Section 163(a) allows a deduction for all interest paid or accrued within the taxable year on indebtedness. Section 163(h) generally disallows a deduction for personal interest. Section 163(h)(1) provides that a taxpayer other than a corporation cannot take a deduction for personal interest paid or accrued during the taxable year under chapter 1 of the Code (chapter 1). Section 163(h)(2) defines “personal interest” as any interest deductible under chapter 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 computing 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 section 6163 of the Code, and (f) any interest allowable as a deduction under section 221 of the Code.

As added by the OBBBA, new 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. 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 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, 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 taxable 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 treatment of refinancings and related party indebtedness.

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 deduction). 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 enumerated in section 63(b)(1) through (7). As amended by the OBBBA, new section 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 taxable income.

Section 6050AA(a) provides that any person engaged in a trade or business who, in the course of that trade or business, receives from any individual interest aggregating $600 or more for any calendar year on an SPVL, must file an information return reporting the receipt of interest. 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 interest 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 calendar 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 information 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 written statement showing the name, address, and phone number of the interest recipient, 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 “specified passenger vehicle loan” as the indebtedness described in section 163(h)(4)(B) with respect to any APV.

Section 6050AA(e) authorizes the Secretary 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.

Section 6011(e) authorizes the Secretary 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 prescribe regulations that require taxpayers to electronically file returns, including information returns, if the taxpayer is required to file at least 10 returns of any type during a calendar year.

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 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 information reporting requirements under section 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 calendar year 2025 on an SPVL.

On January 2, 2026, the Treasury Department and the IRS published a 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 proposed regulations proposed rules regarding 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 persons 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.

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.regulations.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 (collectively, comments) received in response to the proposed regulations, the Treasury Department and the IRS adopt the proposed regulations, as revised in response to the comments described in this Summary 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 Revisions or adopted in the final regulations. These comments included recommendations and questions regarding implementation 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.

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 classification) (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 taxable 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 commences 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 revisions to § 1.163-16(c)(3)(ii) (Exception for substitute vehicle due to an unforeseen 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 security 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 initial 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 subordinated. 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 involuntary 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 involuntary 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 lender’s control. Accordingly, the commenter recommended that the final regulations clarify that interest accruing from the loan origination date (rather than the lien perfection 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 insurance payment following a total loss claim. Accordingly, the commenter recommended that the final regulations clarify that temporary or permanent lien release events that occur after loan origination do not retroactively or prospectively disqualify 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) provides 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 taxpayer 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, minivan, van, sport utility vehicle, pickup truck, or motorcycle. Proposed § 1.163-16(b)(13)(ii) through (vii) defined the terms “car,” “minivan,” “van,” “sport utility vehicle,” “pickup truck,” and “motorcycle” 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 proposed § 1.163-16(b)(13)(v) definition of sport utility vehicle would exclude sport utility vehicles with a GVWR exceeding 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 definitions 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 definitions 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 limitation provided by section 163(h)(4)(D)(vi). Further, while the definition of motorcycle 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 motorcycle that do not reference a GVWR or curb weight limitation for vehicles. Additionally, for clarity and ease of administration, the final regulations define van and minivan by direct reference to the applicable EPA regulation. As under the proposed regulations, these revised definitions operate together with, and do not alter, the separate 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 relevant 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 compensation for the use or forbearance of money under the terms of an instrument or contractual 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 clarification on what constitutes interest for purposes of section 163(h)(4). Specifically, clarification was requested as to the treatment of stated periodic interest, prepaid interest (such as points), origination-related or financing-related charges, prepayment penalties, late payment charges, default-related charges, returned payment fees, and deferred or capitalized interest that is added to the outstanding principal balance in accordance with the terms of the indebtedness. Some commenters mentioned that certain of the fees are specifically 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 purposes 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 interest. The final regulations also provide that QPVLI includes origination-related or financing-related charges, prepayment penalties, late payment charges, default-related charges, and similar fees, if such charge, penalty, or fee is characterized 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 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 relevant 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.

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 commenters 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 “qualified passenger vehicle loan interest” or QPVLI, in relevant part, as interest paid on a loan incurred after December 31, 2024. Therefore, the Treasury Department and the IRS are not able to adopt the commenters’ recommendation as doing so would be inconsistent with the plain language of the statute.

One commenter asked how to identify the amount of interest if a vehicle is purchased 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 indebtedness is not secured indebtedness. Therefore, 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 connection 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 transaction, 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-related 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 warranties, guaranteed asset protection (GAP) insurance, credit-related insurance products (including credit-related accident, health, and life products), key fob replacement, and title and registration fees.

The Treasury Department and the IRS agree with the commenters that expanding 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 collision 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 Treasury Department and the IRS agree that indebtedness attributable to vehicle-related accessories that are components of the APV may be included in an SPVL. Accordingly, the final regulations provide that indebtedness incurred for vehicle-related accessories that are components of the APV purchased as part of an APV transaction may be an SPVL. Additionally, the final regulations now include language 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 industry-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 indebtedness 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 regularly 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 negative 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 indebtedness related to a prior purchased vehicle that is refinanced in connection with the purchase of a new vehicle. While proposed § 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 vehicle loan is not related to the purchase of the APV—the negative equity instead relates to a prior vehicle purchase transaction that is distinct from and unrelated to the APV purchase. Moreover, allowing 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 attributable to negative equity from being an SPVL.

c. Method of Allocating Interest

Proposed § 1.163-16(d)(2)(iii)(A) provided 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 indebtedness that is not an SPVL.

Two commenters requested guidance on acceptable allocation methods or, alternatively, requested confirmation as to whether reasonable allocation methods 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 interest on a proportional basis. For example, if a consumer financed a vehicle with a balance of $50,000 and $5,000 of that balance 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 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. 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 refinancing. 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 taxpayer, and proposed § 1.163-16(d)(4) provided 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 customary amounts incurred in a refinancing (for example, refinancing charges and vehicle-related consumer protection products, including warranties and insurance products) constitute indebtedness 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 purchased the APV (for example, to get a lower interest rate than the rate charged by the dealer). As part of the refinancing, the customer finances the purchase of what would otherwise be “customarily financed” items or amounts in an APV purchase transaction, such as GAP insurance, that the customer did not purchase in connection with the original APV purchase 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 products 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 regulations do not adopt these comments.

Several commenters requested that the Treasury Department and the IRS clarify in the final regulations whether the inclusion 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 taxpayer. Accordingly, the Treasury Department 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 refinancing 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 satisfied.

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 exclusively 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 original use of a vehicle does not commence with the dealer unless the dealer registers or titles the vehicle. In the case of a purchaser that is not a dealer and that incurs indebtedness to purchase a vehicle, proposed § 1.163-16(e)(2)(i) provided that original use of the vehicle does not commence with that purchaser unless the vehicle 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 Treasury Department and the IRS clarify that the requirement that a vehicle be treated as a new vehicle under the loan documentation 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 taxpayer 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 Department and the IRS decline to adopt this recommendation.

Multiple commenters noted that State vehicle titling and registration requirements for demonstrator vehicles vary by State, leading to differing consumer outcomes in different jurisdictions. Specifically, 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, notwithstanding 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) provides 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 person 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 vehicle will generally begin with the dealer. In contrast, a dealer may own a demonstrator 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 customer 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 deduction 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 requirement if the original use of the property commences with the taxpayer. Section 1.168(k)-2(b)(3)(ii)(A) explains that original use means the first use to which the property is put, whether or not that use corresponds to the use of the property by the taxpayer. Example 2 in § 1.168(k)-2(b)(3)(vii)(B) applies the original use requirement 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 demonstrator does not constitute “original use” of the vehicle for the purposes of meeting the original use requirement. Similarly, § 1.163-16(e)(2)(v)(A) (Example 1: Demonstrator vehicles) of the final regulations 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 business.

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 original use of the vehicle for which indebtedness is incurred must commence with the taxpayer.

One commenter asked how the proposed 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 individuals purchase the vehicle and are obligors 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 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 § 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 vehicle 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 vehicle during or at the end of a vehicle lease term and finances that purchase by incurring a loan, the loan documentation generally 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: Vehicle 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 clarification 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 Treasury 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 vehicle 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. Section 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 operation of the vehicle included with the vehicle, whether or not the component parts are permanently installed in or on the vehicle. Proposed § 1.163-16(e)(3) provided that, to establish that final assembly occurred within the United States, the taxpayer 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 Administration (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 manufactured. Another commenter recommended an exemption to the final assembly requirement for any vehicle manufactured by certain large U.S. vehicle manufacturers. The Treasury Department and the IRS do not adopt these recommendations because section 163(h)(4)(D) explicitly requires that a vehicle must have undergone final assembly in the United States to be an APV.

One commenter noted that certain vehicle models with identical specifications may have undergone final assembly either in the United States or in other countries. Accordingly, the commenter recommended that the final assembly determination 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 commenter 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 marketed by a U.S.-headquartered manufacturer 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 manufacturer 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 recommendations.

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 manufacture 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’ convenience. 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 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.

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 indebtedness 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 personal use determination.

One commenter noted that the proposed regulations would complicate recordkeeping 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 purposes 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 taxpayer for any taxable year cannot exceed $10,000. Proposed § 1.163-16(h)(1) provided 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 clarify how the rules work if a taxpayer has multiple SPVLs. The commenter recommended that taxpayers be able to aggregate 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 taxpayer 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 modified adjusted gross income (MAGI) of the taxpayer for the taxable year exceeds $100,000. In the case of married taxpayers 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 clarification 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. Accordingly, comments requesting a change in the phaseout threshold amount for taxpayers 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 commenters requested a separate increased threshold for taxpayers that file a Federal income tax return with a filing status of head of household. The Treasury Department 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). Section 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 applicable dollar amount thresholds. Accordingly, 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 nonresident alien individuals may deduct QPVLI. The commenter noted that section 873(b) of the Code lists the nonbusiness deductions allowed for nonresident alien individuals 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 connected with income that is effectively connected with the conduct of a U.S. trade or business. See section 873. Thus, a nonresident alien individual will generally not be allowed to deduct QPVLI, which relates to indebtedness incurred to purchase an APV for personal use. However, in limited circumstances, interest connected to income that is effectively connected with the conduct of a U.S. trade or business will qualify as QPVLI. For example, 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 individual would be allowed under § 1.163-16(g)(2) to deduct the interest connected to that business as either QPVLI or as business 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 section 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 eligible to deduct QPVLI, subject to the allocation and apportionment rules in sections 861 and 933.

One commenter recommended that individuals with any filing status (including 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.

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 definitions 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 calendar year) have been grouped together in new § 1.6050AA-1(f)(1) and (2), respectively. As a result, the language in proposed § 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 provisions 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 section 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) provided 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). Proposed § 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 determining whether original use commences with 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 requirements 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 recipients 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 recipients do not currently maintain records that include whether the vehicle’s original use commences with the borrower, the vehicle’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 recipients to report interest on all vehicle loans and recommended that individual taxpayers 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 vehicle is an APV. However, as a result of the statutory interaction between sections 6050AA(d)(1) and 163(h)(4)(D), determining 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 (Applicable Passenger Vehicle (APV)) for a discussion 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 vehicle’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 recipient may not. One commenter requested simplified VIN and final assembly verification. 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 recipients 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 obligations. 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 harbor provisions related to the determination of whether a vehicle is an APV. One commenter requested that the Treasury Department and the IRS consider including 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 certifications regarding new vehicle status and original use.

The Treasury Department and the IRS decline to adopt a safe harbor for interest recipients with respect to determining whether a vehicle satisfies the requirements of section 163(h)(4)(D). Section 6001 of the Code provides that every person liable for tax or the collection thereof must keep such records, render such statements, make such returns, and comply with such rules and regulations as may be prescribed. Under § 1.6001-1(a), any person 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 information. This includes all of the information 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 section 6050AA information return. See part III.B.2 of this Summary of Comments and Explanation of Revisions (Specified Passenger Vehicle Loan (SPVL)) for a discussion 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) provided 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 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.

Many commenters requested that the final regulations not require interest recipients to report interest received on an SPVL. In general, these commenters 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 commenters claimed interest recipients do not currently possess sufficient information to determine whether a loan is an SPVL.

Many commenters indicated that interest recipients do not currently collect or 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 components of a vehicle loan. Other commenters claimed that interest recipients do not currently track interest allocable to negative 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 commenter requested that the final regulations 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 harbor allowing interest recipients to provide 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 taxpayers are able to know whether the vehicle 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 contracts from time to time, but do not currently have data regarding whether the death of the original payor of record is the reason for such transfer. These commenters generally requested that the final regulations 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 support permitting interest recipients to report interest received on all vehicle loans. Section 6050AA(a) provides that the information 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 commenter requested that the final regulations provide that interest recipients need only rely on the information contained in the retail installment sales contract. This commenter also requested that the final regulations 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 installment sales contracts may include some indication of whether a vehicle is purchased for personal or business use, this is not true of all such contracts. Further, even when a contract includes some indication 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 contracts, 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 commenters 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 mechanisms to confirm whether the borrower was the original owner during a refinance transaction or whether a refinanced vehicle was purchased during a qualifying year.

Some commenters requested that the final regulations adopt different, specific reporting requirements when a vehicle-secured loan is refinanced. These commenters claimed that, in a typical vehicle refinance transaction, lenders do not receive a copy of the prior retail installment sales contract, and that refinance lenders generally receive limited information. Some commenters recommended that the final regulations clarify that interest recipients may report interest paid on vehicle-secured refinance loans without making determinations regarding original purchase eligibility and that vehicle eligibility 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 ownership.

The Treasury Department and the IRS acknowledge the concerns raised by these commenters and are aware that interest recipients may need to collect more information 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), determining whether the vehicle loan is an SPVL is necessary to determine whether reporting is required under section 6050AA. Section 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 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 diligence 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 limitations in section 163(h)(4)(C). Therefore, to minimize the risk of recipients claiming 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 Revisions (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 calendar 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 regulations on how to correct information returns under section 6050AA. IRS Publication 1099, General Instructions for Certain Information Returns, includes information on how to file corrected information 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) provided 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 collects 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 interest 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 interest is engaged in a trade or business and would receive the interest in the course of its trade or business if it received the interest 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 considered the interest recipient in a securitization structure for retail installment sales contracts. This commenter also requested confirmation that parties may contractually 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 historically been securitized, and the final regulations 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 regarding 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 information 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 regulations address how reporting obligations should be satisfied if the interest recipient enters bankruptcy or is otherwise unable to report for a calendar year. The Treasury Department and the IRS decline to address the consequences of bankruptcy on an interest recipient’s reporting obligation 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 securitized.

5. Payor of Record

Proposed § 1.6050AA-1(b)(5) defined a “payor of record” on an SPVL as any person 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 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 proposed 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 furnished a written statement on the SPVL under § 1.6050AA-1(a)(2)(ii).

Another commenter requested clarification on what, if any, reporting obligations exist when the borrower is deceased at the time of the filing deadline. This commenter requested that the final regulations include guidance confirming that the interest recipient may rely on available public records, correspondence, or obligor account status indicators to determine 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 proposed § 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 location in the United States. Under proposed § 1.6050AA-1(c)(2), an interest recipient that is a foreign person and receives interest at locations outside the United States would be required to report only if the foreign person is a controlled foreign corporation (as defined in section 957(a) of the Code) or if 50 percent or more of the foreign person’s gross income was effectively connected with the conduct of a trade or business within the United States.

One comment requested guidance regarding the information reporting obligations of foreign persons holding securitized 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 holding securitized interests in a vehicle loan with reporting obligations under section 6050AA are subject to the same requirements as domestic interest recipients holding 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) provided 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 decedent’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 applicable to nonresident alien individuals who pay mortgage interest in § 1.6050H-1(d)(2). Accordingly, the Treasury Department 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 decedent’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 outstanding principal on the SPVL as of the beginning 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 description 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 taxpayer identification number of the payor of record; (ii) the name, address, and taxpayer identification number of the interest 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 calendar 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 recommended 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 commenters claimed that interest recipients may experience difficulties accurately reporting the VIN. One commenter recommended 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 associated 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 verify other statutorily mandated information. 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 clarification 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 Treasury Department and the IRS confirm that the date acquired information provides the taxpayer with information regarding which period is covered by each information return rather than requiring consolidated reporting by multiple interest recipients.

G. Requirement to Furnish a Written Statement

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 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 proposed § 1.6050AA-1(a) to furnish a statement to the payor of record. Under proposed § 1.6050AA-1(g), the recipient 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 identifying the statement as important tax information 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 interest recipients should not be required to furnish a written statement to the payor of record. In general, these commenters recommended 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 furnish 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 section 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 recipients 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 inappropriately deputizes the interest recipient as an enforcement authority or tax deduction eligibility auditor.

The Treasury Department and the IRS decline to make any changes to the legend in response to these comments. The legend 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 regulations. Another commenter recommended that the final regulations clarify that the written statement can be sent in an electronic form if the payor of record has consented to receiving disclosures electronically under the Electronic Signatures in Global and National Commerce Act (E-SIGN Act), Public Law 106-229, 114 Stat. 464 (June 30, 2000).

The Treasury Department and the IRS decline to modify the rules regarding the electronic furnishing of certain payee statements because they are outside 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, General Rules and Specifications for Substitute 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 furnishing requirements applicable to persons 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 reporting 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 information reporting responsibility under section 6050AA. In Notice 2025-57, the Treasury Department and the IRS provided transitional guidance with respect to the reporting obligations under section 6050AA with regard to interest that the recipient received on an SPVL in calendar year 2025. However, taxpayers need the information reported under section 6050AA to complete their personal 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 transitional guidance or phased implementation in the final regulations.

Some commenters requested penalty relief for good-faith efforts made by interest 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 commercially reasonable efforts. In the refinance context, one commenter requested confirmation 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 refinancing, 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 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 6724(a) provides that no penalty may be imposed under sections 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 applicability date included in the final regulations and Notice 2025-57. The Treasury Department and the IRS confirm that an interest recipient may satisfy the reporting 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 commenter requested additional clarification on the recordkeeping and reporting requirements for taxpayers. Another commenter recommended adding a specific record retention requirement for recipients 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 liabilities. See section 6011 and § 1.6001-1(a). The Treasury Department and the IRS have determined that providing additional record retention requirements for taxpayers 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.

The final regulations include a revision to proposed § 301.6011-2 to reflect that Form 1098-VLI is used to report information 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 correcting 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.

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits 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 designated by the Office of Management and Budget’s (OMB’s) Office of Information 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 determined that the final rulemaking is significant 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 regulations 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 Code² to provide a newly allowable income tax deduction for qualified passenger vehicle loan interest (QPVLI). In the absence of regulations, taxpayers would face substantial 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 information 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; defining “indebtedness incurred for the purchase 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 requirements; clarifying that the deduction is limited to $10,000 per return, regardless of the taxpayer’s filing status; providing rules for determining whether “final assembly” of a vehicle occurred in the United States; and offering further definitions 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 taxpayers 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 December 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 requirement for taxpayers to include the VIN of the APV on the tax return in order to claim the deduction.

The final regulations provide definitions 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 interest 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 personal 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 percent 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 benefit 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, respectively. Further, under the final regulations, the taxpayer is not required to reevaluate compliance with the personal use standard in taxable years after the indebtedness is incurred. The final regulations also clarify that taxpayers may not deduct the same interest as both QPVLI and otherwise deductible interest (such as a business interest expense) and that taxpayers must report certain information relating to vehicle interest deducted independent of QPVLI.

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 vehicle. 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 eligible 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-related 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 purchase 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 limitations on the amount of QPVLI that a taxpayer may deduct. The dollar limit is $10,000 per taxable year. The final regulations clarify that this limit applies regardless of the taxpayer’s filing status 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 taxable 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 criteria 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, registered, or titled. For purchasers that incur indebtedness to purchase a vehicle, original use does not commence with the taxpayer unless the loan documentation treats the vehicle as a new vehicle. The final regulations provide that taxpayers can determine the location of final assembly by (1) the plant of manufacture 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 refinancing.

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 taxpayers 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 individual 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 regulations provide operational definitions and rules for complying with the information reporting requirements. The final regulations 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 provide 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 borrower. This follows established practice with respect to information reporting requirements for qualified residence interest.

The Treasury Department and the IRS have assessed the benefits and costs of the final regulations relative to a no-action baseline reflecting anticipated Federal income tax-related behavior in the absence of the final regulations.

The final regulations affect individuals, 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 aggregating $600 or more for any calendar year on an SPVL and is therefore subject to certain information reporting requirements. 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 information returns.

Under section 163(h)(4), the deduction 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 Department and the IRS estimate that in 2024, roughly 6 million loans originated on new U.S.-assembled vehicles. See Table A. Retail sales of new light vehicles in the U.S. totaled about 16 million in 2024³; roughly 60 percent of new vehicle purchases are financed with loans⁴; and analysis of vehicle model sales data suggests that about 60 percent of vehicles 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 vehicle loans.

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 System (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.

The final regulations clarify the statute and facilitate taxpayers claiming the QPVLI deduction. Consider, for example, a taxpayer who is purchasing a vehicle. 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 vehicle, a U.S.-assembled versus foreign-assembled vehicle, and a cash purchase versus 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 vehicle 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 sufficient 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 regulations direct taxpayers to the National Highway Traffic Safety Administration (NHTSA) VIN Decoder website to determine 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 facilitating 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 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 following sections describe in further d/eableail 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 purchase that the APV will be used for personal 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 standard benefits taxpayers who debt-finance mixed-use vehicles who would be disallowed from taking the deduction for QPVLI under stricter, alternative standards. 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 expecting 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 interest properly allocable to a trade or business. (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 confidential 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 eligibility for the QPVLI deduction. See Table C.

Tax records also contain information on mixed personal and business use vehicles. Sole proprietors file Schedule C to record business income and expenses, including 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 vehicle 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, 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 nonetheless 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 proprietors 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 vehicle was also available for personal use during off-duty hours. Among filers for whom the vehicle was available for personal 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 percent. These estimates suggest that a substantial 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 exclusive personal use.

The personal use rules also benefit taxpayers by providing clarity. In the absence of a personal use standard, two taxpayers with otherwise similar tax situations would face uncertainty as to whether this deduction applies to their situation. Without guidance, these taxpayers might make different choices as to whether their vehicle loan interest qualifies for the deduction, and, therefore, face different tax liabilities. 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 requirement 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 vehicle is for personal use. The final regulations 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 taxpayers who use their vehicles for mixed personal and business purposes (vehicles on which loan interest would not be considered QPVLI under a strict personal use standard). For this population, the 50 percent 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-assembled 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 vehicles assembled in the U.S. and assembled abroad⁸; the salience of the tax deduction at the time of purchase⁹; and the extent to which taxpayers perceive the deduction as temporary, as prescribed in statute, or likely to be extended by future policymakers. 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 domestic manufacturing.

b. Personal Use Determined Soley by Taxpayer Expectation at Time Debt is Incurred

The final regulations provide that personal 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 taxpayers whose vehicles will be exclusively for personal use. The final regulations would benefit taxpayers by simplifying the process of claiming the QPVLI deduction, relative to a requirement for annual certification 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 allocate 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 constitutes an SPVL. Specifically, the final rules provide that indebtedness qualifies 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 service plans, extended warranties, and sales taxes and vehicle-related fees. Indebtedness incurred for collision and liability insurance or to purchase any property or services unrelated to the APV (for example, 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 definition (such as warranties and sales taxes), relative to a rule that excluded those items and amounts from the SPVL definition.

Alternative guidance could have prescribed that only debt directly attributable to the price of the vehicle is an SPVL and therefore that only interest on that portion of the loan is deductible. Such an alternative standard could result in substantial compliance costs to taxpayers and to lenders and interest recipients in requiring allocations of indebtedness and associated interest. For amounts customarily 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 payment.”¹⁰ A substantial share of taxpayers with QPVLI would therefore benefit from the SPVL definition, relative to an alternative definition that would require taxpayers to identify separately interest attributable 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 determine their QPVLI without needing information on interest amounts related to the price of the vehicle separate from interest amounts related to items and amounts customarily financed with the vehicle.

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 recordkeeping requirements. The recordkeeping requirements mentioned in the final regulations are considered general tax records under § 1.6001-1(e). These records are required for the IRS to validate that taxpayers have met the regulatory requirements and are entitled to the deduction for QPVLI under section 163(a) and (h)(4) and to verify the amount of the deduction 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 claiming the deduction for QPVLI under section 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 tax compliance purposes and by taxpayers 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 documentation 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 interest 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 information such as determining whether a vehicle 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 Explanation of Revisions (Applicable Passenger Vehicle (APV) and Specified Passenger 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 collection of information must be retained as long as their contents may become material 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.

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 substantial 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, section 604 of the RFA requires the agency to present a final regulatory flexibility analysis (FRFA) of the final regulations.

The Treasury Department and the IRS have determined the final regulations will likely have a significant impact on a substantial number of small entities. Accordingly, an FRFA is provided in the final regulations.

A. Need for and Objectives of the Rule

The final regulations provide the eligibility rules and key definitions regarding 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 provision regarding the QPVLI deduction to ease the financial burden of car ownership for individuals and promote domestic 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 information necessary for taxpayers to claim the deduction. Additionally, the final regulations 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 undergone 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 vehicles 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 information reporting requirements with respect to interest received on an SPVL. Information reporting under section 6050AA will provide taxpayers with information needed to claim the QPVLI deduction. The final regulations are expected to facilitate 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 regulations 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 flexibility analysis of the proposed regulations, but comments were received by the IRS on the general burdens associated with the proposed information collection, proposed reporting requirements, and documentation requirements contained in the proposed regulations. Some commenters referenced the entity size of specific interest recipients, including credit unions, and stated that these interest recipients do not currently track all the information necessary to comply with the proposed regulations. As described in the relevant portions of this preamble, the Treasury Department and the IRS have determined that the requirements included in the final regulations are necessary to administer section 163(h)(4) and related information reporting and penalty provisions. The Treasury Department and the IRS also have determined 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 business, as defined by the Small Business Administration. Small Business Administration regulations provide small business size standards by NAICS Industry. See 13 CFR 121.201.

As described more fully in this preamble 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 financial entities that would be required to file and furnish information returns under section 6050AA. The NAICS includes dealers of new vehicles and financial entities 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 section 6050AA. See part I.III of this Special Analysis (Affected Entities and Taxpayers). 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 Treasury 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 Treasury 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 complying with the recordkeeping and reporting requirements are described in part II of this Special Analyses (Paperwork Reduction Act). Based on the estimated number of responses (8,000,000) and the estimated 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 considered a delay for reporting by small businesses. Although this would ease the burden on small businesses, it would increase the burden on individuals who need the information reported under section 6050AA to accurately claim the deduction 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 statement 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 Statement), the requirement to furnish a statement to the payor of record is expressly required by sections 6050AA(c) and 6724(d)(2)(MM).

Pursuant to section 7805(f), the proposed regulations (REG-113515-25) preceding this final regulation were submitted to the Chief Counsel for the Office of Advocacy of the Small Business Administration for comment on its impact on small business, and no comments were received.

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 aggregate, 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 expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

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 governments, 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 Executive order.

Pursuant to the Congressional Review Act (5 U.S.C. 801 et seq.), the Office of Information and Regulatory Affairs designated this rule as a major rule, as defined by 5 U.S.C. 804(2).

This Background describes the rules for determining a United States shareholder’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 preamble has the meaning given to it in the proposed regulations.

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 corporation 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 corporation 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 corporations and other foreign entities (including 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 corporation.

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 taxable 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 relevant 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 corporation was a CFC. The amount determined under former section 951(a)(2)(A) was then reduced for certain distributions 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. Former 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 business 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 corporation’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 hypothetical distribution and reduction rules for determining a U.S. shareholder’s pro rata share of subpart F income under former 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 shareholder owned such stock, (ii) the shareholder was a U.S. shareholder of the corporation, 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 section 951(a)(3), any amount required to be included in gross income by a U.S. shareholder 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 corporation.

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. shareholder’s pro rata share of the tested income of each CFC with respect to which the shareholder 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. shareholder determines its pro rata share of subpart F income and tested items under the transition rule. The transition rule provides that certain dividends are not treated as dividends for purposes of applying former 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 December 31, 2025. See section 70354(c)(2)(A) of the OBBBA. Any dividend subject to the transition rule is not treated as a dividend for purposes of applying former section 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 reason of a dividends received deduction, an exclusion from gross income, or an exclusion 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 regulations 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 dividend does not increase the taxable income of a United States person subject to Federal income tax.

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 foreign controlled United States shareholder (FCUSS) of a foreign controlled foreign corporation (FCFC) by substituting “foreign controlled United States shareholder” for “United States shareholder” each place it appears and by substituting “foreign controlled foreign corporation” for “controlled 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 shareholder” in such section as including a reference to an FCUSS, and by treating each reference to a “controlled foreign corporation” in such section as including a reference 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 without regard to section 958(b)(4). Section 951B(c) provides that an FCFC is a foreign 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 certain foreign income taxes paid or accrued by the taxpayer plus, in the case of a corporation, 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 corporation under section 951A, the domestic corporation 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 foreign-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 corporation (other than a passive foreign investment company as defined in section 1297) with respect to which a domestic corporation 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 personal 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 corporation 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. Additionally, §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 reduction 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 reduction 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 reduction. An extraordinary reduction generally 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 shareholder’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 controlling section 245A shareholder and there would be an extraordinary reduction amount or tiered extraordinary reduction amount greater than zero. If the election is made, no amount is considered an extraordinary reduction amount or tiered extraordinary 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 shareholders of the CFC.

The proposed regulations would provide 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 proposed regulations would also modify information reporting regulations under section 6038 and the applicability date of certain regulations under sections 245A and 1502.

A. Overview

The proposed regulations under section 951 would provide rules to determine 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 taxable 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 discussed 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 generally retain the same approach to determining inclusions under section 951(a)(1)(B), this rule is consistent with the regulations 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 closing 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 corporation was a CFC. The Treasury Department and the IRS considered various recommendations for implementing the OBBBA’s revisions to the pro rata share rules. For example, the Treasury Department 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 taxpayers an election to close the taxable year of CFCs in certain circumstances comparable 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 mandatory 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 ownership 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. shareholder’s pro rata share under the proposed regulations would be the same as determined under the existing rules in §1.951-1(e) (see part II.E of this Explanation of Provisions). 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 permit a closing of the taxable year.

The Treasury Department and the IRS are of the view that other suggested approaches to address changes in ownership 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 attributable to a taxpayer’s ownership period differ from the pro rata share rules in that sections 951 and 951A require the allocation of subpart F income, tested income, or tested loss, each of which is a single, net amount determined at the foreign corporation level with respect to its taxable year. Cf. §1.706-4 (providing various rules, including a proration approach, interim closing method, and extraordinary item exception, where a partner’s interest in a partnership varies during its taxable year) and §1.1502-76(b) (permitting 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)(A) requires this result by referring to the pro rata share of “the corporation’s subpart 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 corporation’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 modifications for determining CFC status that generally are intended to prevent avoidance 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 corporation 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 corporation’s taxable year may mitigate potential compliance burdens associated with obtaining information relating to the foreign corporation while it is owned and controlled by foreign persons.

In other cases involving changes in the ownership of stock of a foreign corporation 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 subpart F income (as well as tested income or tested loss) proportionately based on the number of days in the CFC year, is consistent with the statute’s requirement to attribute an overall income amount to periods of ownership. See also §§1.1248-2 and 1.1248-3 (applying a similar daily proration approach for purposes of determining E&P attributable to foreign corporation stock owned by a United States person during certain periods). However, for certain changes in the ownership of stock of a CFC involving unrelated persons that generally result in shifts of ownership 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 applying 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 substantial 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 inability 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, potentially 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 administrative 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 determination 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 provide that a foreign corporation closes its taxable year if there is a status change event, which occurs if a foreign corporation becomes or ceases to be a CFC. See proposed §1.951-1(d)(1). If there is a status 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 corporation regardless of whether a particular shareholder’s ownership of stock in the foreign corporation changes.

The taxable year of the foreign corporation closes as of the end of the day on which the status change event occurs, which is the last day that the foreign corporation is or is not a CFC (unless the taxable 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 foreign 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 corporation 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 provide additional rules for domestic partnerships (including certain S corporations treated as partnerships by operation of section 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 partnership would not be treated as owning stock of a foreign corporation within the meaning 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 corporation that are subject to income inclusions 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 domestic partnership that are U.S. shareholders in the foreign corporation, the sale results in a status change event of the foreign corporation 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 corporation, 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. shareholders 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 Explanation 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 resulting 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 generally occurs if the specified transfers result in a decrease by more than 50 percentage points in section 958(a) shareholder ownership. See proposed §1.951-1(d)(2)(ii)(A). For this purpose, a specified transfer generally 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 interest, as well as an issuance of stock or a partnership interest.

Because a significant ownership variance 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 different days during the CFC’s default taxable year.

If there are multiple specified transfers that occur pursuant to the same plan on different days in a default taxable year of a CFC, the significant ownership variance 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 percent 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 transfers among related parties because, in those cases, the change in economic ownership of CFC stock is less meaningful or possibly absent. Likewise, there is less reason, from an accuracy and burden-reduction 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 manipulation (for example, transactions may be undertaken solely for purposes of closing a CFC’s taxable year). Accordingly, the proposed regulations would generally 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 proposed §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 making the election to close a CFC’s taxable year, the controlling section 958(a) U.S. shareholders are all the section 958(a) U.S. shareholders of a CFC whose ownership 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 agreement 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 shareholder 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 certain information in a statement that must be submitted to the IRS. See proposed §1.951-1(d)(2)(iv). The proposed regulations 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 provide a rule for allocating certain foreign income taxes that accrue during the period that would have been the foreign corporation’s taxable year if not for the mandatory or elective closing. A mandatory or elective closing of a foreign corporation’s taxable year can result in the foreign corporation’s foreign taxable year spanning multiple short U.S. taxable years. However, 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 allocation 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 percent of its foreign taxable income from January to June 30, 50 percent of the foreign 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 closing) 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, generally, the partnership’s taxable year would not close for any purpose of the Code solely as a result of the foreign corporation’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 distributive 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 status 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 foreign corporation would require a seller to obtain information from a buyer to determine the foreign corporation’s distributive share of partnership items includible in the foreign corporation’s first short taxable year, the proposed regulations would not provide for a closing of the partnership’s taxable year with respect to the foreign 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 partner’s entire interest in the partnership and therefore resulting in treating the partnership 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 provide rules for determining a U.S. shareholder’s pro rata share of a CFC’s subpart F income for a CFC year. This determination is made after the determination of the subpart F income of the CFC for the CFC year in accordance with section 952 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. shareholder owns stock of a foreign corporation while it is a CFC during the CFC year. See part II.E.2 of this Explanation of Provisions. 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 outstanding and there is no change in the number 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. shareholders (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 provide additional rules to address cases in which a foreign corporation has multiple classes of stock outstanding during a CFC year. In general, the proposed regulations would adopt the hypothetical 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 distributed to each class of stock in a hypothetical distribution of the CFC’s allocable earnings and profits on the last day of the CFC year (hypothetical distribution). 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 Explanation 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 hypothetical distribution applies to allocate the subpart F income of the CFC to the preferred 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 subpart 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 example, 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 hypothetical 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 provide 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 regulations 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 regulations would provide that the daily proration approach described in part II.E.2 of this Explanation of Provisions is applied with respect to a class of stock by substituting a weighted average share count for the number of the CFC’s shares outstanding during the CFC year when determining 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 profits 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 determining 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 selling 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.

A. Pro rata share of tested income or tested loss

The proposed regulations would revise §1.951A-1 to coordinate the determination 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 proposed 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 proposed §1.951-1(e)(2)(ii). See proposed §1.951A-1(d)(2)(ii) and (3). The examples under §1.951A-1 would also be modified 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 amendments 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 proposed regulations would also remove the rules for determining a U.S. shareholder’s pro rata share of qualified business asset investment, tested interest expense, and tested interest income. The Treasury Department and the IRS anticipate proposing additional changes to the regulations under section 951A to conform with the amendments made in the OBBBA in a separate guidance project.

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 determines 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 modify the information described in §1.6038-2(f)(8) regarding the outstanding stock of a foreign corporation to reflect the amendments 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 information set forth in §1.6038-2(f). This revision clarifies that additional information may be required on Form 5471 that is not described by regulation, consistent with section 6038(a)(1).

A. Section 951B

As described in part III.A of the Background, 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 section 951 would apply by substituting references to “United States shareholder” for “foreign controlled United States shareholder” and references to “controlled foreign corporation” for “foreign controlled foreign corporation.” The proposed regulations under section 951A would apply by treating each reference 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.

Because the proposed regulations would apply the same rules under sections 951 and 951A to FCUSSs and FCFCs pursuant 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 ownership variance to occur. The mandatory closing of a foreign corporation’s taxable year under proposed §1.951-1(d)(2), however, 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 mandatory 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 operation of section 951B.

B. Section 960

These proposed regulations would not make any changes to the regulations under section 960. While the determination 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 determine the foreign income taxes deemed paid by a domestic corporation as a result of its inclusions under sections 951(a)(1) and 951A.

A. Section 1.1502-80(j)

Section 1.1502-80(j) provides that, in determining the amount described in former section 951(a)(2)(B) that is attributable to distributions of previously taxed earnings and profits to which section 959(b) applies, members of a consolidated 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 former 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, former 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 longer necessary. Accordingly, under the proposed regulations, the extraordinary reduction rules would not apply for taxable years of foreign corporations beginning after December 31, 2025. See proposed §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 dividend to the extent of the E&P of the foreign 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 complex 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 foreign corporation. See §1.1248-3(c)(4) and (d)(6).

The determination of a U.S. shareholder’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 Treasury 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 regulations 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 proposed 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 Department 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 proposed regulations in a separate guidance project.

A. Application

The proposed regulations would provide rules for the application of the transition rule that are consistent with the rules described in the transition rule notice. See proposed §1.951-4.

For example, the proposed regulations would provide as a general rule that certain dividends are not treated as dividends for purposes of applying former section 951(a)(2)(B) to the extent the dividend does not increase the taxable income of a United States person subject to Federal income tax. See proposed §1.951-4(b). As described in section 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 purposes 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 extraordinary 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 Federal income tax. The proposed regulations would provide an example demonstrating 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 harbor 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 statement 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 ambiguous and potentially onerous. The commenter 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 recommended 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 commenter 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 mandatory under the Code and, for all other situations, 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 calculating their pro rata share of subpart F income or tested income when applying the transition rule, while adequately prescribing 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 appropriate. 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 substantiation requirement. Additionally, a specific description of the types of documentation 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).

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 sections 951, 951A, and 6038 are generally proposed to apply to taxable years of foreign corporations beginning after December 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 taxable years of foreign corporations beginning 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, requiring a U.S. shareholder to include in gross income its net CFC tested income instead of its GILTI inclusion amount, are made 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 taxable 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. shareholder, with the U.S. shareholder’s pro rata shares of the CFC’s tested items determined 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 provides 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 proposed regulations regarding the transition rule would apply to taxable years of a foreign corporation that either include June 28, 2025, or begin after June 28, 2025, but before the foreign corporation’s first taxable 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.

The Office of Management and Budget’s (OMB) Office of Information and Regulatory Analysis has determined that this proposed regulation is not significant and is not subject to review under section 6(b) of Executive Order 12866. Therefore, a regulatory impact assessment is not required.

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 individuals, 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 ownership 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 collection 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 Statement” 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 closing under proposed §1.951-1(d)(2).

The collection of information in proposed §1.951-4(h)(2) is mandatory for certain United States persons that are entitled 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 information is satisfied by a United States person attaching a statement to Form 5471 that describes how the United States person determined that the dividend increased the taxable income of a United States person that is subject to Federal income tax for the taxable year, applying the rules in proposed §1.951-4.

The collection of information in proposed §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 outstanding 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 former section 951(a)(2)(B) was appropriate and that the taxpayer is reporting the correct amount of taxable income. The recordkeeping requirements also include that certain taxpayers enter into a binding 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.

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (5 U.S.C. chapter 6) (RFA) requires the 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 entities. 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 substantial economic impact on a substantial number of small entities. A small entity is defined as a small business, small nonprofit 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 economic impact on a substantial number of small entities. The Treasury Department and the IRS have determined that the regulations may affect a substantial number of small entities but do not expect that the proposed regulations will have a significant economic impact on affected small entities within the meaning of sections 601(3) through (6) of the RFA. The proposed regulations provide guidance on issues regarding sections 951 and 951A and related provisions but do not change the economic impact of the existing regulations or impose any new costs on small entities. The proposed regulations would modify some existing reporting requirements as discussed in part II of this Special Analyses, but the modifications are not expected to impose significant costs on any entities. Notwithstanding this certification, the Treasury Department and the IRS welcome comments from the public about the impact of these regulations on small entities.

Pursuant to section 7805(f) of the Code, the proposed regulations have been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small businesses.

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 mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. In 2026, that threshold 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.

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 governments, 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 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 meaning of the Executive order.

Section 501(c)(3) describes, in part, organizations that are organized and operated exclusively for “charitable ... or educational purposes” provided certain restrictions on private inurement, lobbying, and intervention in political campaigns are not violated. Such organizations 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 contributions” to organizations specified in section 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 contribution to an educational organization that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in attendance at the place where its educational 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 normally 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 provisions 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 organization must be both organized and operated 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 “operational 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 organization to be exempt as an organization described in section 501(c)(3) if it is organized and operated exclusively for one or more of the exempt purposes specified in section 501(c)(3), which list includes charitable and educational purposes. Section 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 purposes that may fall within the broad outlines 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 organizations designed to ... eliminate prejudice and discrimination.”

Similar to the description of an educational 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 curriculum, a regular faculty, and a regularly enrolled body of students in attendance at a place where the educational activities are regularly carried on may qualify for exemption as an educational organization of the character contemplated by section 501(c)(3) if it otherwise meets the requirements of section 501(c)(3).

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 public schools violates the Equal Protection Clause of the Fourteenth Amendment. One year later, the Court reiterated that “full compliance” with Brown required 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 participation 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 discriminating against applicants based on their race. The same year, the Supreme Court confirmed that the protections of Section 1981 apply equally to all persons regardless 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, publish, and operate under a racially nondiscriminatory policy as to students and that failed to supply the IRS with certain information to ensure operation on a nondiscriminatory 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 nondiscriminatory policy as to students.” Id. at 1179. It further declared that this requires that “the school or other educational institution 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 exclusively, a policy of making no discrimination on the basis of race in administration of educational policies, applications for admission, of scholarship and loan programs, 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 exemption from Federal income tax. Consistent with Green v. Connally, the revenue ruling 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 activities generally accorded or made available 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 support, the revenue ruling states, “All charitable 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 prohibit the operation of private schools on a discriminatory basis, but states that the policy of the United States is to discourage 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 policy against racial discrimination which extends to racial discrimination in education. Titles IV and VI, The Civil Rights Act of 1964 . . . and Brown v. Board of Education . . . and many subsequent Federal 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, modified by Rev. Proc. 2019-22, 2019-22 I.R.B. 1260, to set forth guidelines and recordkeeping requirements for determining 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 nondiscriminatory 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 discrimination 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 discrimination on the basis of race when the purpose and effect is to promote the establishment 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 programs favoring members of one or more racial minority groups that are designed to promote a school’s racially nondiscriminatory policy will not adversely affect the school’s exempt status. Financial assistance programs favoring members of one or more racial groups that do not significantly 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 interpretation of section 501(c)(3) in Rev. Rul. 71-447, and upheld the IRS’s revocation of 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 policy. 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,” specifying 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 numerous acts of Congress, including the Civil Rights Act of 1964, and numerous executive orders “demonstrating the commitment of the Executive Branch to the fundamental policy of eliminating racial discrimination” for its conclusion that “[r]acially discriminatory educational institutions 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.

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 violated 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 programs, and that the use of racial quotas in university admissions constituted such an exclusion. 438 U.S. at 421. Four other justices, led by Justice Brennan, argued that Title VI’s prohibition on racial discrimination was coextensive with the Equal Protection Clause of the Fourteenth Amendment, 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 admissions 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 diversity of a university’s student body was a compelling state interest which could justify 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-conscious admissions policies should be limited in time since “[a] core purpose of the Fourteenth Amendment was to do away with all governmentally imposed discrimination based on race.” Id. at 341. The Court further stated that “racial classifications, however compelling their goals, are potentially so dangerous that they may be employed no more broadly than the interest 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 admissions policies were not sufficiently narrowly tailored to meet the strict scrutiny standard. Id. at 270. Because the policy did not provide individualized consideration 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 jurisprudence 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 decisions. The Court held that the race-conscious admissions program in use at the time by the University of Texas was lawful 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 benefits of a diverse student body. The court found that the University had met its burden 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 reconcile the pursuit of diversity with the constitutional 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 different approaches to admissions may foster diversity or instead dilute it to scrutinize the fairness of its admissions program, to assess whether the changing demographics 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 standard necessary to justify racial discrimination 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 extraordinary 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 stereotyping, and lack meaningful end points.” Id. at 230. The Court found flaw with the dissenting opinions (which would have upheld the race-based admissions programs 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 compelling interest that justifies race-based state action.” Id. at 226.

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits 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 Information 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 Budget 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 provide that a private school which discriminates 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 private school which engages in racial discrimination cannot qualify for exemption from Federal income tax. Consistent with recent developments in the law,⁴ these regulations 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 provide 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 ethnic origin in administration of its educational, 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, secondary, preparatory, or high schools, as well 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-action baseline reflecting anticipated Federal 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, secondary, 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 addition, the Treasury Department and the IRS estimate that the proposed regulations may also affect taxpayers who donate to scholarship 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 support race-based scholarship funds administered 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 regulation on postsecondary schools will follow from the requirement to apply such definition of discrimination to the administration of scholarship and loan policies.

The Treasury Department and the IRS expect that all private primary and secondary schools will adjust their admissions criteria to conform to the proposed regulations, so that they may retain their tax-exempt status.⁶ The proposed regulations provide that to maintain tax exempt status, schools may not discriminate on the basis of race in their admissions policies, 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 ethnicity 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 private primary and secondary schools will have a minimal effect on primary and secondary student outcomes or economic growth in general. The Treasury Department 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 maintain 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 postsecondary 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 athletic programs where inclusion is generally 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. Second, 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

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 alternative set of eligibility criteria for the scholarship 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: scholarship 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 eligibility 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 scholarship eligibility. The shift to using a different 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 scholarship and loan funds among the population of students. This would result in a change in the composition of the pool of scholarship 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 alternative criteria, such as income, geography, or first-generation student status. The use of these alternative criteria results in a weaker relationship with race and ethnicity 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 population of scholarship recipients whose socioeconomic characteristics are similar to, but do not precisely coincide with, those of the counterfactual set of individuals 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 status, 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 distribute scholarships and loans among their students (for example, income and geography) are correlated with race and ethnicity, 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 distribute 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 eligibility 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 substantially similar outcomes – both for the beneficiaries of their gifts, and with respect to their own tax liability – under the proposed rule as they would have achieved in its absence. As such, the Treasury Department and the IRS expect that the regulation will have a negligible impact on this subset of charitable donors.

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 previously approved OMB information collection requirements and their associated burden.

The Secretary of the Treasury certifies that these proposed regulations will not have a significant economic impact on a substantial number of small entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6). This certification is based on the fact that although these proposed regulations may affect as many as 18,000 private elementary, secondary, and post-secondary schools, the proposed regulations would not impose new economically significant requirements on a substantial number of small entities seeking Federal income tax exemption other than legal requirements such entities likely already comply with. The proposed regulations 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 endowment 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 private 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: scholarship dollars funded by any restricted endowment (restricted by race, ethnicity, or any other criterion) represent no more than 16 percent of total scholarship dollars.¹⁰ As such, the Treasury Department and the IRS believe any legal and administrative costs to comply with the regulations (if finalized as proposed) for those private schools with existing endowed race-based funds would not have a significant 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 substantial number of small entities, the Treasury Department and the IRS invite comments on the economic impacts these proposed regulations may have on small entities.

Pursuant to section 7805(f) of the Code, these proposed regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

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 mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. These 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.

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 governments, 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. 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 meaning of the Executive order.