this paragraph (d)
exceed the amount of the tested income
or tested loss of the controlled foreign
corporation for the CFC inclusion year.
Except as modified in this paragraph (d),
a United States shareholder’s pro rata
share of tested income or tested loss is
determined under the rules of section
951(a)(2) and §1.951-1(b) and (e) in the
same manner as those provisions apply to
subpart F income. See also §1.951-1(d),
which requires or permits the closing of
the taxable year of a foreign corpora-
tion in specified circumstances. Under
section 951(a)(2) and §1.951-1(b) and
(e), as modified by this paragraph (d), a
United States shareholder’s pro rata share
of tested income or tested loss for a U.S.

September 21, 2026 438 Bulletin No. 2026–39
shareholder inclusion year is determined
with respect to the stock of the controlled
foreign corporation owned by the U.S.
shareholder during a CFC inclusion year.
A United States shareholder’s pro rata
share of tested income or tested loss is
translated into United States dollars using
the average exchange rate for the CFC
inclusion year of the controlled foreign
corporation. Paragraphs (d)(2) and (3)
of this section provide rules for determin-
ing a United States shareholder’s pro rata
share of tested income or tested loss of a
controlled foreign corporation.
(2) Tested income—(i) In general.
Except as provided in paragraph (d)(2)(ii)
of this section, a United States sharehold-
er’s pro rata share of the tested income of
each tested income CFC for a U.S. share-
holder inclusion year is determined under
section 951(a)(2) and §1.951-1(b) and (e),
substituting “tested income” for “subpart
F income” each place it appears, other
than in §1.951-1(e)(2)(ii)(A).
(ii) Special rule for prior allocation of
tested loss. In any case in which tested
loss has been allocated to any class of
stock in a prior CFC inclusion year under
paragraph (d)(3)(iii) of this section (or
under §1.951A-1(d)(4)(iii), as contained
in 26 CFR part 1 edition revised as of April
1, 2026), tested income is first allocated
to each such class of stock in the order of
its liquidation priority to the extent of the
excess (if any) of the sum of the tested loss
allocated to each such class of stock for
each prior CFC inclusion year under para-
graph (d)(3)(iii) of this section (or under
§1.951A-1(d)(4)(iii), as contained in 26
CFR part 1 edition revised as of April 1,
2026), over the sum of the tested income
allocated to each such class of stock for
each prior CFC inclusion year under this
paragraph (d)(2)(ii). Paragraph (d)(2)
(i) of this section applies for purposes of
determining a United States sharehold-
er’s pro rata share of the remainder of the
tested income, except that, for purposes
of the hypothetical distribution in §1.951-
1(e)(2)(ii), the amount of allocable earn-
ings and profits of the tested income CFC
is reduced by the amount of tested income
allocated under the first sentence of this
paragraph (d)(2)(ii). For an example of
the application of this paragraph (d)(2),
see paragraph (d)(3)(iv)(B) of this section
(Example 2).
(iii) Examples. The following exam-
ples illustrate the application of paragraph
(d)(2) of this section. See also §1.951-
1(e)(4)(ix) (Example 8) (illustrating a
United States shareholder’s pro rata share
of tested income).
(A) Example 1—(1) Facts. FS, a controlled
foreign corporation, has outstanding 70 shares of
common stock and 30 shares of 4% nonparticipat-
ing, cumulative preferred stock with a par value of
$10x per share. P Corp, a domestic corporation and
a United States shareholder of FS, owns all of the
common shares. Individual A, a United States citi-
zen and a United States shareholder of FS, owns all
of the preferred shares. Individual A, FS, and P Corp
use the calendar year as their taxable year. Individual
A and P Corp are shareholders of FS for all of Year
1. At the beginning of Year 1, FS had no dividend
arrearages with respect to its preferred stock. For
Year 1, FS has $100x of earnings and profits, $120x
of tested income, and no subpart F income within the
meaning of section 952.
(2) Analysis—Determination of pro rata share
of tested income. For purposes of determining P
Corp’s pro rata share of FS’s tested income under
this paragraph (d)(2) the amount of FS’s allocable
earnings and profits for purposes of the hypothetical
distribution described in §1.951-1(e)(2)(ii) is $120x,
the greater of its earnings and profits as determined
under section 964 ($100x) and the sum of its subpart
F income and tested income ($0 + $120x). Under
this paragraph (d)(2) and §1.951-1(e)(2)(ii), the
amount of FS’s allocable earnings and profits distrib-
uted in the hypothetical distribution with respect to
the preferred shares of FS is $12x (0.04 × $10x × 30)
and the amount distributed with respect to the com-
mon shares of FS is $108x ($120x - $12x), which
results in $12x of tested income being allocated to
the preferred shares and $108x being allocated to the
common shares. Accordingly, under this paragraph
(d)(2) and §1.951-1(e)(2), Individual A’s pro rata
share of FS’s tested income is $12x, and P Corp’s pro
rata share of FS’s tested income is $108x for Year 1.
(B) Example 2—(1) Facts. P Corp, a domestic
corporation and a United States shareholder, owns all
100 shares of the only class of stock of FS, a con-
trolled foreign corporation, from January 1 of Year
1, until May 26 of Year 1. On May 26 of Year 1, P
Corp sells all its FS stock to R Corp, a domestic cor-
poration that is not related to P Corp, and recognizes
no gain or loss on the sale. P Corp does not make an
election to close the taxable year of FS under §1.951-
1(d)(2). R Corp, a United States shareholder of FS,
owns the stock of FS from May 27 through Decem-
ber 31 of Year 1. For Year 1, FS has $50x of earnings
and profits, $50x of tested income, and no subpart F
income within the meaning of section 952. P Corp,
R Corp, and FS all use the calendar year as their tax-
able year, and Year 1 has 365 days.
(2) Analysis—Determination of pro rata share
of tested income. Under this paragraph (d)(2) and
§1.951-1(e)(2)(i), P Corp’s pro rata share of the
tested income of FS is $20x, which is equal to $50x
of tested income multiplied by the product of two
fractions. For the first fraction, the numerator is
the number of shares P Corp owned (100) and the
denominator is the number of shares of FS outstand-
ing (100) (100 percent). For the second fraction, the
numerator is the number of days in Year 1 that P Corp
owned the shares while P Corp was a United States
shareholder of FS and FS was a CFC (146) and the
denominator is the number of days in the CFC inclu-
sion year of FS (365) (40 percent). R Corp’s pro
rata share of the tested income of FS is $30x, which
is equal to $50x of tested income multiplied by the
product of two fractions. For the first fraction, the
numerator is the number of shares R Corp owned
(100) and the denominator is the number of shares of
FS outstanding (100) (100 percent). For the second
fraction, the numerator is the number of days in Year
1 that R Corp owned the shares while R Corp was a
United States shareholder of FS and FS was a CFC
(219) and the denominator is the number of days in
the CFC inclusion year of FS (365) (60 percent).
(3) Tested loss—(i) In general. A
United States shareholder’s pro rata share
of the tested loss of each tested loss CFC
for a U.S. shareholder inclusion year is
determined under section 951(a)(2) and
§1.951-1(b) and (e) with the following
modifications—
(A) “Tested loss” is substituted for
“subpart F income” each place it appears;
(B) For purposes of the hypothetical
distribution described in §1.951-1(e)(2)
(ii), the amount of allocable earnings and
profits of a controlled foreign corpora-
tion for a CFC inclusion year is treated as
being equal to the tested loss of the tested
loss CFC for the CFC inclusion year; and
(C) Except as provided in paragraphs
(d)(3)(ii) and (iii) of this section, the hypo-
thetical distribution described in §1.951-
1(e)(2)(ii) is treated as made solely with
respect to the common stock of the tested
loss CFC.
(ii) Special rule in case of accrued but
unpaid dividends. If a tested loss CFC’s
earnings and profits that have accumu-
lated since the issuance of preferred
shares are reduced below the amount nec-
essary to satisfy any accrued but unpaid
dividends with respect to such preferred
shares, then the amount by which the
tested loss reduces the earnings and profits
below the amount necessary to satisfy the
accrued but unpaid dividends is allocated
in the hypothetical distribution described
in §1.951-1(e)(2)(ii) to the preferred stock
of the tested loss CFC and the remainder
of the tested loss is allocated in the hypo-
thetical distribution to the common stock
of the tested loss CFC.
(iii) Special rule for stock with no liq-
uidation value. If a tested loss CFC’s
common stock has a liquidation value of
zero and there is at least one other class of

Bulletin No. 2026–39 439 September 21, 2026
equity with a liquidation preference rela-
tive to the common stock, then the tested
loss is allocated in the hypothetical dis-
tribution described in §1.951-1(e)(2)(ii)
to the most junior class of equity with a
positive liquidation value to the extent of
such liquidation value. Thereafter, tested
loss is allocated to the next most junior
class of equity to the extent of its liquida-
tion value and so on. All determinations
of liquidation value are to be made as of
the beginning of the CFC inclusion year
of the tested loss CFC.
(iv) Examples. The following exam-
ples illustrate the application of this para-
graph (d)(3). See also §1.951-1(e)(4)(x)
(Example 9) (illustrating a United States
shareholder’s pro rata share of subpart F
income and tested loss).
(A) Example 1—(1) Facts. FS, a controlled
foreign corporation, has outstanding 70 shares of
common stock and 30 shares of 4% nonparticipat-
ing, cumulative preferred stock with a par value of
$10x per share. P Corp, a domestic corporation and
a United States shareholder of FS, owns all the com-
mon shares. Individual A, a United States citizen
and a United States shareholder, owns all the pre-
ferred shares. FS, Individual A, and P Corp all use
the calendar year as their taxable year. Individual A
and P Corp are shareholders of FS for all of Year 5.
At the beginning of Year 5, FS had earnings and prof-
its of $120x, which accumulated after the issuance of
the preferred stock. At the end of Year 5, the accrued
but unpaid dividends with respect to the preferred
stock are $36x. For Year 5, FS has a $100x tested
loss, and no other items of income, gain, deduction
or loss. At the end of Year 5, FS has earnings and
profits of $20x.
(2) Analysis. FS is a tested loss CFC for Year 5.
Before taking into account the tested loss in Year 5,
FS had sufficient earnings and profits to satisfy the
accrued but unpaid dividends of $36x. The amount
of the reduction in earnings below the amount nec-
essary to satisfy the accrued but unpaid dividends
attributable to the tested loss is $16x ($36x - ($120x
- $100x)). Accordingly, under paragraph (d)(3)(ii) of
this section, $16x of the tested loss is allocated to the
preferred stock of FS in the hypothetical distribution
described in §1.951-1(e)(2)(ii), and $84x ($100x -
$16x) of the tested loss is allocated to the common
shares of FS in the hypothetical distribution.
(B) Example 2—(1) Facts. FS, a controlled
foreign corporation, has outstanding 100 shares of
common stock and 50 shares of 4% nonparticipat-
ing, cumulative preferred stock with a par value of
$100x per share. P Corp, a domestic corporation
and a United States shareholder of FS, owns all the
common shares. Individual A, a United States cit-
izen and a United States shareholder, owns all the
preferred shares. FS, Individual A, and P Corp all
use the calendar year as their taxable year. Individ-
ual A and P Corp are shareholders of FS for all of
Year 1 and Year 2. At the beginning of Year 1, the
common stock has no liquidation value and the pre-
ferred stock has a liquidation value of $5,000x and
no accrued but unpaid dividends. In Year 1, FS has a
tested loss of $1,000x and no other items of income,
gain, deduction, or loss. In Year 2, FS has tested
income of $3,000x and no other items of income,
gain, deduction, or loss. FS has earnings and profits
of $3,000x for Year 2. At the end of Year 2, FS has
accrued but unpaid dividends of $400x with respect
to the preferred stock, the sum of $200x for Year 1
(0.04 × $100x × 50) and $200x for Year 2 (0.04 ×
$100x × 50).
(2) Analysis—(i) Year 1. FS is a tested loss CFC
in Year 1. The common stock of FS has a liquidation
value of zero, and the preferred stock has a liquida-
tion preference relative to the common stock. The
tested loss ($1,000x) does not exceed the liquidation
value of the preferred stock ($5,000x). Accordingly,
under paragraph (d)(3)(iii) of this section, the tested
loss is allocated to the preferred stock in the hypo-
thetical distribution described in §1.951-1(e)(2)(ii).
Individual A’s pro rata share of the tested loss is
$1,000x, and P Corp’s pro rata share of the tested
loss is $0.
(ii) Year 2. FS is a tested income CFC in Year 2.
Because $1,000x of tested loss was allocated to the
preferred stock in Year 1 under paragraph (d)(3)(iii)
of this section, the first $1,000x of tested income in
Year 2 is allocated to the preferred stock under para-
graph (d)(2)(ii) of this section. P Corp’s and Individ-
ual A’s pro rata shares of the remaining $2,000x of
tested income are determined under the general rule
of paragraph (d)(2)(i) of this section, except that for
purposes of the hypothetical distribution the amount
of FS’s allocable earnings and profits is reduced by
the tested income allocated under paragraph (d)(2)
(ii) of this section to $2,000x ($3,000x - $1,000x).
Accordingly, under paragraph (d)(2)(i) of this sec-
tion and §1.951-1(e)(2)(ii), the amount of FS’s allo-
cable earnings and profits distributed in the hypo-
thetical distribution with respect to the preferred
stock of FS is $400x ($400x of accrued but unpaid
dividends) and with respect to the common stock of
FS is $1,600x ($2,000x - $400x), which results in
$400x of tested income being allocated to the pre-
ferred stock and $1,600x of tested income being allo-
cated to the common stock. Under paragraph (d)(2)
(i) of this section and §1.951-1(e)(2)(i), Individual
A’s pro rata share of the tested income is $1,400x
($1,000x + $400x), and P Corp’s pro rata share of the
tested income is $1,600x.
(e) Definitions. This paragraph (e) pro-
vides additional definitions that apply for
purposes of this section and the section
951A regulations. Other definitions rel-
evant to the section 951A regulations are
included in §§1.951A-2 through 1.951A-
4.
(1) CFC inclusion year. The term CFC
inclusion year means a taxable year of a
foreign corporation in which the foreign
corporation is a controlled foreign corpo-
ration at any time during the taxable year.
(2) Controlled foreign corporation.
The term controlled foreign corpora-
tion has the meaning provided in section
957(a).
(3) Own. The term own (or ownership
or owned), when used with respect to
stock of a foreign corporation, means to
own the stock directly or indirectly within
the meaning of section 958(a) and §1.958-
1(a). See also §1.958-1(d) (except as pro-
vided in §1.958-1(d)(2), a domestic part-
nership is not treated as owning stock of
a foreign corporation within the meaning
of section 958(a) for purposes of section
951A and for purposes of any provision
that specifically applies by reference to
section 951A or the section 951A regu-
lations, and the domestic partnership is
treated as a foreign partnership under sec-
tion 958(a)(2) in determining the persons
that own stock of the foreign corporation
within the meaning of section 958(a)).
(4) United States shareholder. The
term United States shareholder has the
meaning set forth in section 951(b).
(5) U.S. shareholder inclusion year.
The term U.S. shareholder inclusion year
means a United States shareholder’s tax-
able year that includes the last day on
which the United States shareholder owns
stock in a controlled foreign corporation
during a CFC inclusion year of the con-
trolled foreign corporation.
Par. 7. Section 1.951A-7 is amended
by:
1. Revising paragraph (a); and
2. Adding paragraph (c).
The revision and addition read as fol-
lows:
§1.951A-7 Applicability dates.
(a) In general. Except as otherwise pro-
vided in this section, §1.951A-1 applies
to taxable years of foreign corporations
beginning after December 31, 2025, and to
taxable years of United States sharehold-
ers for which such taxable years of those
foreign corporations are relevant. For
rules applicable to taxable years of foreign
corporations beginning on or before such
date, and to taxable years of United States
shareholders in which or with which such
taxable years end, see 26 CFR 1.951A-1 as
contained in 26 CFR part 1 edition revised
as of April 1, 2026. Except as otherwise
provided in this section, §§ 1.951A-2
through 1.951A-6 apply to taxable years
of foreign corporations beginning after
December 31, 2017, and to taxable years
of United States shareholders in which or

September 21, 2026 440 Bulletin No. 2026–39
with which such taxable years of foreign
corporations end.
* * * * *
(c) Transition rule for global intangi-
ble low-taxed income. In the case of a tax-
able year of a foreign corporation begin-
ning after December 31, 2025, that ends
with or within a taxable year of a United
States shareholder beginning on or before
December 31, 2025, 26 CFR 1.951A-1 as
contained in 26 CFR part 1 edition revised
as of April 1, 2026 applies with respect
to such United States shareholder, taking
into account the amendments to section
951(a)(2) made by section 70354(a) of
Public Law 119-21, 139 Stat. 72 (July 4,
2025) when determining the United States
shareholder’s pro rata share of any tested
item.
Par. 8. Section 1.1502-80 is amended
by revising paragraph (j)(3) to read as fol-
lows:
§1.1502-80 Applicability of other
provisions of law.
* * * * *
(j) * * *
(3) Applicability date. This paragraph
(j) applies to consolidated return years—
(i) For which the original consolidated
return is due (without extensions) after
February 23, 2023; and
(ii) That include the last day of a tax-
able year beginning before January 1,
2026, of a controlled foreign corporation
owned by a member of the consolidated
group.
Par. 9. Section 1.6038-2 is amended
by revising paragraphs (f) and (m) to read
as follows:
§1.6038-2 Information returns
required of United States persons with
respect to annual accounting periods of
certain foreign corporations.
* * * * *
(f) Contents of return. Returns on
Form 5471 (or successor form) must con-
tain information prescribed by Form 5471
(or successor form). Such information
may include (but is not limited to) the fol-
lowing:
* * * * *
(8) With respect to the outstanding
stock of the foreign corporation—
(i) A description of each class of stock,
(ii) The first day of the foreign corpo-
ration’s annual accounting period and the
number of shares of each class of stock
outstanding on the first day of the annual
accounting period,
(iii) The date and a description of any
issuance, redemption, or any other change
to the number of shares of any class of
stock during the annual accounting period,
including the number of shares issued,
redeemed, or otherwise changed,
(iv) The balance of each class of stock
outstanding during the annual accounting
period immediately following any such
issuance, redemption, or other change,
and
(v) For each person that directly owns
(within the meaning of section 958(a))
stock in the foreign corporation and each
United States shareholder (as defined in
section 951(b), taking into account section
953(c)) that indirectly owns (as described
in section 958(a)(2) and determined by
treating a domestic partnership in the
same manner as a foreign partnership pur-
suant to §1.958-1(d)) stock in the foreign
corporation, at any time during the annual
accounting period:
(A) A description of each class of stock
held by each such person (in the case of
direct owners) or indirectly owned by
each such person (in the case of United
States shareholders) at any time during the
annual accounting period,
(B) The number of shares of each class
of stock held on the first day of the annual
accounting period by each such person
(in the case of direct owners) or indi-
rectly owned on the first day of the annual
accounting period by each such person (in
the case of United States shareholders),
(C) The date and a description of any
acquisition, receipt, redemption, disposi-
tion, or any other change to the number of
any shares of stock held by each such per-
son (in the case of direct owners) or indi-
rectly owned by each such person (in the
case of United States shareholders) at any
time during the annual accounting period,
including the number of shares acquired,
received, redeemed, disposed, or other-
wise changed, and
(D) The balance of each class of stock
held by each such person (in the case of
direct owners) or indirectly owned by
each such person (in the case of United
States shareholders) during the annual
accounting period immediately following
any such acquisition, receipt, redemption,
disposition, or other change.
* * * * *
(m) Applicability dates. This section
applies to taxable years of foreign cor-
porations beginning after December 31,
2025. For rules applicable to taxable years
of foreign corporations beginning on or
before such date, see 26 CFR 1.6038-2 as
contained in 26 CFR part 1 edition revised
as of April 1, 2026.
Frank J. Bisignano,
Chief Executive Officer.
(Filed by the Office of the Federal Register August
25, 2026, 8:45 a.m., and published in the issue of the
Federal Register for August 26, 2026, 91 FR 55037)
Notice of Proposed
Rulemaking
Racial Nondiscrimination in
Private Schools
REG-119986-25
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing.
SUMMARY: This document contains
proposed regulations that would update
existing regulations to provide that a pri-
vate school is not described as an organi-
zation exempt from Federal income tax if
it discriminates on the basis of race, color,
or national or ethnic origin in adminis-
tration of its educational, admissions,
scholarship, athletic, or other policies,
based on the fundamental public policy of
the United States against such practices.
These proposed regulations would affect
private schools in taxable years beginning
after May 31, 2027, which is after the final
regulations are expected to be published.
DATES: Written or electronic comments
and requests for a public hearing must be
received by November 3, 2026.

Bulletin No. 2026–39 441 September 21, 2026
ADDRESSES: Commenters are strongly
encouraged to submit public comments
electronically via the Federal eRulemak-
ing Portal at https://www.regulations.gov
(indicate IRS and REG-119986-25) by
following the online instructions for sub-
mitting comments. In accordance with 5
U.S.C. 553(b)(4), a plain language sum-
mary of these proposed regulations is also
available on the Federal eRulemaking
Portal. Requests for a public hearing must
be submitted as prescribed in the “Com-
ments and Requests for a Public Hearing”
section. Once submitted to the Federal
eRulemaking Portal, comments cannot be
edited or withdrawn. The Department of
the Treasury (Treasury Department) and
the IRS will publish for public availabil-
ity any comments submitted to the IRS’s
public docket. Send paper submissions to:
CC:PA:01:PR (REG-119986-25), Room
5503, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington,
DC 20044.
FOR FURTHER INFORMATION
CONTACT: Concerning these proposed
regulations, the Office of Associate Chief
Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes) at
(202) 317-6000 (not a toll-free number);
concerning submission of comments or
requests for a public hearing, the Publi-
cations and Regulations Section at (202)
317-6901 (not a toll-free number) or by
email at publichearings@irs.gov (pre-
ferred).
SUPPLEMENTARY INFORMATION:
Authority
This notice of proposed rulemaking
contains proposed amendments to the
Income Tax Regulations (26 CFR part
1) that would add a new §1.501(c)(3)-2
issued under section 501(c)(3) of the
Internal Revenue Code (Code).
These proposed regulations are issued
pursuant to section 7805(a) of the Code,
which authorizes the Secretary of the
Treasury or the Secretary’s delegate to
“prescribe all needful rules and regula-
tions for the enforcement of [the Code],
including all rules and regulations as may
be necessary by reason of any alteration of
law in relation to internal revenue.”
Background
I. Statute and applicable regulations
Section 501(c)(3) describes, in part,
organizations that are organized and
operated exclusively for “charitable ...
or educational purposes” provided cer-
tain restrictions on private inurement,
lobbying, and intervention in political
campaigns are not violated. Such organi-
zations are generally exempt from Federal
income tax by section 501(a). Section 170
of the Code provides, in part, a deduction
to taxpayers who make “charitable contri-
butions” to organizations specified in sec-
tion 170(c)(2), which essentially mirrors
the description of organizations satisfying
the requirements of section 501(c)(3). In
determining the amount of a taxpayer’s
deduction allowed under section 170(a)
within the taxable year, section 170(b)
(1)(A)(ii) includes any charitable con-
tribution to an educational organization
that normally maintains a regular faculty
and curriculum and normally has a regu-
larly enrolled body of pupils or students
in attendance at the place where its edu-
cational activities are regularly carried on.
Section 1.170A-9(c)(1) provides that an
“educational organization” is described
in section 170(b)(1)(A)(ii) if its primary
function is the presentation of formal
instruction and it normally maintains a
regular faculty and curriculum and nor-
mally has a regularly enrolled body of
pupils or students in attendance at the
place where its educational activities are
regularly carried on. The term includes
institutions such as primary, secondary,
preparatory, or high schools, and colleges
and universities. It includes Federal, State,
and other public-supported schools that
otherwise come within the definition.
Sections 170(c)(2), 170(b)(1)(A)(ii),
and 501(c)(3) do not further define the
terms “charitable” or “educational” or
explain what it means to be organized and
operated exclusively for such purposes.
For over 65 years, however, the pro-
visions of §1.501(c)(3)-1 have provided
guidance on the interpretation of the terms
“charitable” and “educational” as used in
section 501(c)(3). Section 1.501(c)(3)-
1(a) provides that, in order to be exempt
under section 501(a) as an organization
described in section 501(c)(3), the organi-
zation must be both organized and oper-
ated exclusively for one or more of the
purposes specified in section 501(c)(3),
as defined and elaborated in §1.501(c)
(3)-1(d). Thus, an organization that fails
to meet either the “organizational test” set
forth in §1.501(c)(3)-1(b) or the “opera-
tional test” set forth in §1.501(c)(3)-1(c)
is not exempt from Federal income tax.
Section 1.501(c)(3)-1(d)(1) provides a
list of purposes that would allow an orga-
nization to be exempt as an organization
described in section 501(c)(3) if it is orga-
nized and operated exclusively for one or
more of the exempt purposes specified
in section 501(c)(3), which list includes
charitable and educational purposes. Sec-
tion 1.501(c)(3)-1(d)(2) provides that the
term “charitable” is used in section 501(c)
(3) in its generally accepted legal sense
and is, therefore, not to be construed as
limited by the separate enumeration in
section 501(c)(3) of other tax-exempt pur-
poses that may fall within the broad out-
lines of “charity” as developed by judicial
decisions. In addition, §1.501(c)(3)-1(d)
(2)(ii) states that the term includes the
“promotion of social welfare by organi-
zations designed to ... eliminate prejudice
and discrimination.”
Similar to the description of an educa-
tional organization in section 170(b)(1)
(A)(ii), §1.501(c)(3)-1(d)(3)(ii), (Example
1), provides that a primary or secondary
school, a college, or a professional or trade
school, that has a regularly scheduled cur-
riculum, a regular faculty, and a regularly
enrolled body of students in attendance
at a place where the educational activi-
ties are regularly carried on may qualify
for exemption as an educational organi-
zation of the character contemplated by
section 501(c)(3) if it otherwise meets the
requirements of section 501(c)(3).
II. Policy of the United States against
racial discrimination in education
On May 17, 1954, the Supreme Court of
the United States decided Brown v. Board
of Education of Topeka, Kansas, 347 U.S.
483 (1954), in which the Court held that
state-sanctioned racial segregation of pub-
lic schools violates the Equal Protection
Clause of the Fourteenth Amendment.
One year later, the Court reiterated that
“full compliance” with Brown required

September 21, 2026 442 Bulletin No. 2026–39
public schools to admit the students that
had sued “on a racially nondiscriminatory
basis.” Brown v. Board of Education, 349
U.S. 294, 300–301 (1955).
Enacted into law on July 2, 1964, Title
VI of the Civil Rights Act of 1964 states,
in relevant part, “No person in the United
States shall, on the ground of race, color,
or national origin, be excluded from par-
ticipation in, be denied the benefits of,
or be subjected to discrimination under
any program or activity receiving Federal
financial assistance.”
In 1976, the Supreme Court decided
the case of Runyon v. McCrary, 427 U.S.
160, holding that 42 U.S.C. 1981 (Section
1981)
1
bars a private school from discrim-
inating against applicants based on their
race. The same year, the Supreme Court
confirmed that the protections of Section
1981 apply equally to all persons regard-
less of race. McDonald v. Santa Fe Trail
Transp. Co., 427 U.S. 273, 295 (1976).
On June 30, 1971, the United States
District Court for the District of Columbia
entered an order permanently enjoining
the Treasury Department and the IRS from
recognizing as described in section 501(c)
(3) any private school located in the State
of Mississippi that failed to adopt, pub-
lish, and operate under a racially nondis-
criminatory policy as to students and that
failed to supply the IRS with certain infor-
mation to ensure operation on a nondis-
criminatory basis. Green v. Connally, 330
F. Supp. 1150 (D.D.C. 1971), aff’d sub
nom., Coit v. Green, 404 U.S. 997 (1971).
The court stated that “[t]he Code must be
construed and applied in consonance with
the Federal public policy against support
for racial segregation of schools, public or
private.” Id. at 1163. The court declared
that section 501(c)(3) “does not provide
a tax exemption for ...any organization
that is operated for educational purposes
unless the school or other educational
institution involved has a racially nondis-
criminatory policy as to students.” Id. at
1179. It further declared that this requires
that “the school or other educational insti-
tution admits the students of any race to
all the rights, privileges, programs and
activities generally accorded or made
available to students at that school, and
which includes, specifically but not exclu-
sively, a policy of making no discrimina-
tion on the basis of race in administration
of educational policies, applications for
admission, of scholarship and loan pro-
grams, and athletic and extra-curricular
programs.” Id.
That year, the IRS issued Rev. Rul.
71-447, 1971-2 C.B. 230, which states
that a private school that does not have
a racially nondiscriminatory policy as
to students does not qualify for exemp-
tion from Federal income tax. Consistent
with Green v. Connally, the revenue rul-
ing defines a “racially nondiscriminatory
policy as to students” as meaning that the
school admits the students of any race to all
the rights, privileges, programs, and activ-
ities generally accorded or made avail-
able to students at that school and that the
school does not discriminate on the basis
of race in administration of its educational
policies, admissions policies, scholarship
and loan programs, and athletic and other
school-administered programs. In sup-
port, the revenue ruling states, “All chari-
table trusts, educational or otherwise, are
subject to the requirement that the purpose
of the trust may not be illegal or contrary
to public policy,” citing to common law
concepts of charity and the Restatement of
Trusts.
2
The revenue ruling acknowledges
that Federal statutory law does not pro-
hibit the operation of private schools on
a discriminatory basis, but states that the
policy of the United States is to discour-
age discrimination in such schools. The
revenue ruling cites to the “well-settled”
Federal policy against discrimination in
many areas of wide public interest and
to “developments of recent decades and
recent years reflect[ing] a Federal pol-
icy against racial discrimination which
extends to racial discrimination in edu-
cation. Titles IV and VI, The Civil Rights
Act of 1964 . . . and Brown v. Board of
Education . . . and many subsequent Fed-
eral court cases, demonstrate a national
policy to discourage racial discrimination
in education, whether public or private.”
Based on the permanent injunction in
Green v. Connally, the IRS also issued
Rev. Proc. 75-50, 1975-2 C.B. 587, mod-
ified by Rev. Proc. 2019-22, 2019-22
I.R.B. 1260, to set forth guidelines and
recordkeeping requirements for determin-
ing whether private schools that apply for
recognition of exemption from Federal
income tax under section 501(c)(3), or are
presently recognized as exempt from tax,
have racially nondiscriminatory policies
as to students. Section 3.01 of Rev. Proc.
75-50 defines a “racially nondiscrimina-
tory policy as to students” by reference to
policies addressed by Rev. Rul. 71-447.
The first sentence of section 3.02 of Rev.
Proc. 75-50 clarifies that “discrimination
on the basis of race” includes discrimi-
nation on the basis of color and national
or ethnic origin. The second sentence of
section 3.02 of Rev. Proc. 75-50 states
that a “policy of a school that favors
racial minority groups with respect to
admissions, facilities and programs, and
financial assistance will not constitute dis-
crimination on the basis of race when the
purpose and effect is to promote the estab-
lishment and maintenance of that school’s
racially nondiscriminatory policy as to
students.” Likewise, the third and fourth
sentences of section 4.05 of Rev. Proc.
75-50 state: “Consistent with section 3.02,
supra, scholarships and loans that are
made pursuant to financial assistance pro-
grams favoring members of one or more
racial minority groups that are designed to
promote a school’s racially nondiscrimi-
natory policy will not adversely affect the
school’s exempt status. Financial assis-
tance programs favoring members of one
or more racial groups that do not signifi-
cantly derogate from the school’s racially
nondiscriminatory policy similarly will
not adversely affect the school’s exempt
status.”
On May 24, 1983, the Supreme Court
decided Bob Jones University v. United
States, 461 U.S. 574 (1983). In that case,
the Court held that the IRS did not exceed
its authority when it announced its inter-
pretation of section 501(c)(3) in Rev. Rul.
71-447, and upheld the IRS’s revocation of
1
Section 1 of the Civil Rights Act of 1866 is codified at 42 U.S.C. 1981 and provides that all persons in the United States shall have the same right to “make and enforce contracts, to sue, be
parties, give evidence, and to the full and equal benefit of all laws and proceedings for the security of persons and property as is enjoyed by white citizens.”
2
The Restatement of Trusts is a treatise published by the American Law Institute that restates and clarifies the common law of trusts in the United States.

Bulletin No. 2026–39 443 September 21, 2026
the section 501(c)(3) status of Bob Jones
University and the Goldsboro Christian
Schools, Inc. These schools maintained
racially discriminatory policies promoting
racial segregation, which the Court held
were contrary to a fundamental public
policy. Id. at 593. The Court reasoned that,
in analyzing section 501(c)(3), there was
unmistakable evidence that entitlement
to a tax exemption depends on meeting a
“charitable” standard under common law;
that is, serving a public purpose and not
being contrary to established public pol-
icy. Id. at 586. The Court further stated,
“[a]n unbroken line of cases following
Brown v. Board of Education establishes
beyond doubt this Court’s view that racial
discrimination in education violates a
most fundamental national public policy,
as well as rights of individuals,” specify-
ing that “[t]he right of a student not to be
segregated on racial grounds in schools . .
. is indeed so fundamental and pervasive
that it is embraced in the concept of due
process of law.” Id. at 593 (internal cites
omitted). The court also cited to numer-
ous acts of Congress, including the Civil
Rights Act of 1964, and numerous exec-
utive orders “demonstrating the com-
mitment of the Executive Branch to the
fundamental policy of eliminating racial
discrimination” for its conclusion that “[r]
acially discriminatory educational insti-
tutions cannot be viewed as conferring
a public benefit within the ‘charitable’
concept ... or within Congressional intent
underlying § 170 and § 501(c)(3).” Id. at
595-96.
The authorities described in this
Background section establish that racial
discrimination in education violates a
fundamental public policy of the United
States and that schools engaging in racial
discrimination are ineligible for section
501(c)(3) status.
III. Developments regarding racial
discrimination in education
In the 1970s, some universities adopted
“affirmative action” admissions policies
considering race as one factor among
others to increase the enrollment of racial
minority students in their programs, and
courts began to delineate constitutional
limits, emphasizing that programs must
be narrowly tailored and serve compelling
interests. For example, the Supreme Court
in Regents of the University of California
v. Bakke, 438 U.S. 265 (1978), addressed
whether the University of California vio-
lated the Fourteenth Amendment’s Equal
Protection Clause, and Title VI of the
Civil Rights Act of 1964, by practicing an
“affirmative action” policy that resulted
in the repeated rejection of a white male’s
application for admission to its medical
school.
The Bakke Court was divided. Led by
Justice Stevens, four justices concluded
that Title VI categorically prohibited using
race as the basis for excluding persons
from participation in federally funded pro-
grams, and that the use of racial quotas in
university admissions constituted such an
exclusion. 438 U.S. at 421. Four other jus-
tices, led by Justice Brennan, argued that
Title VI’s prohibition on racial discrimina-
tion was coextensive with the Equal Pro-
tection Clause of the Fourteenth Amend-
ment, that the Equal Protection Clause
did not bar the use of race-based criteria
that were designed to mitigate the effects
of racial discrimination, and accordingly
that the use of racial quotas in admissions
was not illegal. 438 U.S. at 328, 362, 378.
Justice Powell’s opinion announcing the
judgment of the Court landed between
these two camps. Powell concurred with
Brennan that Title VI was coextensive
with the Equal Protection Clause, but
found that any race-based classification,
even for a purportedly benign purpose,
was subject to strict scrutiny. Id. at 299.
Justice Powell held that the practice of
setting a specific quota for specific racial
groups could not survive strict scrutiny,
but that an admissions program which was
aimed at attaining the benefits of a diverse
student body and treated race as just one
element among many in an applicant’s
profile was constitutionally permissible.
Id. at 318-20. Thus, although the Court
struck down the use of racial quotas, the
Court allowed race to be considered as
one of many factors to be considered in
admissions.
Approximately 25 years later, the
Supreme Court addressed in Grutter v.
Bollinger, 539 U.S. 306 (2003), whether
the University of Michigan Law School’s
use of racial preferences in student admis-
sions violated the Equal Protection Clause
of the Fourteenth Amendment or Title VI
of the Civil Rights Act of 1964. Looking
to Justice Powell’s opinion in Bakke, the
Court reiterated that maintaining the diver-
sity of a university’s student body was a
compelling state interest which could jus-
tify race-conscious admissions policies.
Id. at 325. The Court further found that the
University of Michigan’s policies were
narrowly tailored to that interest because
review of every student’s application was
highly individualized, race was one of
many types of diversity considered in the
process, and acceptance or rejection was
not automatic based on the presence of a
single variable such as race. Id. at 336-38.
However, the Court noted that race-con-
scious admissions policies should be lim-
ited in time since “[a] core purpose of the
Fourteenth Amendment was to do away
with all governmentally imposed discrim-
ination based on race.” Id. at 341. The
Court further stated that “racial classifica-
tions, however compelling their goals, are
potentially so dangerous that they may be
employed no more broadly than the inter-
est demands,” so a permanent justification
for racial preferences would be contrary
to the principle of equal protection. Id.
at 342. Justice O’Connor expressed an
expectation that 25 years from the date of
the opinion, “the use of racial preferences
will no longer be necessary to further the
interest approved today.” 539 U.S. at 343
(internal citations omitted).
That same year, the Supreme Court, in
Gratz v. Bollinger, 539 U.S. 244 (2003),
addressed whether the University of
Michigan’s use of racial preferences in
undergraduate admissions violated the
Equal Protection Clause of the Fourteenth
Amendment and Title VI of the Civil
Rights Act of 1964. The Court found that
the undergraduate admissions policy of
awarding automatic “points” for race was
mechanical, not individualized, and made
race a decisive factor in the admissions
process. Id. at 271-72, 274. As such, the
Court held that the undergraduate admis-
sions policies were not sufficiently nar-
rowly tailored to meet the strict scrutiny
standard. Id. at 270. Because the policy
did not provide individualized consider-
ation of applicants but rather resulted in
the admission of nearly every qualified
applicant of “underrepresented minority”
status, it was not narrowly tailored in the
manner required by previous jurispru-

September 21, 2026 444 Bulletin No. 2026–39
dence to not violate the Equal Protection
Clause of the Fourteenth Amendment and
Title VI of the Civil Rights Act of 1964.
Id.
In 2016, in Fisher v. University of
Texas, 579 U.S. 365 (2016), the Supreme
Court again addressed whether the Equal
Protection Clause of the Fourteenth
Amendment permits the consideration of
race in undergraduate admissions deci-
sions. The Court held that the race-con-
scious admissions program in use at the
time by the University of Texas was law-
ful under the Equal Protection Clause. Id.
at 388. That admissions program had been
carefully crafted in light of Grutter, with
the goal of providing the educational ben-
efits of a diverse student body. The court
found that the University had met its bur-
den of showing that the admissions policy
was narrowly tailored, although it noted
that it “remains an enduring challenge to
our Nation’s education system to recon-
cile the pursuit of diversity with the con-
stitutional promise of equal treatment and
dignity.” Id. at 368. The court observed
that the University must continue to use
its data about the manner in which differ-
ent approaches to admissions may foster
diversity or instead dilute it to scrutinize
the fairness of its admissions program,
to assess whether the changing demo-
graphics have undermined the need for a
race-conscious admissions policy, and to
study the positive and negative effects of
its affirmative action measures. Id.
Most recently, the Supreme Court
held in Students for Fair Admissions,
Inc. v. President and Fellows of Harvard
College, 600 U.S. 181 (2023), that the
admissions policies of Harvard College
and the University of North Carolina had
employed unlawful racial discrimination
in violation of Title VI of the Civil Rights
Act of 1964 and the Equal Protection
Clause of the Fourteenth Amendment,
respectively. The Court discussed the
exacting nature of the strict scrutiny stan-
dard necessary to justify racial discrimi-
nation under the Equal Protection Clause,
explaining that, “[o]ur acceptance of
race-based state action has been rare for
a reason. Distinctions between citizens
solely because of their ancestry are by
their very nature odious to a free people
whose institutions are founded upon the
doctrine of equality. That principle cannot
be overridden except in the most extraor-
dinary case.” Id. at 208 (internal cites
omitted). Ultimately, the Court found that
these universities’ race-based admissions
policies did not survive strict scrutiny
because they “lack sufficiently focused
and measurable objectives warranting the
use of race, unavoidably employ race in
a negative manner, involve racial stereo-
typing, and lack meaningful end points.”
Id. at 230. The Court found flaw with the
dissenting opinions (which would have
upheld the race-based admissions pro-
grams based on remedying the effects
of societal discrimination), stating that
“[i]n the years after Bakke, the Court
repeatedly held that ameliorating societal
discrimination does not constitute a com-
pelling interest that justifies race-based
state action.” Id. at 226.
Explanation of Provisions
These proposed regulations would
provide that all forms of racial discrim-
ination in education, regardless of the
intent behind or the legality of such dis-
crimination (for example, where such
discrimination is defended as serving
remedial or diversity-related objectives),
are against a fundamental public policy
of the United States and thus preclude a
school’s exemption from Federal income
tax under section 501(c)(3). In so doing,
the proposed regulations would make
clear that discriminating based on race,
color, or national or ethnic origin for any
purpose by a private school is contrary to
a fundamental public policy of the United
States. This public policy is evidenced
by antidiscrimination law such as the
Equal Protection Clause of the Fourteenth
Amendment, the Civil Rights Act of 1964,
Supreme Court case law such as Brown to
Runyon to Bob Jones to Students for Fair
Admissions, and the actions taken by the
Executive Branch to ensure racial nondis-
crimination is instituted throughout the
United States.
3

If these regulations are finalized as
proposed, certain portions of Rev. Proc.
75-50, concerning private schools favor-
ing racial minority groups with respect to
admissions, facilities and programs, and
financial assistance, would be incompati-
ble with the new rules. Accordingly, Rev.
Proc. 75-50, as modified by Rev. Proc.
2019-22, would be modified by deleting
the second sentence of section 3.02 and
the third and fourth sentences of section
4.05. Consistent with these proposed rules,
these modifications would take effect with
respect to taxable years of private schools
beginning after May 31, 2027, which is
expected to be after the date of publication
of final regulations in the Federal Regis-
ter: Apart from these modifications, Rev.
Proc. 75-50 (as modified by Rev. Proc.
2019-22) would remain in effect.
For the avoidance of any doubt, the
proposed regulations would not preclude
a private school from maintaining a reli-
gious mission, curriculum, or program of
observance, or from selecting students on
the basis of religious affiliation or mem-
bership. Use of a religiously based selec-
tion criterion does not become discrimina-
tion on the basis of race, color, or national
or ethnic origin merely because members
of the relevant religious community may
also share ancestry or ethnic character-
istics (so long as the selection criteria is
based solely on religion and not on shared
ancestry or ethnic characteristics). Simi-
larly, the proposed regulations would not
disturb the continued ability of an organi-
zation (including a private school) to take
actions or adopt policies intended to elim-
inate prejudice and discrimination, con-
sistent with existing §1.501(c)(3)-1(d)(2),
provided the organization achieves these
purposes by means other than actions or
policies that discriminate on the basis of
race, color, or national or ethnic origin.
Incorporating the long-standing hold-
ing of Rev. Rul. 71-447 in regulatory text
and removing the language in Rev Proc.
75-50 as to the favoring of racial minority
groups to further a school’s racially non-
discriminatory purpose would allow for
more consistent application of Federal
tax law across the United States and make
3
See, e.g., Executive Order 10730 (22 FR 7628; Sep. 24, 1957) (authorizing the use of the National Guard to enforce the desegregation of public schools in Little Rock, Arkansas); Executive
Order 14173 (90 FR 8633; Jan. 21, 2025) (directing agency heads to create plans to deter illegal discrimination, including at institutions of higher education); Executive Order 14280 (90 FR
17533; April 23, 2025) (directing the Secretary of Education and Attorney General to take action aimed at preventing racial discrimination in school disciplinary systems).

Bulletin No. 2026–39 445 September 21, 2026
clear to all private schools (that is, all
private primary and secondary schools,
colleges, professional or trade schools,
and universities) the need to eliminate all
impermissible racially discriminatory pol-
icies incompatible with the benefit of Fed-
eral income tax exemption. The proposed
regulations would achieve this result by
stating a clear, enforceable standard: pri-
vate schools cannot qualify as “operated
exclusively for exempt purposes” within
the meaning of section 501(c)(3) if they
adopt, maintain, or enforce any policy or
practice that discriminates on the basis of
race, color, or national or ethnic origin
in the administration of any educational
policy, admissions policy, scholarship or
loan program, athletic program, or other
school-administered or supported pro-
gram.
The proposed regulations would
achieve these objectives by adding a new
§1.501(c)(3)-2 to 26 CFR part 1.
Proposed §1.501(c)(3)-2(a) would
provide the general rule that a private
school (as defined in proposed §1.501(c)
(3)-2(c)) must be operated exclusively for
exempt purposes (within the meaning of
§1.501(c)(3)-1(d)) to be an organization
described in section 501(c)(3). It would
also provide that a private school that fails
to satisfy the nondiscrimination require-
ment of proposed §1.501(c)(3)-2(b) will
not be exempt from Federal income tax
under section 501(c)(3) with respect to
taxable years beginning after May 31,
2027, which is after the date final regula-
tions are expected to be published in the
Federal Register.
Proposed §1.501(c)(3)-2(b) would pro-
vide that a private school is not “operated
exclusively for exempt purposes” if it
adopts, maintains, or enforces any policy
or practice that discriminates on the basis
of race, color, or national or ethnic origin
in the administration of any educational
policy, admissions policy, scholarship and
loan program, athletic program, or other
school-administered or school-supported
program. Proposed §1.501(c)(3)-2(b)
would add that, for this purpose, policies
or practices that discriminate on the basis
of race, color, or national or ethnic origin
include policies or practices that so dis-
criminate for any purpose.
Lastly, proposed §1.501(c)(3)-2(c)
would provide that for purposes of pro-
posed §1.501(c)(3)-2, the term “private
school” means an organization that (deter-
mined without regard to the nondiscrim-
ination requirement of paragraph (b)) is
described in section 501(c)(3) and classified
as an educational organization described in
section 170(b)(1)(A)(ii) (that is, any pri-
vate primary or secondary school, college,
professional or trade school, or university).
The term does not include a governmental
unit, an agency or instrumentality of a gov-
ernmental unit, or an organization owned
or operated by an agency or instrumentality
of a governmental unit.
The proposed regulations are intended
to clarify the law applicable to qualifi-
cation for the Federal tax exemption of
private schools, which would eliminate
ambiguity and ensure consistent appli-
cation across all private schools. The
proposed regulations would also provide
administrative certainty for IRS person-
nel and ensure that Federal income tax
exemption does not benefit racially dis-
criminatory practices in education.
Proposed Applicability Date
The Treasury Department and the IRS
expect to finalize these regulations, with
any necessary modifications based on
timely comments received, in advance of
May 31, 2027. These regulations are pro-
posed to apply to taxable years of private
schools beginning after May 31, 2027. This
proposed applicability date will allow any
private schools that may need to amend
their existing policies, including admissions
or scholarship policies, to do so before the
beginning of any taxable year to which the
final regulations are expected to apply.
Special Analyses
I. Regulatory Planning and Review
Executive Orders 12866 and 13563
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, reducing costs, harmonizing
rules, and promoting flexibility.
These proposed regulations have been
designated by the Office of Management
and Budget’s (OMB’s) Office of Infor-
mation and Regulatory Affairs (OIRA)
as subject to review under section 6(b)
of Executive Order 12866 pursuant to
the Memorandum of Agreement (July 4,
2025) between the Treasury Department
and the Office of Management and Bud-
get regarding review of tax regulations.
OIRA has determined that the proposed
rulemaking is significant and subject to
review under Executive Order 12866
and section 1(b) of the Memorandum of
Agreement. Accordingly, the proposed
regulations have been reviewed by OMB.
A. Need for Regulation
The proposed regulations would pro-
vide that a private school which discrimi-
nates on the basis of race, color, or national
or ethnic origin in the administration of its
policies is not operated “exclusively for
charitable purposes.” Therefore, a pri-
vate school which engages in racial dis-
crimination cannot qualify for exemption
from Federal income tax. Consistent with
recent developments in the law,
4
these reg-
ulations hold that racial discrimination in
education is impermissible, regardless of
its intent (for example, to ameliorate the
effects of past racial discrimination).
B. The Statute and the Proposed
Regulations
The proposed regulations would pro-
vide that a private school cannot meet the
definition of an organization exempt from
Federal income tax if it discriminates on
the basis of race, color, or national or eth-
nic origin in administration of its educa-
tional, admissions, scholarship, athletic,
or other policies. It would further define
race-based action for the purpose of
ameliorating societal discrimination as a
form of discrimination. These regulations
would apply to private primary, second-
ary, preparatory, or high schools, as well
4
See Students for Fair Admissions v. President and Fellows of Harvard College, 600 U.S. 181 (2023) (SFFA).

September 21, 2026 446 Bulletin No. 2026–39
as colleges and universities, for taxable
years beginning after May 31, 2027.
C. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of the
proposed regulations relative to a no-ac-
tion baseline reflecting anticipated Fed-
eral income tax-related behavior in the
absence of these proposed regulations.
D. Affected Entities and Taxpayers
The Treasury Department and the IRS
estimate that the proposed regulations may
affect the 18,000 private elementary, sec-
ondary, and post-secondary schools in the
United States that currently qualify for tax
exempt status and the 750,000 students
attending these schools who may qualify
for scholarships allocated on the basis of
racial, ethnic, or national identity.
5
In addi-
tion, the Treasury Department and the IRS
estimate that the proposed regulations may
also affect taxpayers who donate to scholar-
ship funds administered by private schools,
and that use racial criteria to determine
eligibility to receive scholarship funds.
The Treasury Department and the IRS do
not have readily available parameters and
models to quantify the number of taxpayers
who make charitable contributions to sup-
port race-based scholarship funds adminis-
tered by private schools.
E. Economic Effects of the Proposed
Regulations
As postsecondary schools have already
changed their admissions policies following
the Supreme Court’s decision in Students
for Fair Admissions (SFFA), the Treasury
Department and the IRS anticipate that all
economic effects of this proposed regula-
tion on postsecondary schools will follow
from the requirement to apply such defini-
tion of discrimination to the administration
of scholarship and loan policies.
The Treasury Department and the IRS
expect that all private primary and sec-
ondary schools will adjust their admis-
sions criteria to conform to the proposed
regulations, so that they may retain their
tax-exempt status.
6
The proposed regula-
tions provide that to maintain tax exempt
status, schools may not discriminate on
the basis of race in their admissions pol-
icies, but the Treasury Department and
the IRS are not aware of any data that
would provide the extent to which private
primary and secondary schools currently
discriminate on the basis of race and eth-
nicity when admitting students. Further
to the extent that the number of primary
and secondary students being educated is
unchanged, it is expected that the change
in the racial composition of primary and
secondary students among public and pri-
vate primary and secondary schools will
have a minimal effect on primary and
secondary student outcomes or economic
growth in general. The Treasury Depart-
ment and the IRS also do not have the data
to model the cost to schools (that currently
discriminate based on race or ethnicity) of
changing admission criteria to maintain
compliance. Low-cost options to main-
tain compliance may be available to many
schools, but some schools may choose
higher cost options in order to meet other
objectives. To the extent that primary and
secondary schools have preemptively
adjusted admission criteria in the wake of
the SFFA decision regarding postsecond-
ary schools and to the extent that low cost
compliance options are available (even if
not chosen), compliance costs with regard
to private primary and secondary school
admission would be minimal.
The proposed regulations are not
expected to affect private school ath-
letic programs where inclusion is gen-
erally based on athletic ability, not race
or ethnicity. Further, while the proposed
regulations might also affect any other
school-supported programs or education
policies administered by private schools,
the Treasury Department and the IRS
assume that any economic effects arising
from this relatively narrow, miscellaneous
group of activities would be insignificant.
The proposed regulations are expected
to have three types of economic effects on
private school financial aid policies. First,
private schools may incur some legal and
administrative costs as they endeavor to
comply with the proposed regulations. Sec-
ond, the proposed regulations may affect
the distribution of scholarship and loan
funds among the population of students.
Third, the proposed regulations may affect
the charitable giving behavior of donors
who wish to provide scholarships or loans
where race, ethnicity, or national origin are
included in the set of eligibility criteria. In
all cases, if these nondiscrimination rules
are finalized as proposed, the Treasury
Department and the IRS expect that private
schools will comply in order to maintain
their tax-exempt status. This assumption is
based on the observed compliance with the
Supreme Court ruling in SFFA.
7
5
The Treasury Department and the IRS do not collect information on race or ethnicity. The number of students potentially qualifying for scholarships based on race or ethnicity is estimated
using a survey conducted by the GAO, (Linda G. Morra, “Higher Education: Information on Minority-Targeted Scholarships,” U.S. Government Accountability Office (GAO), HEHS-94-77,
January 14, 1994; last accessed February 19, 2026. https://www.gao.gov/assets/hehs-94-77.pdf).
6
Private primary and secondary schools were not directly affected by SFFA. However, following SFFA, several prominent advisors to private primary and secondary schools anticipated that
this decision would ultimately come to apply to K-12 private schools as well, and advised schools to adapt their admissions processes accordingly. Treasury and the IRS therefore anticipate
that a subset of these schools have already changed their admissions policies to reflect a definition of discrimination close to the one in the proposed rule. Smith, Kristin L. 2023. “6 Steps
for Private and Independent Schools in the Wake of the SCOTUS Affirmative Action Ruling.” https://www.fisherphillips.com/en/insights/insights/private-and-independent-schools-scotus-af-
firmative-action-ruling. Pass, Caryn G., Grace H. Lee, Janice P. Gregerson, and Ashley E. Sykes. 2023. “No More Affirmative Action: What Does the Supreme Court’s Decision Mean for
Independent Schools?” https://www.venable.com/insights/publications/2023/07/no-more-affirmative-action-what-does.
7
Prior to SFFA, experts anticipated that a race-blind admissions policy would impact the racial composition at only the most selective institutions, reducing the share of their student body which
comes from historically underrepresented racial, ethnic, or national groups, and correspondingly increasing the share of other students represented on these campuses (Reber, Goodman, and
Nagashima (2023)). Recent research finds evidence that SFFA has had this expected effect on admissions. In the year following SFFA, the shares of Black, Native American, Hispanic/Latino,
Native Hawaiian, and Pacific Islander students enrolled at the most selective schools fell (Snider, 2026). These findings are corroborated by Bloem et al. (2026), which further shows that these
students instead enrolled at less-selective schools, while the highest-achieving students belonging to other races, ethnicities, and nationalities, and residing in low-income neighborhoods, were
more likely to attend “Ivy Plus” colleges following SFFA. As the anticipated effect of this policy has thus far been borne out in empirical data, this evidence is consistent with compliance with
the Supreme Court ruling in SFFA. Bloem, Michael D., Ashley Edwards, J. Parker Goyer, Jessica Howell, Xiaowen Hu, Michael Hurwitz, Samuel J. Imlay, Jennifer Ma, and Matea Pender.
2026. “College Enrollment Patterns After SFFA v. Harvard.” EdWorkingPaper: 26-1392. Retrieved from Annenberg Institute at Brown University: https://doi.org/10.26300/6a7w-bq06.
Reber, Sarah, Gabriela Goodman, and Rina Nagashima. 2023. “Admissions at most colleges will be unaffected by Supreme Court ruling on affirmative action.” https://www.brookings.edu/
articles/admissions-at-most-colleges-will-be-unaffected-by-supreme-court-ruling-on-affirmative-action/. Snider, Emily. 2026. “The Impact of the 2023 Students for Fair Admissions v Har-
vard Decision on Undergraduate Demographics.” EdWorkingPaper: 26-1471. Retrieved from Annenberg Institute at Brown University: https://doi.org/10.26300/98fw-8558.

Bulletin No. 2026–39 447 September 21, 2026
1. Compliance costs for private schools
Private schools may incur some legal
and administrative costs as they endeavor
to comply with the proposed regulations.
These costs will depend, in part, on the
legal circumstances under which a race-
based scholarship was created. In the event
that a race-based scholarship was endowed
by a donor, whose letter of intent explicitly
stated that eligibility relies on race-based
criteria, schools may need to work with the
donors, or the donors’ heirs, to find an alter-
native set of eligibility criteria for the schol-
arship recipients. This process will incur
administrative and legal costs. The Treasury
Department and the IRS do not have readily
available parameters or models to precisely
assess the extent of such costs. However,
only a minority of scholarship dollars are
restricted by the donor’s intention: schol-
arship dollars funded by any restricted
endowment (restricted by race, ethnicity or
any other criterion) represent no more than
16 percent of total scholarship dollars.
8
Most scholarships and loans offered by
private schools are not endowed by a donor
with the express intent of restricting eligi-
bility based on race, ethnicity, or national
origin. For these scholarships and loans,
private schools would have the latitude to
revise eligibility criteria to conform to the
proposed regulation’s definition of racial
nondiscrimination. In this case, private
schools may use a different mechanism
for allocating scholarships and loans to
recipients, for example, using geographic
or income-based criteria in lieu of a racial
or ethnic criterion to determine scholar-
ship eligibility. The shift to using a differ-
ent mechanism is not expected to result
in significant compliance costs and may
be the preferred method for maintaining
compliance while targeting scholarships
and loans to certain students.
2. Changes in recipient population
The proposed regulations may affect
the distribution of private school scholar-
ship and loan funds among the population
of students. This would result in a change
in the composition of the pool of schol-
arship and loan recipients, but the total
value of scholarships and loans awarded,
and the number of scholarship and loan
recipients, are not expected to change.
The degree to which the composition of
the pool of scholarship and loan recipients
changes may also be limited.
The Treasury Department and the
IRS expect that donors may continue to
donate to private schools using alterna-
tive criteria, such as income, geography,
or first-generation student status. The
use of these alternative criteria results in
a weaker relationship with race and eth-
nicity and a stronger relationship with
other indicators of disadvantage such as
income.
9
The Treasury Department and
the IRS therefore anticipate that, should
donors come to rely on alternative criteria,
their gifts would ultimately benefit a pop-
ulation of scholarship recipients whose
socioeconomic characteristics are simi-
lar to, but do not precisely coincide with,
those of the counterfactual set of individu-
als who would have received scholarships
in the absence of the proposed rule.
The Treasury Department and the IRS
also expect that almost all private schools,
in order to maintain their tax-exempt sta-
tus, will adjust their scholarship and loan
criteria to conform to the regulations if
finalized as proposed. To the extent the
new criteria used by private schools to dis-
tribute scholarships and loans among their
students (for example, income and geog-
raphy) are correlated with race and ethnic-
ity, the change in the recipient population
may be limited. The Treasury Department
and the IRS do not have readily available
parameters and models to more precisely
assess the correlation between race and
ethnicity and other possible criteria that
may be used by private schools to distrib-
ute scholarships and loans.
3. Charitable giving behavior of donors
The Treasury Department and the IRS
expect that the proposed regulation may
affect the charitable giving behavior of
donors who wish to provide scholarships
or loans where race, ethnicity, or national
origin are included in the set of eligibility
criteria. These donors may find that eli-
gibility criteria other than race, ethnicity,
or national origin, can also be well-suited
to promoting educational attainment for
certain families. While the proposed rule
does prevent these donors from granting
scholarships based on race, ethnicity, or
national origin through schools, these
donors retain the ability to fund other
scholarships. By funding these alternative
scholarships, donors may achieve substan-
tially similar outcomes – both for the ben-
eficiaries of their gifts, and with respect
to their own tax liability – under the pro-
posed rule as they would have achieved in
its absence. As such, the Treasury Depart-
ment and the IRS expect that the regula-
tion will have a negligible impact on this
subset of charitable donors.
II. Paperwork Reduction Act
The proposed regulations do not create
new collection requirements, as defined
under the Paperwork Reduction Act (44
U.S.C. 35); and do not alter any previ-
ously approved OMB information col-
lection requirements and their associated
burden.
III. Regulatory Flexibility Act
The Secretary of the Treasury certifies
that these proposed regulations will not
have a significant economic impact on a
substantial number of small entities pur-
suant to the Regulatory Flexibility Act
(5 U.S.C. chapter 6). This certification is
based on the fact that although these pro-
posed regulations may affect as many as
18,000 private elementary, secondary, and
post-secondary schools, the proposed reg-
ulations would not impose new econom-
ically significant requirements on a sub-
stantial number of small entities seeking
Federal income tax exemption other than
legal requirements such entities likely
8
U.S. Department of Education, National Center for Education Statistics, Integrated Postsecondary Education Data System (IPEDS), Spring 2025, Finance component, retrieved on February
10, 2026, from https://nces.ed.gov/ipeds/use-the-data. This share represents the share of all institutional grants to students which are funded by endowments. Unfunded institutional grants
include the amount awarded to students from unrestricted institutional resources. Funded institutional grants include the amounts awarded to students from institutional resources restricted
for the purpose of student aid, such as scholarships and fellowships funded by gifts or endowment return restricted for that purpose.
9
Levine, Phillip, and Sarah Reber. 2023.“Can colleges afford class-based affirmative action?” Technical report, The Brookings Institution. https://www.brookings.edu/articles/can-colleges-af-
ford-class-based-affirmative-action/. Epple, Dennis, Richard Romano, and Holger Sieg. “Diversity and affirmative action in higher education.” Journal of Public Economic Theory 10.4
(2008): 475-501.

September 21, 2026 448 Bulletin No. 2026–39
already comply with. The proposed regu-
lations also would not impose a collection
of information on any entities (including
small entities). The economic effects of
the proposed regulations would follow
from the administration of scholarship
and loan policies by these private schools,
with effects on athletics and any other
school-supported programs or education
policies administered by private schools
being insignificant.
Private schools may incur some legal
and administrative costs as they endeavor
to comply with the regulations if finalized
as proposed to the extent of any race-based
scholarships that are endowed by a donor,
whose letter of intent explicitly stated that
eligibility relies on race-based criteria.
The income from a scholarship endow-
ment is restricted to fund scholarships, so
the impact of eliminating or transferring
any such funds on the operating budget
and investment assets of the school would
be minimal. To the extent that such pri-
vate schools have preemptively adjusted
admissions and scholarship criteria in
the wake of the SFFA decision, any such
effects would be attenuated towards zero.
The Treasury Department and the IRS
do not have readily available parameters
and models to precisely assess the extent
to which affected private schools would
pursue shifting criteria, returning funds,
or maintaining funds without granting
race-based scholarships, or the cost of
implementing such changes. However,
only a minority of scholarship dollars are
restricted by the donor’s intention: schol-
arship dollars funded by any restricted
endowment (restricted by race, ethnicity,
or any other criterion) represent no more
than 16 percent of total scholarship dol-
lars.
10
As such, the Treasury Department
and the IRS believe any legal and admin-
istrative costs to comply with the regula-
tions (if finalized as proposed) for those
private schools with existing endowed
race-based funds would not have a sig-
nificant economic impact on a substantial
number of small entities.
Notwithstanding this certification that
the proposed regulations would not have a
significant economic impact on a substan-
tial number of small entities, the Treasury
Department and the IRS invite comments
on the economic impacts these proposed
regulations may have on small entities.
IV. Section 7805(f)
Pursuant to section 7805(f) of the
Code, these proposed regulations will be
submitted to the Chief Counsel for Advo-
cacy of the Small Business Administra-
tion for comment on their impact on small
business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates
Reform Act of 1995 requires that agencies
assess anticipated costs and benefits and
take certain other actions before issuing a
final rule that includes any Federal man-
date that may result in expenditures in any
one year by a State, local, or Tribal gov-
ernment, in the aggregate, or by the pri-
vate sector, of $100 million in 1995 dol-
lars, updated annually for inflation. These
proposed regulations do not include any
Federal mandate that may result in expen-
ditures by State, local, or Tribal govern-
ments, or by the private sector, in excess
of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local gov-
ernments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of the Execu-
tive order. These proposed regulations
do not have federalism implications, do
not impose substantial direct compliance
costs on State and local governments, and
do not preempt State law within the mean-
ing of the Executive order.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any comments that are sub-
mitted timely to the Treasury Department
and the IRS as prescribed in this pream-
ble under the ADDRESSES heading. The
Treasury Department and the IRS request
comments on all aspects of the proposed
regulations. Any comments submitted
will be made available at https://www.
regulations.gov or upon request. A public
hearing will be scheduled if requested in
writing by any person that timely submits
electronic or written comments. Requests
for a public hearing are encouraged to be
made electronically. If a public hearing is
scheduled, notice of the date, time, and
place for the hearing will be published in
the Federal Register.
Effect on Other Documents
If these rules are finalized as proposed,
Rev. Proc. 75-50, as modified by Rev.
Proc. 2019-22, would be modified by
deleting the following sentences which
are incompatible with the proposed rules:
1. The second sentence of section 3.02.
2. The third and fourth sentences of
section 4.05.
Statement of Availability of IRS
Documents
Rev. Rul. 71-447 and Rev. Proc. 75-50
were published in the Internal Revenue
Bulletin and are available from the Super-
intendent of Documents, U.S. Govern-
ment Publishing Office, Washington, DC
20402, or by visiting the IRS website at
https://www.irs.gov.
Drafting Information
The principal author of these proposed
regulations is the Office of Associate Chief
Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes).
However, other personnel from the Trea-
sury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and record-
keeping requirements.
10
See Id.

Bulletin No. 2026–39 449 September 21, 2026
Proposed Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS propose to amend 26 CFR
part 1 as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for 26 CFR part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Par. 2. Section 1.501(c)(3)-2 is added
to read as follows:
§1.501(c)(3)-2 Racial
nondiscrimination requirement for
private schools.
(a) In general. A private school (as
defined in paragraph (c) of this section)
must be operated exclusively for one
or more exempt purposes (as defined in
§1.501(c)(3)-1(d)) to be an organiza-
tion described in section 501(c)(3) of the
Internal Revenue Code (Code). A private
school that fails to satisfy the nondiscrimi-
nation requirement of paragraph (b) of this
section is not an organization described in
section 501(c)(3) with respect to any tax-
able year of the private school described
in paragraph (d) of this section.
(b) Nondiscrimination requirement. A
private school is not operated exclusively
for exempt purposes if it adopts, main-
tains, or enforces any policy or practice
that discriminates on the basis of race,
color, or national or ethnic origin in the
administration of any educational pol-
icy, admissions policy, scholarship or
loan program, athletic program, or other
school-administered or school-supported
program. For purposes of this section, dis-
crimination on the basis of race, color, or
national or ethnic origin includes any dis-
crimination on the basis of race, color, or
national or ethnic origin for any purpose.
(c) Private school defined. For pur-
poses of this section, the term private
school means an organization described
in section 501(c)(3) (determined without
regard to the nondiscrimination require-
ment of paragraph (b) of this section) and
classified as an educational organization
described in section 170(b)(1)(A)(ii) of
the Code. The term private school does not
include a governmental unit, an agency or
instrumentality of a governmental unit, or
an organization that is owned or operated
by an agency or instrumentality of a gov-
ernmental unit. For purposes of this defi-
nition, the term governmental unit means
the United States, a State, an Indian Tribal
government (within the meaning of sec-
tion 7701(a)(40) of the Code), the District
of Columbia, a possession of the United
States, or a political subdivision of any of
the foregoing.
(d) Applicability date. This section
applies with respect to the taxable year of
any private school beginning after May
31, 2027.
Frank J. Bisignano,
Chief Executive Officer.
(Filed by the Office of the Federal Register Septem-
ber 3, 2026, 8:45 a.m., and published in the issue of
the Federal Register for September 4, 2026, 91 FR
56811)

Bulletin No. 2026–39 i September 21, 2026
Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current
use and formerly used will appear in
material published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.
—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

September 21, 2026 ii Bulletin No. 2026–39
Numerical Finding List
1
Bulletin 2026–39
Announcements:
2026-11, 2026-29 I.R.B. 49
2026-12, 2026-29 I.R.B. 50
2026-13, 2026-32 I.R.B. 173
2026-14, 2026-34 I.R.B. 180
2026-15, 2026-35 I.R.B. 214
2026-16, 2026-39 I.R.B. 413
Notices:
2026-39, 2026-27 I.R.B. 1
2026-38, 2026-28 I.R.B. 30
2026-40, 2026-28 I.R.B. 33
2026-41, 2026-29 I.R.B. 39
2026-42, 2026-29 I.R.B. 41
2026-43, 2026-29 I.R.B. 42
2026-21, 2026-30 I.R.B. 51
2026-44, 2026-32 I.R.B. 143
2026-28, 2026-34 I.R.B. 177
2026-46, 2026-35 I.R.B. 182
2026-48, 2026-35 I.R.B. 185
2026-49, 2026-35 I.R.B. 198
2026-50, 2026-36 I.R.B. 242
2026-51, 2026-38 I.R.B. 314
Proposed Regulations:
REG-101355-26, 2026-37 I.R.B. 249
REG-103844-26, 2026-37 I.R.B. 275
REG-115145-25, 2026-37 I.R.B. 298
CC-00349938-26, 2026-38 I.R.B. 317
REG-107855-25, 2026-38 I.R.B. 333
REG-117130-25, 2026-38 I.R.B. 343
REG-119882-25, 2026-38 I.R.B. 355
REG-115646-25, 2026-39 I.R.B. 414
REG-119986-25, 2026-39 I.R.B. 440
Revenue Procedures:
2026-25, 2026-29 I.R.B. 45
2026-18, 2026-30 I.R.B. 53
2026-26, 2026-31 I.R.B. 131
2026-32, 2026-32 I.R.B. 146
2026-28, 2026-33 I.R.B. 175
2026-30, 2026-35 I.R.B. 212
2026-32, 2026-39 I.R.B. 406
Revenue Rulings:
2026-12, 2026-28 I.R.B. 27
2026-13, 2026-32 I.R.B. 132
2026-14, 2026-35 I.R.B. 181
2026-15, 2026-36 I.R.B. 216
2026-16, 2026-36 I.R.B. 237
2026-17, 2026-37 I.R.B. 247
Treasury Decisions:
10051, 2026-31 I.R.B. 118
10052, 2026-31 I.R.B. 121
10050, 2026-32 I.R.B. 134
10053, 2026-36 I.R.B. 237
10054, 2026-39 I.R.B. 372
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2026–27 through 2026–52 is in Internal Revenue Bulletin
2025–52, dated December 21, 2025.

Bulletin No. 2026–39 iii September 21, 2026
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2026–39
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2026–27 through 2026–52 is in Internal Revenue Bulletin
2025–52, dated December 21, 2025.

Internal Revenue Service
Washington, DC 20224
Official Business
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