These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2026–3

January 12, 2026

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

REG-110519-25, page 353.

The proposed regulations would update points of contact

within the Department of Justice and the IRS. The proposed

regulations are necessary to reflect a reorganization within

the Department of Justice to identify new points of contact

for matters involving the internal revenue laws. The proposed

regulations would also update points of contact at the IRS

for administrative claim submissions from taxpayers seeking

civil damages for certain unauthorized collection actions or

awards of administrative costs with respect to certain admin­

istrative proceedings.

REG-134219-08; REG-132251-11, page 358.

This document withdraws two notices of proposed rule­

making regarding innocent spouse relief.

INCOME TAX

REG-101952-24, page 349.

These proposed regulations relate to the taxation of

the income of foreign governments from investments in

Finding Lists begin on page ii.

the United States. In particular, these proposed regula­

tions provide guidance for determining when an acqui­

sition of debt by a foreign government is considered to

be commercial activity, and when a foreign government

has effective control of an entity engaged in commercial

activity. These proposed regulations will affect foreign

governments that derive income from sources within the

United States.

Rev. Rul. 2026-2, page 342.

Federal rates; adjusted federal rates; adjusted federal longterm rate, and the long-term tax exempt rate. For purposes

of sections 382, 1274, 1288, 7872 and other sections of

the Code, tables set forth the rates for January 2026.

T.D. 10042, page 320.

These final regulations relate to the taxation of the income

of foreign governments from investments in the United

States. In particular, these final regulations provide guid­

ance for determining when a foreign government is engaged

in commercial activity and when an entity is a controlled

commercial entity. The final regulations will affect foreign

governments that derive income from sources within the

United States.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing offi­

cial rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all sub­

stantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless other­

wise indicated. Procedures relating solely to matters of inter­

nal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rul­

ings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbar­

ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

January 12, 2026 

Bulletin No. 2026–3

Part I

26 CFR 1.892-3 through 5.

Background

T.D. 10042

On June 27, 1988, the Department of

the Treasury (Treasury Department) and

the IRS published in the Federal Register a notice of proposed rulemaking (53

FR 24100) (1988 proposed regulations)

with a cross-reference to temporary regulations under section 892 (TD 8211, 53

FR 24060) (1988 temporary regulations)

to provide guidance concerning the taxation of income of foreign governments

and international organizations from

investments in the United States following

changes made to section 892 of the Code

by section 1247 of the Tax Reform Act of

1986 (1986 Act) (Public Law 99-514, 100

Stat. 2085, 2583). After the 1988 temporary regulations and 1988 proposed regulations were published, section 892(a)(2)

(A) was amended by section 1012(t) of the

Technical and Miscellaneous Revenue Act

of 1988 (1988 Act or TAMRA) (Public

Law 100–647, 102 Stat. 3342, 3527-28)

to provide that income derived from the

disposition of any interest in a controlled

commercial entity (CCE) does not qualify for the exemption under section 892.

Section 1019(a) of TAMRA states that,

except as otherwise provided, any amendments made by TAMRA are effective as if

included in the provision of the 1986 Act

to which such amendment relates.

On August 1, 2002, the Treasury

Department and the IRS published

§ 1.892-5(a)(3) in the Federal Register

(TD 9012, 67 FR 49864) to provide that

the term “entity” for purposes of section

892(a)(2)(B) (defining “controlled commercial entity”) includes partnerships

(2002 final regulations).

On November 3, 2011, the Treasury

Department and the IRS published in the

Federal Register a notice of proposed

rulemaking (76 FR 68119) that would provide additional guidance for determining

when a foreign government is engaged in

commercial activity (2011 proposed regulations). On December 29, 2022, the Treasury Department and the IRS published

in the Federal Register a notice (87 FR

80108) to reopen the comment period for

the 2011 proposed regulations.

Also on December 29, 2022, the Treasury Department and the IRS published in

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Income of Foreign

Governments and of

International Organizations

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains

final regulations relating to the taxation of

the income of foreign governments from

investments in the United States. In particular, these final regulations provide guidance for determining when a foreign government is engaged in commercial activity

and when an entity is a controlled commercial entity. The final regulations will affect

foreign governments that derive income

from sources within the United States.

DATES: Effective date: These regulations

are effective on December 15, 2025.

Applicability dates: For dates of applicability, see §§ 1.892-3(c), 1.892-4(d),

and 1.892-5(e).

FOR FURTHER INFORMATION

CONTACT: Jack Zhou at (202) 3176938 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Authority

This document contains amendments

to the Income Tax Regulations (26 CFR

part 1) under section 892 of the Internal

Revenue Code (Code). These regulations

are issued under the express delegations

of authority under sections 892(c) and

7805(a) of the Code.

January 12, 2026

320

the Federal Register a notice of proposed

rulemaking (87 FR 80097) that would

make changes to § 1.892-5T(b)(1) to provide exceptions to the general rule that a

United States real property holding corporation (USRPHC), as defined in section

897(c)(2), which may include a foreign

corporation, is treated as engaged in commercial activity and, therefore, is a CCE if

the requirements of § 1.892-5T(a)(1) or (2)

are satisfied (2022 proposed regulations).

The Treasury Department and the IRS

received comments on the 2011 proposed

regulations and the 2022 proposed regulations, all of which are available at https://

www.regulations.gov or upon request. A

public hearing was not requested and none

was held. After taking into account and

addressing those comments, this Treasury

decision finalizes, with modifications, the

2022 proposed regulations and the 2011

proposed regulations. In addition, this Treasury decision finalizes proposed § 1.8923(a)(4) of the 1988 proposed regulations in

accordance with the modifications recommended by the comments to the 2011 proposed regulations, which were reiterated

by a comment to the 2022 proposed regulations. Since reopening the comment period

of the 2011 proposed regulations has not

resulted in any new or different comments,

§ 1.892-3(a)(4) is finalized without reproposing the provision (as discussed in part

II.B.2 of the Summary of Comments and

Explanation of Revisions). Terms used but

not defined in this preamble have the meaning provided in the final regulations.

Summary of Comments and

Explanation of Revisions.

The final regulations retain the general approach and structure of the 2011

proposed regulations and the 2022 proposed regulations, with certain revisions.

This section of the preamble discusses

the comments received in response to the

2011 proposed regulations and the 2022

proposed regulations, and explains the

revisions reflected in the final regulations.

I. Overview

Section 892 exempts a foreign government from U.S. income taxation under

Bulletin No. 2026–3

subtitle A of the Code on certain qualified

income received from investments in the

United States in stocks, bonds, or other

domestic securities, or financial instruments held in the execution of governmental financial or monetary policy. Section 892(a)(1)(A). This exemption does

not apply to income that is (1) derived

from the conduct of any commercial activity (whether within or outside the United

States), (2) received by a CCE or received

(directly or indirectly) from a CCE, or (3)

derived from the disposition of any interest in a CCE. Section 892(a)(2)(A).

Section 892 does not define the term

“foreign government.” The 1988 temporary

regulations generally define a foreign government to consist only of integral parts and

controlled entities of a foreign sovereign,

and define an “integral part” of a foreign

sovereign to include any body, however

designated, that constitutes a governing

authority of a foreign country. See § 1.8922T(a)(2). The 1988 temporary regulations

generally define a “controlled entity” of a

foreign sovereign to mean an entity that is

separate in form from a foreign sovereign

or otherwise constitutes a separate juridical entity if it satisfies certain requirements, including that it is wholly owned

and controlled by the foreign sovereign

directly or indirectly through one or more

controlled entities. See § 1.892-2T(a)(3).

The 1988 temporary regulations provide

that a controlled entity does not include

partnerships or any other entity owned and

controlled by more than one foreign sovereign. Thus, a foreign financial organization

organized and wholly owned and controlled

by several foreign sovereigns to foster economic, financial, and technical cooperation

between various foreign nations is not a

controlled entity for purposes of section

892. See § 1.892-2T(a)(3).

Section 892(a)(2)(B) provides that, for

purposes of section 892(a)(2)(A), a CCE

is any entity engaged in commercial activities (whether within or outside the United

States) and in which a foreign government

holds (directly or indirectly) interests that

meet specified thresholds. The 2002 final

regulations provide that the term “entity”

in section 892(a)(2)(B) means a corporation, a partnership, a trust (including a

pension trust described in § 1.892-2T(c)),

and an estate. See § 1.892-5(a)(3).

Section 892(c) authorizes the Secretary

to prescribe such regulations as may be

necessary or appropriate to carry out the

purposes of section 892.

II. Defining Commercial Activities

A. General rule

The 1988 temporary regulations define

commercial activities to include all activities (whether conducted within or outside

the United States) which are ordinarily

conducted by the taxpayer or by other persons with a view towards the current or

future production of income or gain. See

§ 1.892-4T(b). Furthermore, those regulations provide that an activity may be considered commercial activity even if that

activity does not constitute the conduct

of a trade or business in the United States

under section 864(b). Id.

The 2011 proposed regulations would

continue to define commercial activities to include all activities (whether

conducted within or outside the United

States) which are ordinarily conducted

for the current or future production of

income or gain, and provide that only

the nature of the activity, not the purpose or motivation for conducting it, is

determinative of whether the activity is

commercial in character.1 See proposed

§ 1.892-4(d) (which corresponds to the

rule in § 1.892-4T(b)). Moreover, the

2011 proposed regulations would provide that an activity may be considered

commercial activity even if that activity

does not constitute a trade or business for

purposes of section 162 or does not constitute (or would not constitute if undertaken in the United States) the conduct of

a trade or business in the United States

for purposes of section 864(b). Id.

Several comments generally recommended that the final regulations should not

distinguish between commercial activity

under section 892 and a trade or business

under section 864(b), or should provide

that an activity will not be treated as commercial activity if it would not constitute

a trade or business under section 864(b)

if it were carried on in the United States.

The comments recommended that the final

regulations provide additional guidance by

making the existing Treasury regulations

under section 864(b) applicable to foreign

governments under section 892.

The Treasury Department and the IRS

agree that, subject to express exceptions,

an activity that constitutes a trade or business for purposes of section 162 or constitutes (or would constitute if undertaken

in the United States) a trade or business in

the United States for purposes of section

864(b) is commercial activity; however, the

best reading of the term “commercial activities” as used in section 892 is that it has a

different and broader meaning than “trade

or business” under sections 162 and 864.

In drafting section 892, Congress opted

for a different term, “commercial activities,” instead of the familiar term “trade or

business.” The word “activities” denotes a

standard more easily satisfied than the term

“trade or business.” Congress’s decision to

use a different term should be given effect.

The final regulations therefore employ

a broad definition, and provide that commercial activities potentially include

activities that may not (or would not, if

undertaken in the United States) constitute the conduct of a trade of business in

the United States under section 864(b).

Accordingly, the final regulations do not

adopt the comments to limit the definition of commercial activities to activities

that are a trade or business under section

864(b). In addition, the final regulations

clarify that activities that constitute a

trade or business for purposes of section

162 or constitute (or would constitute if

undertaken in the United States) a trade or

business in the United States for purposes

of section 864(b) are commercial activities for purposes of section 892, except as

expressly provided otherwise.

Another comment suggested that the

position taken in proposed § 1.892-4(d)

(that an activity may be considered commercial activity even if it does not constitute a trade or business) appears contrary

to the rules of proposed § 1.892-4(e)(1)

(ii), which would provide that effecting

transactions in securities, commodities,

or financial instruments for a foreign gov-

The 2011 proposed regulations provided rules in proposed § 1.892-4(d) and (e) that correspond to the same rules stated in § 1.892-4T(b) and (c). These final regulations revise the structure

of the provisions of the 2011 proposed regulations to be consistent with the structure of the 1988 temporary regulations.

1

Bulletin No. 2026–3

321

January 12, 2026

ernment’s own account does not constitute

commercial activity regardless of whether

the activity constitutes a trade or business.

The Treasury Department and the IRS do

not agree with this comment, and are of the

view that the 2011 proposed regulations

are internally consistent. Proposed § 1.8924(d) would define the term commercial

activities generally to include activities

beyond those that would constitute a trade

or business, while proposed § 1.892-4(e)

(1)(ii) would provide a specific exception

to that general rule for trading activities.

The final regulations remove the reference

to trade or business activity to clarify the

trading exception under § 1.892-4(c)(2)

(formerly proposed § 1.892-4(e)(1)(ii)).

B. Investment exception

Section 892 does not identify specific

activities that do or do not constitute commercial activities. However, the regulations

under section 892 provide that commercial

activities do not include investment activities, cultural events, governmental functions, purchasing of goods for use of the

foreign sovereign, and non-profit activities.

See, for example, § 1.892-4T(c).

The 2011 proposed regulations would

provide an exclusive list of investments

that are not treated as commercial activities. This list includes investments in

stocks, bonds, and other securities (as

defined in § 1.892-3T(a)(3)); loans;

investments in financial instruments (as

defined in § 1.892-3T(a)(4)); the holding

of net leases on real property; the holding

of real property which is not producing

income (other than on its sale or from an

investment in net leases on real property);

and the holding of bank deposits in banks.

See proposed § 1.892-4(e)(1)(i) (which

corresponds to § 1.892-4T(c)(1)(i)). The

2011 proposed regulations’ investment

exception also would provide that transferring securities under a loan agreement

which meets the requirements of section

1058 is an investment and not commercial

activity, and that an activity will not cease

to be an investment solely because of the

volume of transactions of that activity or

because of other unrelated activities.

The 2011 proposed regulations also

would provide that investments (including loans) made by a banking, financing,

or similar business constitute commer-

January 12, 2026

cial activities, even if the income derived

from such investments is not considered

to be income effectively connected with

the active conduct of a banking, financing,

or similar business in the United States by

reason of the application of § 1.864-4(c)(5).

See proposed § 1.892-4(e)(1)(iii) (which

corresponds to § 1.892-4T(c)(1)(iii)).

1. Investment in Loans

The exclusive list of investments that are

not treated as commercial activities under

the 2011 proposed regulations includes the

term “loans.” See proposed § 1.892-4(e)(1)

(i) (which corresponds to § 1.892-4T(c)(1)

(i)). A comment stated that there is uncertainty as to the circumstances in which loan

origination is commercial activity. The

comment recommended that lending (and

charging of associated fees) should not be

treated as commercial activity unless an

entity offers to make loans to the general

public or makes more than five loans in a

single year.

The recommendation of the comment

is not adopted in the final regulations

because the Treasury Department and the

IRS do not agree that making loans to

the general public or making a particular

minimum number of loans constitute necessary conditions for loan (or other debt)

acquisitions to be commercial in character, or that a lack of those characteristics

necessarily indicates absence of commercial activities. The Treasury Department

and the IRS are separately proposing rules

in this issue of the Federal Register as

to when acquiring a loan or other debt,

including in connection with original issuance, is treated as an investment for purposes of section 892.

2. Investment and Trading in Financial

Instruments

The 1988 temporary regulations provide

an exception from commercial activities for

investments in financial instruments held

in the execution of governmental financial

or monetary policy. See § 1.892-4T(c)(1).

The 2011 proposed regulations would have

modified this exception by providing that

investments in financial instruments (as

defined in § 1.892-3T(a)(4)) are not treated

as commercial activities, without regard to

whether the financial instruments are held

322

in the execution of governmental financial

or monetary policy. See proposed § 1.8924(e)(1)(i) (which corresponds to § 1.8924T(c)(1)(i)). The 2011 proposed regulations also would have added financial

instruments (as defined in § 1.892-3T(a)

(4)) to the trading exception under § 1.8924T(c)(1)(ii), without regard to whether the

financial instruments are held in the execution of governmental financial or monetary

policy. See proposed § 1.892-4(e)(1)(ii).

Section 1.892-3T(a)(4) defines financial

instrument to include any forward, futures,

options contract, swap agreement or similar

instrument in a functional or nonfunctional

currency (as defined in section 985(b)) or

in precious metals when held by a foreign

government or central bank of issue (as

defined in § 1.895-1(b)).

Numerous comments to the 2011 proposed regulations recommended clarifying

that all transactions in financial instruments

that are within the scope of the trading

safe harbors under section 864(b), including derivative transactions within the

scope of the 1998 proposed regulations

(63 FR 32164, June 12, 1998) under proposed § 1.864(b)-1, be treated as within

the investment and trading exceptions of

proposed § 1.892-4(e)(1)(i) and (ii) (which

correspond to § 1.892-4T(c)(1)(i) and (ii)).

Certain of these comments asserted that

investing in these financial instruments is

no less passive than a direct investment

in stocks or securities and, therefore, the

recommended clarification would be consistent with the purposes of section 892.

Comments also recommended expanding

the definition of the term “financial instrument” in § 1.892-3T(a)(4) to include all

types of market standard derivatives. The

recommendation was reiterated by a comment to the 2022 proposed regulations.

The Treasury Department and the IRS

generally agree that investing and trading

by a foreign government investor in financial instruments that are derivatives within

the scope of the proposed regulations

under section 864(b) are not commercial

activities. See Prop. Reg. § 1.864(b)-1(b)

(2), 63 FR 32164, June 12, 1998. Investing

and trading in such financial instruments

generally involve only putting capital at

risk and do not involve activity such as

structuring the instrument, in contrast to

structuring of bespoke, non-market standard derivatives; thus, the expected return

Bulletin No. 2026–3

is generally a return exclusively on capital rather than on the activities conducted.

Accordingly, the final regulations adopt

these comments by revising the definition of the term “financial instrument”

under § 1.892-3(a)(4) to include financial

instruments that are derivatives, which

the final regulations define in a manner

that is substantially similar to the definition in proposed § 1.864(b)-1(b)(2). As a

result, a foreign government may invest

and effect transactions (as a nondealer)

for its own account with respect to these

expanded types of financial instruments

without being treated as engaged in commercial activities. See § 1.892-3(a)(4)(i).

If, however, a contract or other financial

instrument would be characterized under

general Federal income tax principles

as resulting in beneficial ownership of

a reference asset, the determination of

whether the foreign government investor is conducting commercial activity is

made based on ownership of that asset

and not with regard to the financial instrument. Moreover, if a contract or similar

arrangement is not a derivative described

in § 1.892-3(a)(4)(i), and does not otherwise qualify as an investment within the

meaning of § 1.892-4(c)(1), effecting a

transaction for one’s own account in that

contract or similar arrangement may be

commercial activity unless it is within

the scope of an exception to commercial

activities under §§ 1.892-4(c) and 1.8924T(c). The final regulations also make

changes to the structure of § 1.892-3T(a)

(4) by separating the provision into separate paragraphs for ease of reference.

See § 1.892-3(a)(4)(i) and (ii). The final

regulations finalize proposed § 1.892-3(a)

(4) of the 1988 proposed regulations with

modifications in accordance with the comments discussed above, together with the

changes described herein, and remove the

provision from the temporary regulations

that were published on the same date.

3. Holding of Non-functional Currency

A comment recommended adding the

holding of non-functional currency in a

capacity other than a dealer or financial

institution to the exclusive list of investments that are not treated as commercial

activities. The Treasury Department and

the IRS agree with this comment because

Bulletin No. 2026–3

solely holding one’s own cash, whether or

not in functional currency, is not an activity ordinarily conducted for the current

or future production of income or gain.

Although currency deposited in a bank may

produce income or gain, merely depositing

currency does not rise to the level of commercial activity. Since a foreign government entity generally would hold currency

(whether functional or non-functional) in a

bank deposit, the Treasury Department and

the IRS are revising the rule for holding of

bank deposits to clarify that the exception

includes the holding of bank deposits in

any currency. See § 1.892-4(c)(1)(i). The

comment also recommended excluding

currency gains from commercial activity

income, but this recommendation is beyond

the scope of the final regulations. Therefore, the final regulations do not adopt this

recommendation.

4. Receipt of Certain Fee Income

A comment recommended an exception

from commercial activity for the receipt of

certain fee income as a passive investor in

a private equity or private credit fund. The

comment noted that foreign governments

and their controlled investment vehicles

that invest in private equity or similar

funds may negotiate for the right to share

in fees for services provided to portfolio

companies by the sponsor of the fund. The

comment thus recommended that a foreign government investor should not be

treated as conducting commercial activity

solely by reason of receiving a share of the

fees for services performed by the sponsor

if the foreign government holds (directly

or indirectly) an equity interest in the

underlying fund, subject to certain conditions. The comment also asserted that a

foreign government investor should not be

treated as conducting commercial activity

if it receives fees incidental to providing

capital for an investment in debt or equity

of an underlying issuer. The comment

contended that the receipt of these types of

fees is not commercial activity because the

fees are payable for making, continuing to

make, or having made capital available to

the underlying issuer for an investment

otherwise described in § 1.892-4T(c)(1).

The final regulations do not adopt this

comment. The Treasury Department and

the IRS are of the view that, for purposes of

323

determining whether a foreign government

is engaged in commercial activities, the

best reading of the term “commercial activities” is that it is concerned with the nature

of the activity performed by, or attributable to, the foreign government. To the

extent the commercial activities of a fund

sponsor are attributable to a foreign government investor in a privately managed

fund under § 1.892-5(d)(5)(i) (attribution

from an entity classified as a partnership),

or on the basis of agency, the foreign government investor is considered to conduct

commercial activity unless one or more

exceptions under § 1.892-5 (for example,

the qualified partnership interest exception

under § 1.892-5(d)(5)(iii)(B)) applies. This

analysis applies without regard to whether

the foreign government actually or constructively receives or otherwise shares in

income labelled as a fee. The final regulations do not treat the receipt of any particular type of fee as alone determinative of

whether a foreign government conducts

commercial activities. This approach is

consistent with Federal tax principles

which analyze the substance of a transaction, rather than its label or form.

5. Partnership Equity Interests

The 2011 proposed regulations would

provide, in relevant part, that investments

in other securities (as defined in § 1.8923T(a)(3)) or generally effecting transactions in other securities (as defined in

§ 1.892-3T(a)(3)) for a foreign government’s own account as a nondealer do not

constitute commercial activities. See proposed § 1.892-4(e)(1)(i) and (ii) (which

correspond to § 1.892-4T(c)(1)(i) and (ii)).

Section 1.892-3T(a)(3) provides that the

term “other securities” does not include

partnership interests (with the exception

of publicly traded partnerships within the

meaning of section 7704). As a result of

the cross-reference to § 1.892-3T(a)(3)

in proposed § 1.892-4(e)(1)(i) and (ii),

comments have requested clarification as

to whether a disposition of a partnership

interest would be treated as commercial

activity for purposes of section 892.

The Treasury Department and the IRS

have determined that holding or trading

partnership equity interests for one’s own

account and other than as a dealer is not by

itself commercial activity. Rather, holding

January 12, 2026

equity interests in a partnership (including

holding by an entity incident to trading

partnership equity interests for one’s own

account and other than as a dealer) results in

commercial activity if the partnership conducts commercial activity that is attributed

to the holder. If this were not the case, there

would be no need for a rule attributing the

commercial activities of a partnership to its

partners or for the exception to that rule for

qualified partnership interests as defined in

§ 1.892-5(d)(5)(iii)(B). The exclusion of

partnership equity interests from the definition of “other securities” for purposes

of the investment and trading exceptions

should not be read as implying that holding or trading such interests for one’s own

account and other than as a dealer are commercial activities. Accordingly, although

a partner may be attributed commercial

activities conducted by a partnership, the

final regulations provide that the mere act

of holding a partnership equity interest

or effecting transactions in a partnership

equity interest (for a foreign government’s

own account and other than as a dealer) are

not in themselves treated as commercial

activities. See § 1.892-4(c)(1)(i) and (c)(2).

Further, pursuant to section 892(a)(2)(A), a

foreign government’s distributive share of

partnership income attributable to commercial activities is not exempt from taxation

under section 892. Moreover, pursuant to

§ 1.892-3T(a)(2) and (3), gain from the disposition of a partnership equity interest is

not exempt from taxation under section 892

(though, depending on the partnership’s

assets and activities, it may be under the

generally applicable Code provisions).

Comments also recommended that any

income earned through a partnership and

any gain arising from the disposition of a

partnership interest be exempt under section 892 to the extent such income or gain

would be exempt if realized directly by a

foreign government. These recommendations pertaining to the types of income that

are exempt under § 1.892-3T(a), however,

are beyond the scope of the final regulations. Therefore, the final regulations do

not adopt these recommendations.

6. Banking, Financing, or Similar

Business

With respect to the 2011 proposed regulations’ provision that otherwise qualifying

January 12, 2026

investments made by a banking, financing,

or similar business would constitute commercial activities, comments recommended

that the final regulations define banking,

financing, or similar business by reference

to § 1.864-4(c)(5)(i) without regard to the

limitation that the activities be undertaken

in the United States.

The Treasury Department and the IRS

address this comment by proposing new

rules included in this issue of the Federal

Register for determining the circumstances in which acquisitions of loans

(and other debt) are investments or commercial activities for purposes of section

892, and, in doing so, propose to withdraw

§ 1.892-4T(c)(1)(iii) (the rule that treats

investments and loans made by a banking,

financing, or similar business as commercial activities). Therefore, the final regulations do not adopt the comment or finalize

proposed § 1.892-4(e)(1)(iii) in the 2011

proposed regulations because it repeats

the text of § 1.892-4T(c)(1)(iii).

III. Controlled Commercial Entities

Consistent with section 892(a)(2)(B),

proposed § 1.892-5(a)(1) would define

CCE to mean any entity (including a controlled entity as defined in § 1.892-2T(a)

(3)) that is engaged in commercial activities (whether conducted within or outside

the United States) if the foreign government holds (directly or indirectly) any

interest in such entity which (by value or

voting power) is 50 percent or more of

the total of such interests in such entity,

or holds (directly or indirectly) any other

interest in such entity which provides the

foreign government with effective practical

control of such entity. The 2011 proposed

regulations would define entity for purposes of section 892 and the regulations

thereunder to include a corporation, a partnership, a trust (including a pension trust

described in § 1.892-2T(c)), and an estate.

The 2002 final regulations, however, define

entity only for purposes of section 892(a)

(2)(B). Consistent with the 2002 final regulations, the final regulations provide that

the definition of “entity” in § 1.892-5(a) is

for purposes of section 892(a)(2)(B) only.

Several comments requested further

detail on the definition of effective practical control, including additional examples

of arrangements and rules to illustrate the

324

definition. Other comments made specific

recommendations for what should not be

treated as effective practical control, such

as normal creditor interests and holding

solely a minority equity interest (by vote

and value) without more.

The Treasury Department and the IRS

generally agree with the comments that

the definition of effective practical control

under § 1.892-5T(c)(2) would be made

clearer by inclusion of additional details

and examples. The final regulations replace

the term “effective practical control” with

the term “effective control” to be consistent

with section 892(a)(2)(B)(ii). See § 1.8925(a)(1)(iii)(B) and (c)(2). No inference is

intended that the term “effective control”

has any meaning different from that of

“effective practical control.” In a separate

notice of proposed rulemaking published

in this issue of the Federal Register, the

Treasury Department and the IRS propose

rules for defining effective control. See proposed § 1.892-5(c)(2).

One comment recommended clarifying

that control with respect to entities held

through a partnership be determined based

on a foreign government’s indirect interest

through the partnership rather than based

on the direct interest held by the partnership. The recommendation requires modifying § 1.892-5T(c), which is outside the

scope of these final regulations. Therefore, the final regulations do not adopt this

recommendation.

A. U.S. real property holding

corporations and U.S. real property

interests

The 1988 temporary regulations provide that a USRPHC, as defined in section

897(c)(2), or a foreign corporation that

would be a USRPHC if it were a domestic corporation, is treated as engaged in

commercial activity and, therefore, is a

CCE, if a foreign government meets certain ownership or control thresholds with

respect to that USRPHC or foreign corporation (the USRPHC per se rule). See

§ 1.892-5T(b)(1).

Proposed § 1.892-4(e)(1)(iv) of the

2011 proposed regulations would provide

that a disposition, including a deemed disposition under section 897(h)(1), of a U.S.

real property interest (as defined in section

897(c)) (USRPI), by itself, does not con-

Bulletin No. 2026–3

stitute the conduct of commercial activity.

However, as provided in § 1.892-3T(a),

the income derived from the disposition

of a USRPI described in section 897(c)(1)

(A)(i) (generally an interest in real property located in the United States or the Virgin Islands) shall in no event qualify for

the exemption from tax under section 892.

The 2022 proposed regulations would

revise § 1.892-5T(b)(1) by providing two

exclusions from the USRPHC per se rule

for: (i) a foreign corporation that is a qualified holder under § 1.897(l)-1(d) (referring to qualified foreign pension funds or

certain qualified controlled entities), or (ii)

a corporation that is a USRPHC solely by

reason of its direct or indirect ownership

interest in one or more other corporations

that are not controlled by the foreign government (as determined under § 1.8925T(a)). As a result of the latter exclusion in

the 2022 proposed regulations, a foreign

government could use a domestic holding

company for those minority interests without that holding company being treated as

a CCE (the minority interest exception).2

The 2022 proposed regulations would

apply to taxable years ending on or after

December 28, 2022, when finalized. The

preamble provided that taxpayers may

rely on the 2022 proposed regulations,

including the minority interest exception,

until the date the regulations are published

as final regulations in the Federal Register.

Comments recommended that the final

regulations withdraw the USRPHC per se

rule. They asserted that there is no policy

rationale under section 897 for the USRPHC per se rule in the context of section

892 and that it is merely a “trap for the

unwary” that causes section 892 investors

to devise ways to plan around the rule. One

comment asserted that the 1988 Act’s legislative history (discussed below) addressed

only a foreign government’s disposition

of an investment in a domestic USRPHC,

rather than demonstrating an intent to

treat a foreign USRPHC as a per se CCE.

Another comment recommended that the

rule should apply solely to an entity that

would be a USRPHC if the reference to

USRPI in section 897(c)(2) were replaced

with a cross reference to the definition of a

USRPI in section 897(c)(1)(A)(i). Another

comment recommended replacing the

USRPHC per se rule with a rule that treats

the gain or loss on the sale of a controlled

USRPHC as if it were derived from commercial activity, similar to the rule under

section 897(a) which treats gain or loss

realized from the disposition of a USRPI as

effectively connected with a U.S. trade or

business. This comment explained that this

recommendation is better aligned with the

1988 Act’s legislative history.

Several comments recommended that

the final regulations clarify or expand the

application of the minority interest exception. Two comments made recommendations that would modify the assets to be

taken into account for the minority interest

exception, such as by disregarding USRPIs

that do not collectively exceed ten percent

of an entity’s assets after excluding USRPIs that qualify for the minority interest

exception. Other comments recommended

other ways of expanding the minority

interest exception, including by taking into

account noncontrolling interests in noncorporate entities and investments in debt

instruments or other financial instruments

that could be treated as USRPIs.

The 1988 Act’s legislative history

includes a statement that “a commercial

entity is to include any U.S. real property

holding corporation (sec. 897(c)(2)).” S.

Rep. No. 100-445, 306 (1988). Although

the legislative history does not expressly

distinguish between domestic and foreign

USRPHCs, the Treasury Department and

the IRS have determined that limiting the

USRPHC per se rule to domestic corporations is appropriate to preserve U.S. taxation of gain on the sale of shares of a controlled domestic USRPHC, consistent with

the legislative history, while at the same

time addressing the concerns of commenters as to application of the rule to foreign

USRPHCs. The Treasury Department and

the IRS also have determined that applying

the USRPHC per se rule only to domestic

corporations more directly addresses the

concerns raised by comments that controlled entities, which are necessarily foreign and otherwise eligible for the section

892 exemption, must continuously monitor

their investments to ensure that they do not

become subject to the USRPHC per se rule.

Thus, the final regulations limit the USRPHC per se rule to domestic corporations

and do not deem a foreign corporation to

be engaged in commercial activity solely

by reason of its status as a USRPHC. See

§ 1.892-5(b)(1)(ii)(A). Due to this change

in the USRPHC per se rule in the final

regulations, the proposed exception for

foreign corporations that are qualified

holders under § 1.897(l)-1(d) is not necessary and so is not finalized. Therefore,

foreign government investors as defined in

§ 1.892-2T(a) and foreign government pension funds that are qualified holders under

§ 1.897(l)-1(d) do not need to monitor their

own USRPHC status for purposes of the

USRPHC per se rule.

Similarly, the change in the USRPHC

per se rule in the final regulations renders

the proposed minority interest exception

unnecessary because, under the final regulations, foreign governments have the

alternative of investing directly or through

foreign holding companies. However, the

Treasury Department and the IRS understand that foreign government investors

have relied on the minority interest exception for taxable years ending on or after

December 28, 2022, as permitted by the

preamble to the 2022 proposed regulations, and have entered into long-term

minority interest investments in USRPHCs using domestic holding companies.

If the minority interest exception were not

finalized, the Treasury Department and

the IRS understand, these investors could

incur substantial costs to restructure these

investments. Accordingly, the final regulations retain the minority interest exception

(with certain clarifying modifications).

See § 1.892-5(b)(1)(ii)(B). The Treasury

Department and the IRS are of the view

that adopting the minority interest exception does not present policy concerns under

section 897 in the context of section 892

because the exception allows foreign government investors to use domestic holding

companies for investments that could otherwise be entered into directly or by using

foreign holding companies and therefore

does not present an opportunity to facilitate

the inappropriate avoidance of section 897.

With respect to the minority interest

exception, a comment asserted that there

The 2022 proposed regulations would also clarify § 1.892-5T(b)(1) by replacing the phrase “or a foreign corporation that would be a United States real property holding corporation if it was

a domestic corporation” with “which may include a foreign corporation” when referencing section 897(c)(2) to define a USRPHC. See proposed § 1.892-5(b)(1)(i).

2

Bulletin No. 2026–3

325

January 12, 2026

are two possible interpretations of the

phrase “solely by reason of its direct or indirect ownership interest in one or more other

corporations”: (1) any ownership interests

in noncontrolled corporations are removed

from an entity’s balance sheet before performing the asset test under section 897 to

determine whether USRPIs constitute 50

percent or more of the value of the entity’s

assets (the Balance Sheet Method); and (2)

noncontrolling interests in USRPHCs are

treated as “good” assets for purposes of

the asset test under section 897 and thereby

are included in the denominator but not the

numerator (the Good Asset Method).

The Treasury Department and the IRS

have determined that the correct interpretation of the minority interest exception in

§ 1.892-5(b)(1)(ii)(B) requires use of the

Balance Sheet Method, and thus it (and

not the Good Asset Method) is the only

method permitted to be used when applying this exception. That is because a corporation applying the Good Asset Method

could satisfy § 1.892-5(b)(1)(ii)(B) even if

it held a controlling interest in a USRPHC

or a direct interest in U.S. real estate. In

that case, the corporation would not be a

USRPHC “solely by reason of its direct or

indirect ownership interest in one or more

other corporations that are not controlled

by the foreign government,” as required

for the exception to apply. Thus, the final

regulations provide that the phrase “solely

by reason of its direct or indirect ownership interest in one or more other corporations that are not controlled by the

foreign government” means disregarding

any ownership interests, held directly

or indirectly, in noncontrolled corporations determined under § 1.892-5(a)(1),

after applying the asset test under section

897(c)(2) and § 1.897-2. For example, if

a controlled entity (CE) within the meaning of § 1.892-2T(a)(3) does not own any

assets other than 100 percent of the interests in a USRPHC whose only asset is a

minority interest in a real estate investment trust (REIT), neither the USRPHC

directly owned by CE nor CE itself (which

does not hold any other assets) would be

treated as a CCE pursuant to § 1.892-5(b)

(1)(ii)(B). The asset test under § 1.8972(e)(3) provides that CE, which holds a

controlling interest in the USRPHC within

the meaning of § 1.897-2(e)(3)(iii) (flush

language), holds a proportionate share of

January 12, 2026

each asset held by the USRPHC. Thus,

because CE holds a controlling interest

in the USRPHC, the USRPHC’s minority

interest in the REIT is treated as held by

CE. That ownership interest in the REIT,

which is a noncontrolled corporation

(within the meaning of § 1.892-5(a)(1)),

however, is disregarded when determining whether the USRPHC and CE are

USRPHCs for purposes of § 1.892-5(b)

(1)(ii)(B). Therefore, after having applied

the asset test under § 1.897-2, including

the look-through rules of § 1.897-2(e)(3),

and then removing such minority interests

from the balance sheets of the USRPHC

and CE, neither the USRPHC nor CE are

USRPHCs and therefore are not CCEs

pursuant to § 1.892-5(b)(1)(ii)(B).

Additionally, the final regulations do

not adopt the comments previously discussed relating to expanding the scope

of the minority interest exception. The

Treasury Department and the IRS have

determined that expanding the scope of

the minority interest exception may result

in foreign governments holding (through a

controlled U.S. corporation) active rather

than passive, noncontrolling investments

in U.S. real property, which would be contrary to the purpose of the CCE rules.

A comment recommended that the

parent-to-subsidiary attribution rule of

§ 1.892-5T(d)(2)(ii) not apply where the

parent corporation is treated as engaged in

commercial activity under § 1.892-5T(b)

(1) because it is a USRPHC. This recommendation is beyond the scope of the final

regulations. Therefore, the final regulations do not adopt this recommendation.

B. Inadvertent commercial activity

exception

The 2011 proposed regulations would

treat an entity that conducts only inadvertent commercial activities in a particular

tax year as not engaged in commercial

activities if (1) failure to avoid conducting the commercial activity is reasonable

as described in proposed § 1.892-5(a)

(2)(ii); (2) the commercial activity is

promptly cured as described in proposed

§ 1.892-5(a)(2)(iii); and (3) the record

maintenance requirements described in

proposed § 1.892-5(a)(2)(iv) are met (the

inadvertent commercial activity exception). However, any income derived from

326

any foreign government’s inadvertent

commercial activity, including activity

attributed from a partnership, would not

qualify for exemption from tax under section 892. See proposed § 1.892-5(a)(2)(i).

Comments recommended that the final

regulations provide for a new rule permitting a specified percentage of an entity’s

assets or income during a tested year to be

derived from the conduct of commercial

activities regardless of whether the commercial activities were inadvertent and

regardless of whether the requirements

for the inadvertent commercial activity

exception were satisfied. The comment

asserted that section 892 allows for such a

de minimis rule.

The final regulations do not adopt these

comments. Section 892(a)(2)(B) provides

that any entity engaged in commercial

activities is a CCE if either clause (i) or

(ii) of section 892(a)(2)(B) is satisfied.

The provision notably does not provide

for a quantitative threshold for determining whether an entity is engaged in

commercial activities. Therefore, the

Treasury Department and the IRS have

determined that a quantitative threshold for determining whether an entity is

engaged in commercial activities is inconsistent with section 892. However, the

Treasury Department and the IRS have

also determined that the best reading of

section 892(a)(2)(B) is that an entity is

not “engaged” in commercial activities

where reasonable precautions were taken

to avoid the commercial activities, but the

entity nevertheless conducted such activities inadvertently. Accordingly, the exception in § 1.892-5(a)(2) finalizes providing

targeted relief in the case of an entity that

inadvertently conducts commercial activity, provided that the activity is discontinued in a timely manner.

A comment requested that the Treasury

Department and the IRS prescribe procedures to simplify the tax payment and

return filing obligations arising from inadvertent commercial activity. This comment is beyond the scope of the final regulations and, therefore, it is not adopted.

1. Whether Failure to Avoid Conducting

Commercial Activities is Reasonable

Subject to the continuing due diligence

requirement under proposed § 1.892-5(a)

Bulletin No. 2026–3

(2)(ii)(B) and a safe harbor under proposed § 1.892-5(a)(2)(ii)(C), the 2011

proposed regulations would provide that

whether an entity’s failure to avoid engaging in commercial activity is reasonable

is determined in light of all the facts and

circumstances. Due regard will be given

to the number of commercial activities

conducted during the taxable year, and

the amount of income earned from, and

assets used in, the conduct of the commercial activities in relationship to the

entity’s total income and assets. The 2011

proposed regulations would also provide

that for purposes of § 1.892-5(a)(2)(ii)(A)

and (C), where commercial activity conducted by a partnership is attributed under

§ 1.892-5(d)(5)(i) to an entity owning an

interest in the partnership, assets used in

the conduct of the commercial activity by

the partnership are treated as assets used

in the conduct of commercial activity

by the entity in proportion to the entity’s

interest in the partnership, and the entity’s distributive share of the partnership’s

income from the conduct of the commercial activity is treated as income earned by

the entity from the conduct of commercial

activities.

Comments recommended that the final

regulations provide that the continuing

due diligence and other requirements

to satisfy the inadvertent commercial

activity exception do not apply where an

entity reasonably concludes that it holds

an interest as a limited partner in a limited partnership described in proposed

§ 1.892-5(d)(5)(iii)(B). The final regulations do not adopt this comment because

the inadvertent commercial activity

exception and qualified partnership interest exception are provided for different

reasons and apply in different situations.

See, for example, § 1.892-5(a)(2)(ii)(A),

which acknowledges the separate exception for qualified partnership interests by

citing to § 1.892-5(d)(5)(i) (attribution

from an entity classified as a partnership

that is subject to the qualified partnership

interest exception under § 1.892-5(d)(5)

(iii)). The inadvertent commercial activity exception may be available when it

is not reasonably expected for an entity’s investment to result in the attribution

of commercial activities. In contrast, the

qualified partnership interest exception

may be available even when an entity

Bulletin No. 2026–3

invests in a partnership that it expects

will deliberately conduct activities that

may be treated as commercial activities.

Therefore, whether an entity reasonably

concludes that it qualifies for the qualified

partnership interest exception is not a factor in determining whether the inadvertent

commercial activity exception is available

for activities conducted by the partnership

in which the entity invests.

Proposed § 1.892-5(a)(2)(ii)(B) provides that a failure to avoid commercial

activity will not be considered reasonable

unless there is continuing due diligence

to prevent the entity from engaging in

commercial activities within or outside

the United States as evidenced by having

adequate written policies and operational

procedures in place to monitor the entity’s

worldwide activities.

Comments requested additional details

and illustrations with respect to “adequate

written policies and operational procedures.” One comment recommended

a safe harbor in which an entity will be

treated as having adequate written policies

and operational procedures if the entity

satisfies certain specified requirements,

including that the entity (1) establish a

written policy that prohibits the entity

from engaging in commercial activities

both directly and through investments

in entities whose activities could be

attributed to it for purposes of section 892,

(2) communicate that written policy and

its operational procedures to employees of

the entity and other persons who have a

relationship with the entity, and (3) periodically review a representative sample

of the entity’s investments. Another comment recommended replacing the word

“adequate” with “reasonably suitable”

because an entity that fails the inadvertent

commercial activity exception did not, by

definition, have “adequate” written policies and operational procedures.

The final regulations do not adopt

the comment requesting a change to the

description of written policies and operational procedures to “reasonably suitable,”

but instead provide examples of facts and

circumstances that may be used to determine whether a written policy or operational procedure is considered adequate.

See § 1.892-5(a)(2)(ii)(B). The description

of written policies and operational procedures as being “adequate” does not mean

327

that the policies and procedures, viewed

with hindsight, had the effect of completely preventing commercial activities,

but instead means that there is a reasonable expectation that the policies and procedures will be adequate for that purpose,

considering all facts and circumstances.

In determining whether written policies

and operational procedures are considered

adequate, the final regulations adopt, with

modifications, the factors recommended

by the comment but without providing a

safe harbor. See § 1.892-5(a)(2)(ii)(B)(1)

through (5).

Another comment recommended

adopting a standard of review for determining reasonableness by taking into

account whether commercial activity is

de minimis. The final regulations do not

adopt this comment because, as described

above, the Treasury Department and the

IRS have determined that a quantitative

threshold for determining whether an

entity is engaged in commercial activity is

inconsistent with section 892.

Proposed § 1.892-5(a)(2)(ii)(B) also

provides that a failure to avoid commercial

activity will not be considered reasonable

if the management-level employees of

the entity have not undertaken reasonable

efforts to establish, follow, and enforce

the written policies and operational procedures. Comments recommended that the

final regulations include within the scope

of this rule the management-level personnel of an entity that is affiliated with

the foreign government investor or that

is responsible for the management of its

investments. Comments similarly recommended that an entity should be able to rely

on the establishment and enforcement of

policies and procedures of the investment

manager of (or those of another third-party

controlling investments by) funds or managed accounts in which the entity invests.

In response to these comments, the final

regulations provide that either employees of the entity claiming the inadvertent

commercial activity exception or employees of any of its controlling entities (such

control determined within the meaning

of § 1.892-5(a)(1)) may be designated to

establish, follow, and enforce the adequate

written policies and operational procedures

to appropriately monitor the worldwide

activities of the entity claiming the inadvertent commercial activity exception. See

January 12, 2026

§ 1.892-5(a)(2)(v)(B). Moreover, the final

regulations concentrate on any employees

who have these oversight responsibilities,

rather than solely on management-level

employees, because management-level

employees are not always the only employees undertaking efforts with respect to the

written policies and operational procedures. However, regardless of where the

responsible employees are located, the

written policies and operational procedures

must be adequate within the meaning of

the final regulations. See § 1.892-5(a)(2)

(ii)(B). Further, the responsible employees must in all cases undertake reasonable

efforts (meaning exercising ordinary business care and prudence) in light of all facts

and circumstances to establish, follow, and

enforce the written policies and operational

procedures.

Comments also requested with respect

to the “reasonable efforts” requirement that

reasonable reliance on competent tax advisors should constitute a reasonable effort

to avoid conducting commercial activity,

even if the advice is incorrect in hindsight.

Other comments recommended creating a

safe harbor under which an entity would

be treated as having undertaken reasonable

efforts if it had relied on tax advice that is

a reasoned opinion rendered based on pertinent information and before the undertaking of the commercial activity.

The Treasury Department and the IRS

have determined that an entity’s failure

to avoid commercial activity will not be

treated as reasonable solely on the basis

of obtaining a tax opinion or legal advice.

Obtaining a tax opinion or legal advice

alone does not supersede the need for

employees of the entity claiming the inadvertent commercial activity exception (or

employees of a controlling entity within

the meaning of § 1.892-5(a)(1)) to take

reasonable efforts to establish, follow, and

enforce the applicable written policies and

operational procedures to prevent the applicable entity from engaging in commercial

activity. Accordingly, the final regulations

do not adopt this comment with respect to

proposed § 1.892-5(a)(2)(ii)(B).

2. Inadvertent Commercial Activity Safe

Harbor

The 2011 proposed regulations would

provide a safe harbor under which, if there

January 12, 2026

are adequate written policies and operational procedures in place, the entity’s

failure to avoid the conduct of commercial activity during a taxable year will be

considered reasonable if it satisfies the

following two conditions: (1) the value

of the assets used in, or held for use in,

all commercial activity does not exceed

five percent of the total value of the assets

reflected on the entity’s balance sheet for

the taxable year as prepared for financial

accounting purposes, and (2) the income

earned by the entity from commercial

activity does not exceed five percent of

the entity’s gross income as reflected on

its income statement for the taxable year

as prepared for financial accounting purposes. Proposed § 1.892-5(a)(2)(ii)(C).

Numerous comments recommended

that the final regulations provide additional

information about the meaning of “prepared for financial accounting purposes.”

Because foreign government entities are

not publicly traded and are not domestic

entities, they are not required to prepare

financial statements under U.S. GAAP.

Therefore, comments recommended that

the final regulations provide that financial

statements maintained under IFRS or an

entity’s local accounting rules or, if the

entity does not prepare separate financial

statements, books and records maintained

in the ordinary course of its operations or

for purposes of monitoring its investments

will qualify for use under this safe harbor.

A comment observed that many entities

that own financial assets are required to

use, or do use, mark-to-market accounting

which, in the case of the income test, may

distort an entity’s eligibility for the safe

harbor. The same comment also requested

guidance regarding when both the income

and assets limits are to be calculated and

using what convention (for example, average of the quarter-end or month-end).

The Treasury Department and the IRS

have determined that the safe harbor must

be applied using an applicable financial

statement as defined in section 451(b)

(3) and § 1.451-3(a), which may include

a financial statement prepared in U.S.

GAAP, IFRS, or another method required

under applicable regulatory accounting

rules. The final regulations provide that if

the entity does not prepare financial statements for financial accounting or regulatory reporting purposes, the entity may

328

use books of account or records that are

adequate and sufficient to establish the

respective amount. The final regulations

also provide that the determination of

asset values for purposes of the safe harbor is made using the average of amounts

as of the close of each quarter of the taxable year and the determination of income

is made as of the end of the taxable year.

Whether mark-to-market accounting is

required with respect to financial assets

will depend upon the method used by the

applicable financial statement. The quarterly averaging method is unnecessary

for the income portion of the safe harbor

because income (in contrast to assets) is

measured over a period rather than as of

specific dates.

A comment recommended that the final

regulations increase the safe harbor thresholds to ten percent (from five percent) to

alleviate challenges with obtaining necessary information about Federal entity

classification status of foreign investments. Another comment recommended

that only asset values be used for the safe

harbor. The comment also recommended

that where an entity holds an interest as

a limited partner under proposed § 1.8925(d)(5)(iii), the value of that interest be

included in the entity’s calculation of its

total assets, but not included in the value

of its commercial activity assets.

The Treasury Department and the

IRS have determined that an analysis of

both the entity’s income and assets and a

five percent threshold are reasonable and

appropriate for a safe harbor that relates to

inadvertent commercial activity. The five

percent threshold for this purpose is used

to substantiate that the commercial activity is inadvertent, rather than permitting a

de minimis rule that ignores any evidence

of the commercial activity being inadvertent, such as, for example, having in place

adequate written policies and operational

procedures. Therefore, the final regulations do not adopt the comment to increase

the safe harbor thresholds or to limit the

safe harbor measurements to assets only.

The Treasury Department and the IRS do

agree with the comment on the treatment

of qualified partnership interests in the

safe harbor asset test. The final regulations

provide that the commercial activity asset

of a qualified partnership interest that is

described in § 1.892-5(d)(5)(iii) is not

Bulletin No. 2026–3

included as an asset used in commercial

activity of the tested entity for purposes of

this safe harbor, but the value of the qualified partnership interest is included in the

entity’s calculation of its total assets for

that purpose. See § 1.892-5(a)(2)(ii)(A)

and (a)(2)(ii)(C)(2). Furthermore, the final

regulations provide that a tested entity’s

distributive share of commercial activity

income from a qualified partnership interest that is described in § 1.892-5(d)(5)(iii)

is not included as income earned by the

entity from commercial activity for purposes of this safe harbor, but is included in

the entity’s gross income for that purpose

and treated as commercial activity income

for all other purposes of section 892. Id.

3. Cure Requirement

The second requirement to qualify

for the inadvertent commercial activity

exception is that the commercial activity must be promptly cured as described

in proposed § 1.892-5(a)(2)(iii). A cure

is considered prompt under proposed

§ 1.892-5(a)(2)(i)(B) if the entity engaging in inadvertent commercial activity discontinues the activity within 120 days of

discovering it. See proposed § 1.892-5(a)

(2)(iii). The third requirement is that adequate records of each discovered commercial activity and the remedial action taken

to cure that activity must be maintained.

The records must be retained so long as

the contents thereof may become material

in the administration of section 892. See

proposed § 1.892-5(a)(2)(iv).

The proposed rule would provide, as an

example, that if an entity holding an interest as a general partner in a partnership discovers that the partnership is conducting

commercial activity, the entity will satisfy

the cure requirement if, within 120 days

of the discovery of the commercial activity, the entity discontinues the activity by

divesting itself of its partnership interest

(including by transferring its interest in

the partnership to a related entity) or the

partnership itself discontinues its conduct

of commercial activity.

Comments recommended that the final

regulations provide a period that is greater

than 120 days from the date of discovery

for an entity to cure the inadvertent commercial activity. One comment recommended a six-month (or 180 days) cure

Bulletin No. 2026–3

period, and another comment requested

that the cure period be the greater of 120

days or the length of the notice and exit

terms to which the entity is contractually

bound under the relevant governing document of the investment, plus 45 days

to initiate the process of notice and exit.

Another comment asserted that a period

longer than 120 days is required because

of the time needed to craft a legal plan

effecting the discontinuance of the commercial activity and, in some cases, to

obtain required governmental or thirdparty approvals. Yet another comment recommended tolling the curing period until

the commercial activity is discovered by

an officer or employee of the entity who

is reasonably expected to be aware of the

significance of the activity.

The Treasury Department and the IRS

have determined that a period greater than

120 days to cure the inadvertent commercial activity is reasonable and appropriate

to accommodate foreign legal and commercial or contractual considerations. The

final regulations extend the cure period to

180 days from the date of the discovery

by the employees who are responsible

for monitoring and reviewing the entity’s

commercial activity pursuant to § 1.8925(a)(2)(ii)(B) (the rule providing responsible employees undertake reasonable

efforts to establish, follow, and enforce

the adequate written policies and operational procedures). However, the final regulations do not adopt the other comments

because adopting them would provide an

entity the ability to select its own cure

period based on contractual terms or by

disputing whether an officer or employee

of the entity was reasonably expected to

have been aware of the significance of the

activity.

Comments requested that the final

regulations provide that an entity that is

engaged in commercial activity solely by

attribution through its interest in a partnership may cure inadvertent commercial activity by exchanging (including

by amending the terms of) its partnership interest for one that qualifies for the

exception under proposed § 1.892-5(d)

(5)(iii) (the qualified partnership interest

exception). The final regulations provide

that an entity may, depending on the facts

and circumstances, be able to satisfy the

cure requirement by exchanging its part-

329

nership interest for one that is a qualified

partnership interest within the meaning

of § 1.892-5(d)(5)(iii) in the same partnership (including a deemed exchange

from an agreed modification of terms).

The final regulations do not adopt the

comment as a bright-line rule because the

Treasury Department and the IRS are concerned about the potential of abuse, such

as negotiating for a partnership interest to

be automatically exchanged for a different

interest upon the discovery of commercial activity. Such an automatic feature

also is inconsistent with the principles

of satisfying the inadvertent commercial

activity exception, which requires an entity’s active involvement. The final regulations retain the language from proposed

§ 1.892-5(a)(2)(iii) that divesture by an

entity of its interest in a partnership may

be achieved by transferring its interest in

the partnership to a related entity, such

as to a related entity classified as a corporation for Federal tax purposes, so that

commercial activity is not attributable to

an entity that is eligible for the section 892

exemption.

Finally, a comment recommended

that the final regulations use the term

“promptly” in § 1.892-5(a)(2) rather than

interchangeably using “promptly” and

“timely.” In the comment’s view, the term

“timely” indicates a deadline imposed by a

governmental body. The final regulations

do not adopt this comment, but instead

replace the term “promptly” in § 1.892-5(a)

(2)(i)(B) with the term “timely.” Because

§ 1.892-5(a)(2)(i)(B) provides that the

commercial activity is promptly cured as

described in § 1.892-5(a)(2)(iii) which in

turn describes a “timely” cure (relevant to a

particular time period), it is appropriate to

revise the general rule in § 1.892-5(a)(2)(i)

(B) as requiring a “timely” cure.

C. Annual CCE determination

Proposed § 1.892-5(a)(3) would provide that, if an entity described in proposed § 1.892-5(a)(1)(i) or (ii) (relating to

whether the entity is controlled by a foreign government) engages in commercial

activities at any time during the taxable

year, the entity will be considered a CCE

for the entire taxable year. An entity not

otherwise engaged in commercial activities during a taxable year will not be con-

January 12, 2026

sidered a CCE for a taxable year even if

the entity engaged in commercial activities in a prior taxable year.

A comment recommended that the final

regulations expressly provide that the relevant taxable year for purposes of this rule

is the taxable year of the entity. Another

comment requested guidance on whether

an entity’s commercial activity carries

over to an acquiring entity in an asset

reorganization or a transaction in which

the transferee retains the tax attributes of

the transferor under section 381.

The final regulations generally adopt

the comment’s recommendation that the

annual determination of whether an entity

is a CCE under proposed § 1.892-5(a)

(3) be made with respect to the entity’s

taxable year, which may be less than a

12-month period if, for example, the entity’s taxable year is terminated as a result

of a transaction or reorganization. See

§ 1.892-5(a)(3)(i). If the taxable year of a

corporation engaged in commercial activity is terminated as a result of an acquisition to which section 381(a) applies

(except for a complete liquidation under

section 332(a), which acquisition would

fall within the exception to this general

rule as described below), the acquiring

corporation generally does not succeed to

the commercial activity of the distributor

or transferor corporation for the acquiring corporation’s applicable taxable year,

provided that after the acquisition, the

acquiring corporation is not the entity that

directly carries on such commercial activity. See § 1.892-5(a)(3)(ii)(A). This condition might be met in the case of reorganizations followed by transfers described in

§ 1.368-2(k). However, if the corporation

engages in an acquisition to which section

381(a) applies with another corporation

controlled by the same foreign sovereign

under § 1.892-5(a)(1), for example, in a

complete liquidation of a subsidiary under

section 332(a), then the distributor or

transferor corporation’s commercial activity will cause the acquiring corporation

to be treated as a CCE for the acquiring

corporation’s taxable year in which the

acquisition occurred. See § 1.892-5(a)(3)

(ii)(B).

As a result of adopting the taxable year

as the relevant measurement period for the

annual CCE test, it is possible without further safeguards that activity in one taxable

January 12, 2026

year, considered in isolation, might not be

characterized as commercial, even though

it is part of a course of conduct or transaction spanning two taxable years which,

taken as a whole, is characterized as commercial activity. For example, consider

a controlled entity whose taxable year is

the calendar year and conducts activity in

December of year 1 that relates to a transaction the controlled entity enters into in

January of year 2. Without any additional

guardrails to the annual CCE test, if the

January transaction in isolation is not

considered commercial activity, and no

commercial activities were otherwise performed by the controlled entity in year 2,

the controlled entity would not be treated

as a CCE in year 2, even if the activities in

December of year 1 and January of year

2 constitute commercial activities when

considered together. To address this scenario, the final regulations provide that

for purposes of determining whether an

entity is engaged in commercial activities

during its taxable year, that entity’s activities during its immediately preceding taxable year will also be taken into account

to the extent relevant in characterizing the

activities in the current taxable year. See

§ 1.892-5(a)(3)(i). The Treasury Department and the IRS concluded that this test

should not look past the immediately preceding year for reasons of administrability, but other doctrines may still apply to

activities that occur across multiple years

in form and only one year in substance

when making the commercial activity

determination.

Another comment recommended that

an entity that is a CCE under § 1.8925T(b)(1) solely because it is a USRPHC

should not be treated as a CCE for its

entire taxable year if the entity ceases to

be a USRPHC on any determination date

under § 1.897-2(c) or through operation

of the cleansing rule of section 897(c)(1)

(B). The Treasury Department and the

IRS have determined that an exception to

proposed § 1.892-5(a)(3) in this limited

situation would be inconsistent with the

treatment of other types of entities that do

not have the option to cleanse themselves

of CCE status. Moreover, since the 2011

proposed regulations were published,

the cleansing rule of section 897(c)(1)

(B) generally was eliminated for regulated investment companies (RICs) and

330

REITs and, therefore, adopting this comment would have limited effect only for

domestic corporations that are not RICs

or REITs. In addition, the final regulations

provide that only domestic corporations

are subject to the rule in § 1.892-5(b)(1)

(i) that treats controlled USRPHCs as

CCEs. This change to § 1.892-5(b)(1) narrows the scope of entities that are treated

as CCEs, thereby partially addressing the

comment’s concerns. Therefore, the final

regulations do not adopt this comment.

D. Commercial activities of partnerships

The 1988 temporary regulations generally attribute all commercial activities

of a partnership to its general and limited

partners except for partners of publicly

traded partnerships (PTP). See § 1.8925T(d)(3). Proposed § 1.892-5(d)(5)(i) of

the 2011 proposed regulations generally

would attribute commercial activities of

an entity classified as a partnership for

Federal tax purposes to its partners, subject to two exceptions, for trading activity and for limited partnership interests.

See proposed § 1.892-5(d)(5)(ii) and (iii).

The preamble to the 2011 proposed regulations explained that the limited partnership interest exception under proposed

§ 1.892-5(d)(5)(iii) “modifies the existing

exception to the partnership attribution

rule for PTP interests by providing a more

general exception for limited partnership

interests.” Comments noted that it may

be necessary to amend § 1.892-5T(d)(3)

and (4) to coordinate with the final regulations to the extent they preserve proposed

§ 1.892-5(d)(5). The final regulations

withdraw § 1.892-5T(d)(3) and, in its

place, adopt proposed § 1.892-5(d)(5)(i)

with minor modifications. In addition, the

final regulations modify § 1.892-5T(d)(4)

by removing Example 4, which is obsoleted by the final regulations.

The trading activity exception under

proposed § 1.892-5(d)(5)(ii) would provide that an entity not otherwise engaged

in commercial activities will not be

considered to be engaged in commercial activities solely because the entity

is a member of a partnership (whether

domestic or foreign) that effects transactions in stocks, bonds, other securities (as

defined in § 1.892-3T(a)(3)), commodities

(as defined in proposed § 1.892-4(e)(1)

Bulletin No. 2026–3

(ii)), or financial instruments (as defined

in § 1.892-3T(a)(4)) for the partnership’s own account or solely because an

employee of such partnership, or a broker,

commission agent, custodian, or other

agent, pursuant to discretionary authority

granted by such partnership, effects such

transactions for the account of the partnership. This exception does not apply to any

member in the case of a partnership that

is a dealer in stocks, bonds, other securities, commodities, or financial instruments, as determined under the principles

of § 1.864-2(c)(2)(iv)(a). The final regulations adopt proposed § 1.892-5(d)(5)(ii)

with minor modifications.

A comment recommended that transitory ownership of a pass-through entity not

result in attribution of commercial activity

from that pass-through entity. The final

regulations do not adopt this comment

because of administrability challenges

as to whether a transfer was transitory.

No other comments were received with

respect to the attribution of commercial

activities by a partnership under proposed

§ 1.892-5(d)(5)(i) or the trading activity

exception under proposed § 1.892-5(d)(5)

(ii). Instead, comments made recommendations about the treatment under section

892 of income derived from partnerships

or gain arising from the disposition of a

partnership interest.

The 2011 proposed regulations would

not alter the treatment of the income

derived by an entity. For example, proposed § 1.892-5(d)(5)(iii)(A) would provide that, despite an entity that holds an

interest as a limited partner in a limited

partnership not being treated as conducting commercial activities, that entity’s

distributive share of partnership income

will not be exempt from taxation under

section 892 to the extent that the partnership derives such income from the

conduct of commercial activity. With the

exception of § 1.892-3(a)(4) (regarding

the definition of financial instruments),

the final regulations do not address the

items of income that are exempt under

section 892. Accordingly, recommendations about the treatment under section

892 of income derived from partnerships or gain arising from the disposition

of a partnership interest are outside the

scope of the final regulations and are not

adopted.

Bulletin No. 2026–3

E. Qualified partnership interest

exception

The 2011 proposed regulations would

provide for a limited partnership interest

exception in which an entity that is not

otherwise engaged in commercial activities (including, for example, performing

services for a partnership as described in

section 707(a) or section 707(c)) will not

be deemed to be engaged in commercial

activities solely because it holds an interest as a limited partner in a limited partnership. Proposed § 1.892-5(d)(5)(iii)

(A). The 2011 proposed regulations also

would provide that a foreign government

member’s distributive share of partnership

income will not be exempt from taxation

under section 892 to the extent that the

partnership derived such income from the

conduct of commercial activity.

For this purpose, an interest in an entity

classified as a partnership for Federal tax

purposes would be treated as an interest as

a limited partner in a limited partnership if

the holder does not have rights to participate in the management and conduct of the

partnership’s business at any time during

the partnership’s taxable year under the

law of the jurisdiction in which the partnership is organized or under the governing agreement. See proposed § 1.892-5(d)

(5)(iii)(B). The 2011 proposed regulations

would provide that rights to participate in

the management and conduct of a partnership’s business do not include consent

rights in the case of extraordinary events

such as admission or expulsion of a general or limited partner, amendment of the

partnership agreement, dissolution of the

partnership, disposition of all or substantially all of the partnership’s property outside of the ordinary course of the partnership’s activities, merger, or conversion. Id.

1. Tax Classification as a Partnership

Comments recommended that the final

regulations confirm that § 1.892-5(d)(5)

(iii) does not apply solely to limited partnerships under State or local law. To this

end, the comments recommended replacing the phrase “interest as a limited partner

in a limited partnership” with “a passive

investment in a partnership or other flowthrough entity” or expressly providing

that interests as a limited partner in limited

331

liability companies and other vehicles not

taking the form of State law partnerships

can qualify under § 1.892-5(d)(5)(iii).

The Treasury Department and the IRS

are of the view that the 2011 proposed

regulations already would provide that a

qualifying partnership interest can include

certain interests other than interests in a

State law limited partnership. By providing that “an interest in an entity classified

as a partnership for Federal tax purposes is

treated as an interest as a limited partner in

a limited partnership,” the 2011 proposed

regulations were not confining the scope

of the exception to State law partnerships.

Thus, for example, an interest in a limited liability company that is classified

as a partnership for Federal tax purposes

may qualify under proposed § 1.892-5(d)

(5)(iii) if the other requirements are satisfied. To make this clearer, the final regulations adopt the term “qualified partnership

interest” rather than “interest as a limited

partner in a limited partnership.” No inference is intended by this change as to the

meaning of the phrase “limited partner”

in other Code sections or Treasury regulations.

Because the qualified partnership

interest exception applies to more than

only State law partnerships, the Treasury

Department and the IRS determined that

the qualified partnership interest exception should set forth uniform requirements

applicable to all relevant juridical forms

to which the qualified partnership interest exception may apply. Accordingly, the

final regulations contain requirements that

a holder of a qualified partnership interest must not (1) have personal liability for

claims against the partnership; or (2) have

the right to enter into contracts or act on

behalf of the partnership. These requirements are generally consistent with the

rights of a limited partner under relevant

State law, but apply regardless of the legal

form of the entity or the governing law.

Further, the Treasury Department and

the IRS agree with the comment that

the qualified partnership interest exception should be available only for passive investments in partnerships. To that

end, in addition to the two requirements

provided in the previous paragraph, the

qualified partnership interest exception

retains the requirement that the holder

of the partnership interest must not have

January 12, 2026

rights to participate in the management

and conduct of the partnership’s business

and adopts a requirement that the holder

must not control the partnership within the

meaning of § 1.892-5(a)(1). The Treasury

Department and the IRS have determined

that these four requirements are necessary

and appropriate guardrails to help ensure

that the qualified partnership interest

exception is available only to partnership

equity interest holders with passive participation in the partnership. Accordingly,

the final regulations do not adopt a separate comment suggesting that a greater

than 50 percent economic interest (which

would constitute a controlling interest in

an entity under § 1.892-5(a)(1)(iii)(A)) in

a partnership could be a qualified partnership interest.

2. Rights to Participate in the

Management and Conduct of a

Partnership’s Business

With respect to the requirement under

the qualified partnership interest exception that the holder does not have rights

to participate in the management and

conduct of the partnership’s business,

comments recommended that the final

regulations provide greater specificity on

exactly which rights satisfy the definition.

For example, a comment recommended

that the final regulations adopt a standard

under which general oversight rights, consultation rights, and veto rights are treated

as consistent with holding an interest as a

limited partner under proposed § 1.8925(d)(5)(iii)(B) because these rights serve

the purpose of allowing the investor to

monitor and protect its investment and do

not convey control over the partnership’s

day-to-day operations. Another comment

recommended that the final regulations

provide that consent rights customarily

granted to a significant lender, such as

approval of a borrowing entity’s annual

budget, major transactions and expenses,

and other similar items be permitted under

§ 1.892-5(d)(5)(iii)(B). Other comments

recommended that the final regulations

provide that investor rights typically

granted by side letters, including certain

veto rights and consent rights with respect

to key decisions and extraordinary events

outside of a partnership’s day-to-day management, are consistent with holding an

January 12, 2026

interest as a limited partner. Comments

also recommended that the final regulations provide that holding an interest as a

limited partner can include participating

on a partnership’s investment advisory

committee or holding a minority position

on a partnership’s governing committee

because these roles are consistent with

being a passive investor by providing

investors with consent rights normally

afforded to minority investors for the purpose of monitoring and protecting their

investments.

These comments generally suggested

that participation in the management and

conduct of a partnership’s business refers

to participation in the day-to-day management or operation of the partnership’s

business and does not include participation in activities relating to monitoring

and protecting the partnership interest

holder’s capital investment. The Treasury

Department and the IRS agree, and the

final regulations clarify that rights to participate in the management and conduct

of a partnership’s business mean rights to

participate in the day-to-day management

or operation of the partnership’s business.

The final regulations also provide that

rights to participate in monitoring or protecting the partnership interest holder’s

capital investment in the partnership do

not constitute rights to participate in the

management and conduct of the partnership’s business, to the extent such rights

are not rights to participate in the dayto-day management or operation of the

partnership’s business and do not result in

effective control under § 1.892-5(a)(1)(iii)

(B).

Due to the highly fact-intensive nature

of determining whether rights to participate in the management and conduct of a

partnership’s business exist, the final regulations do not provide an exclusive list of

rights that would (or would not) be consistent with participating in the management

and conduct of a partnership’s business.

Instead, the Treasury Department and the

IRS have determined that this analysis

should be based on a holistic review taking into account all the facts and circumstances. The final regulations do specify,

however, that participation in the management and conduct of a partnership’s

business includes the right to participate

in ordinary-course personnel and com-

332

pensation decisions, and the right to take

active roles in formulating the business

strategy for the partnership. The final regulations also specify that rights to monitor

or protect capital investment in the partnership may include oversight or supervisory rights in the case of major strategic

decisions, such as admission or expulsion

of a partner, amendment of the partnership

agreement, or dissolution of the partnership, unusual and non-ordinary course

deviations from previously determined

investment parameters, extending the

term of the partnership’s governing agreement, merger or conversion of the partnership, or disposition of all or substantially

all of the partnership’s property outside of

the ordinary course of the partnership’s

activities. Facts and circumstances pertaining to the analysis of participation in

the management and conduct of a partnership’s business may be identified by reference to, for example, the conduct of the

relevant parties, the law of the jurisdiction

in which the partnership is organized, the

governing documents of the partnership,

contractual agreements such as side letters, shareholders’ agreements, and the

partnership’s agreements with creditors.

See § 1.892-5(d)(5)(iii)(B).

Comments also recommended that the

final regulations eliminate the rule that

the law of the jurisdiction in which a partnership is organized determines whether

a partner has rights to participate in the

management and conduct of the partnership’s business. These comments asserted

that making this determination under this

standard would be complex and burdensome. These comments, therefore, also

recommended that an investor be permitted to rely on the advice of local counsel

when determining whether the investor has rights exceeding those permitted

under proposed § 1.892-5(d)(5)(iii)(B).

The final regulations do not adopt these

comments because the Treasury Department and the IRS have determined that the

relevant law of the jurisdiction in which

the partnership is organized often sets

forth certain default rights where rights

are not expressly provided by the entity’s governing documents, and that those

default rights are relevant to a facts and

circumstances analysis.

No inference is intended as to the

meaning of the phrase “participate in the

Bulletin No. 2026–3

management and conduct of the partnership’s business” or similar phrases and

standards in other Code sections and Treasury regulations.

3. Qualified Partnership Interest Safe

Harbors

A comment recommended that the final

regulations provide certainty to investors

by incorporating one or more of three

proposed safe harbors for determining

whether the investor holds an interest as

a limited partner in a limited partnership.

The first safe harbor would be available to

investors who have obtained legal opinions

stating that the investors are, in fact, and,

at law, limited partners with limited liability. The second safe harbor recommended

by the comment would cover interests in

widely held investment partnerships with

more than ten unrelated partners. The

third recommended safe harbor would

cover investors who hold less than a prescribed percentage of interests in a partnership. The comment recommended taking into account all investors both in the

main investment vehicle and any related

parallel or alternative investment vehicles

for purposes of determining whether an

investor qualifies for the widely held or

the de minimis safe harbors.

The final regulations adopt a safe harbor for a holder who at all times during

the partnership’s taxable year (1) has no

personal liability for claims against the

partnership; (2) has no right to enter into

contracts or act on behalf of the partnership; (3) is not a managing member or

managing partner, and does not hold an

equivalent role under applicable law; and

(4) does not directly or indirectly (under

the principles of § 1.892-5(d)(5)(iii)(B)(2)

(iii)) own more than five percent of either

the partnership’s capital interests or the

partnership’s profits interests. See § 1.8925(d)(5)(iii)(C). The Treasury Department

and the IRS have determined that this safe

harbor would ease the compliance burden for those investors who fall within

its scope. The first two requirements typically would be met by a holder treated as

a limited partner under State law. As to the

last two requirements, an investor with no

more than five percent of a partnership’s

capital or profits interests and who is neither a managing member (in the case of an

Bulletin No. 2026–3

entity organized as a limited liability company) nor a managing partner (in the case

of an entity organized as a partnership) is

unlikely to control the partnership under

§ 1.892-5(a)(1) or have any rights to participate in the management and conduct of

a partnership’s business and thus can be

treated as a passive investor. Although a

foreign government investor, for example,

that satisfies the requirements of the safe

harbor is not attributed the partnership’s

commercial activities, the investor’s distributive share of the partnership’s income

from the conduct of commercial activity

is not exempt from taxation under section

892. See § 1.892-5(d)(5)(iii)(A).

4. Holding Multiple Interests in a

Partnership or in Tiered Partnerships

Finally, comments made requests and

recommendations regarding tiers of partnerships and attribution of the qualified

partnership interest exception among

classes of partnership interests. Comments recommended that the final regulations provide rules for the operation of the

qualified partnership interest exception in

tiered partnership structures. These comments asserted that an investor should not

be deemed to participate in the management and conduct of a lower-tier partnership’s business if that investor holds an

interest in an upper-tier partnership that

does not engage in any commercial activity and does not afford the investor any

rights to participate in the management

and conduct of the lower-tier partnership’s

business. In other words, these comments

requested that the final regulations apply

a “bottom-up” approach in determining

whether the requirements for the qualified

partnership interest exception are met.

Another comment requested that the

final regulations provide guidance on

whether the rights of one class of partnership interest could be attributed to

another class of partnership interest when

determining whether an investor, who

holds multiple classes of partnership

interests, satisfies the exception under

proposed § 1.892-5(d)(5)(iii). The comment asserted that the qualified partnership interest exception should apply in

situations where an investor, in addition to

holding its interest as a limited partner in a

limited partnership, also holds an interest

333

as a limited partner in the general partner

of the same limited partnership.

The final regulations adopt with modifications the comment that the qualified

partnership interest exception applies from

the bottom up. An upper-tier partnership

that holds a qualified partnership interest

in a lower-tier partnership is not attributed

the lower-tier partnership’s commercial

activities. If, however, the upper-tier partnership’s interest in a lower-tier partnership is not a qualified partnership interest,

the lower-tier partnership’s commercial

activity will be attributed to the upper-tier

partnership and could, in turn, be further

attributed to a foreign government investor holding an interest in the upper-tier

partnership unless the investor holds a

qualified partnership interest in the uppertier partnership. See § 1.892-5(d)(5)(iii)

(D).

The rules in § 1.892-5(d)(5)(iii)(D)

applicable to tiered partnerships may provide relief in certain circumstances if, in

addition to holding directly a qualified

partnership interest in a lower-tier partnership, the foreign government investor

holds a qualified partnership interest in the

entity that is a general partner of the lower-tier partnership and does not have rights

to participate in the management and conduct of the general partner’s business in

managing the lower-tier partnership.

With respect to holding multiple classes

of interests in the same partnership, the

final regulations provide that all interests

held in a partnership by an investor are

evaluated in their totality to determine

whether the investor has rights to participate in the management and conduct of

that partnership’s business. See § 1.8925(d)(5)(iii)(B)(2)(i). Thus, the final regulations do not adopt the approach that the

qualified partnership interest exception

ignores other interests held by an investor

in the same partnership.

The final regulations also provide that

where a foreign sovereign holds directly

or indirectly multiple interests in a partnership through one or more integral

parts or controlled entities as defined

in § 1.892-2T, or controlled subsidiaries under § 1.892-5(a)(1), all of these

entities’ interests in the partnership are

aggregated for purposes of the qualified

partnership interest exception. To the

extent any one entity’s interest or all of

January 12, 2026

the interests aggregated together fails to

satisfy the qualified partnership interest exception, then none of the entities

would qualify for the qualified partnership interest exception. See § 1.892-5(d)

(5)(iii)(B)(2)(iii).

F. Other comments and revisions

In addition to the comments and revisions described in parts II and III of this

Summary of Comments and Explanation

of Revisions, the final regulations include

several drafting changes. The final regulations revise the structure of the provisions

of the 2011 proposed regulations to be

consistent with the structure of the 1988

temporary regulations. In doing so, the

final regulations change the placement of

rules under § 1.892-4(c).

There were numerous comments that

were outside the scope of the final regulations and, therefore, are not adopted by

the final regulations. Several comments

recommended that § 301.7701-2(b)(6)

(treating a business entity wholly owned

by a foreign government as a per se corporation) be modified so that a business

entity that is wholly owned by a foreign

government is not precluded from electing to be disregarded as an entity separate from its owner. Another comment

requested guidance on whether incentive

compensation arrangements for investment advisors, brokers, or employees

would cause an entity to fail the requirement under § 1.892-2T(a)(3)(iii) (requiring that net earnings of the entity be

credited to its own account or to other

accounts of the foreign sovereign, with

no portion of the entity’s income inuring

to the benefit of any private person) to

be a controlled entity. The comment also

requested guidance on whether an entity

established under a statute with a separate legal personality can be an “integral part” of a foreign sovereign under

§ 1.892-2T(a). Finally, a comment recommended modifying § 1.882-5(a)(6) to

remove the limitation on a foreign government’s ability to deduct its allocable

interest expense. The final regulations do

not adopt these comments because they

are outside the scope of the final regulations. However, the final regulations

modify § 1.882-5(a)(6) to update the

cross-reference to § 1.892-5.

January 12, 2026

IV. Applicability Dates

The 2011 proposed regulations were

proposed to apply on the date the final

regulations are published in the Federal

Register. See proposed §§ 1.892-4(f) and

1.892-5(e). The preamble to the 2011 proposed regulations provided that taxpayers

may rely on the 2011 proposed regulations until final regulations are issued.

The 2022 proposed regulations were proposed to apply to taxable years ending on

or after December 28, 2022. See proposed

§ 1.892-5(b)(1)(iii). The preamble to the

2022 proposed regulations provided that

taxpayers may rely on the 2022 proposed

regulations until the date of publication of

the final regulations in the Federal Register. The rules under §§ 1.892-4T and

1.892-5T are effective for taxable years

beginning after June 30, 1986, until, and

only to the extent that, they are replaced

by these final regulations.

The Treasury Department and the

IRS have determined that the applicability date of the 2025 final regulations

should be consistent with the 2011 proposed regulations and generally apply to

taxable years beginning on or after the

date the regulations become finalized in

the Federal Register. A comment recommended that when the 2011 proposed

regulations are finalized, taxpayers be

permitted to apply the provisions of the

final regulations to all open taxable years.

The Treasury Department and the IRS

agree that taxpayers should be permitted

to apply the rules of the 2025 final regulations, once finalized, to their open taxable years subject to consistency requirements. Accordingly, except in the case of

§ 1.892-3(a)(6) and the second sentence

of § 1.892-5(a)(1) (rules finalized in prior

regulations), the final regulations provide

that a taxpayer may choose to apply the

2025 final regulations to a taxable year

beginning before December 15, 2025

(finalization date) if the period of limitations on assessment of the taxable year

is open under section 6501 and the taxpayer and entities that are related (within

the meaning of section 267(b) or section 707(b)) to the taxpayer consistently

apply the rules of 2025 final regulations

in their entirety to the taxable year and

all succeeding taxable years beginning

before the finalization date.

334

Another comment recommended that

taxpayers who have structured investments in reliance on the 2011 proposed

regulations be given a transition period to

undertake any necessary restructuring if

the final regulations are different from the

2011 proposed regulations. The final regulations do not adopt this comment. The

Treasury Department and the IRS have

determined that the provisions of the final

regulations are consistent with the 2011

proposed regulations and the differences

do not require a transition period. A separate notice of proposed rulemaking is published in this issue of the Federal Register which contains proposed changes and

modifications that are materially different

from the 2011 proposed regulations.

Special Analyses

I. Regulatory Planning and Review –

Economic Analysis

These final regulations are not 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 (OMB) regarding review of tax regulations.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(44 U.S.C. 3501–3520) (PRA) generally

requires that a Federal agency obtain the

approval of the OMB before collecting

information from the public, whether such

collection of information is mandatory,

voluntary, or required to obtain or retain

a benefit. An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information displays a valid control number.

The collection of information in these

final regulations contains recordkeeping

requirements. The recordkeeping requirements are necessary for the IRS to validate if certain entities have met the regulatory requirements and are entitled to the

inadvertent commercial activity exception under section 892. No public comments received by the IRS were directed

at the recordkeeping requirements. The

recordkeeping requirements in § 1.892-

Bulletin No. 2026–3

5(a)(2)(ii)(B) and § 1.892-5(a)(2)(iv) are

approved by OMB under Control Number

1545-2239.

III. Regulatory Flexibility Act

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), it is hereby certified that this rulemaking will not have a significant economic impact on a substantial

number of small entities within the meaning of section 601(6) of the Regulatory

Flexibility Act. This certification is based

on the fact that the final regulations affect

foreign governments, including their controlled entities, with income from sources

within the United States. Accordingly, the

entities affected by the final regulations are

not considered small entities, and a regulatory flexibility analysis under the Regulatory Flexibility Act is not required.

IV. Section 7805(f)

Pursuant to section 7805(f) of the

Code, the notice of proposed rulemaking

that preceded these final regulations was

submitted to the Chief Counsel for the

Office of Advocacy of the Small Business

Administration for comment on its impact

on small business. No comments on that

notice of proposed rulemaking were

received from the Chief Counsel for the

Office of Advocacy of the Small Business

Administration.

V. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates

Reform Act of 1995 requires that agencies

assess anticipated costs and benefits and

take certain other actions before issuing a

final rule that includes any Federal 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 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.

VI. Executive Order 13132: Federalism

Executive Order 13132 (entitled “Federalism”) prohibits an agency from publishing

Bulletin No. 2026–3

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

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.

Statement of Availability of IRS

Documents

IRS guidance cited in this preamble is

published in the Internal Revenue Bulletin

and is available from the Superintendent

of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by

visiting the IRS website at https://www.

irs.gov.

Drafting Information

The principal authors of the final regulations are Jack Zhou of the Office of

Associate Chief Counsel (International),

and Joel Deuth, formerly of the Office of

Associate Chief Counsel (International).

However, other personnel from the Treasury Department and the IRS participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the

Regulations

Accordingly, the Treasury Department

and the IRS amend 26 CFR part 1 as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by adding entries for

§§ 1.892-3 and 1.892-4 in numerical order

to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

*****

Section 1.892-3 also issued under 26

U.S.C. 892(c).

335

*****

Section 1.892-4 also issued under 26

U.S.C. 892(c).

*****

Par. 2. Section 1.882-5 is amended by

revising paragraph (a)(6) to read as follows:

§ 1.882-5 Determination of interest

deduction.

(a) * * *

(6) Special rule for foreign governments. The amount of interest expense

of a foreign government, as defined in

§ 1.892-2T(a), that is allocable to ECI

is the total amount of interest paid or

accrued within the taxable year by the

United States trade or business on U.S.

booked liabilities (as defined in paragraph (d)(2) of this section). Interest

expense of a foreign government, however, is not allocable to ECI to the extent

that it is incurred with respect to U.S.

booked liabilities that exceed 80 percent of the total value of U.S. assets

for the taxable year (determined under

paragraph (b) of this section). This paragraph (a)(6) does not apply to controlled

commercial entities within the meaning

of § 1.892-5.

*****

Par. 3. Section 1.892-3 is revised to

read as follows:

§ 1.892-3 Income of foreign

governments.

(a) Types of income exempt—(1) In

general. For further guidance, see § 1.8923T(a)(1).

(2) Income from investments. For further guidance, see § 1.892-3T(a)(2).

(3) Securities. For further guidance,

see § 1.892-3T(a)(3).

(4) Financial instrument—(i) Definition. For purposes of this paragraph (a),

the term financial instrument includes:

(A) Any interest rate, currency, equity,

or commodity (as the term is used in

section 864(b)(2)(B) and § 1.864-2(d))

notional principal contract (as the term is

used in section 475(c)(2)); or

(B) Any evidence of an interest in

options, forward or futures contracts, and

any other similar contracts, the value of

which, or any payment or other transfer

January 12, 2026

with respect to which, is (directly or indirectly) determined by reference to one or

more of the following:

(1) Commodity (as the term is used in

section 864(b)(2)(B) and § 1.864-2(d));

(2) Currency;

(3) Share of stock;

(4) Partnership or beneficial ownership

interest in a widely held or publicly traded

partnership or trust;

(5) Note, bond, debenture, or other evidence of indebtedness; or

(6) Notional principal contract

described in paragraph (a)(4)(i)(A) of this

section.

(ii) Special rule. For purposes of

paragraph (a)(4)(i) of this section, nonfunctional currency or gold is a financial

instrument when physically held by a foreign central bank of issue (as defined in

§ 1.895-1(b)).

(5) Execution of financial or monetary

policy. For further guidance, see § 1.8923T(a)(5).

(6) Dividend equivalents. Income from

investments in stocks includes the payment of a dividend equivalent described

in section 871(m) and the regulations in

this part under section 871(m).

(b) Illustrations. For further guidance,

see § 1.892-3T(b).

(c) Applicability dates. (1) Paragraph

(a)(4) of this section applies to taxable

years beginning on or after December

15, 2025. See § 1.892-3T(a)(4), as contained in 26 CFR in part 1 in effect on

April 1, 2025, for the rules that apply to

taxable years beginning before December 15, 2025. A taxpayer may choose to

apply paragraph (a)(4) of this section to

a taxable year beginning before December 15, 2025, if the period of limitations

on assessment of the taxable year is open

under section 6501 and the taxpayer and

entities that are related (within the meaning of section 267(b) or section 707(b))

to the taxpayer apply this rule and

§§ 1.892-4 and 1.892-5 in their entirety

to the taxable year and all succeeding

taxable years beginning before December 15, 2025.

(2) Paragraph (a)(6) of this section

applies to payments made on or after

December 5, 2013.

Par. 4. Section 1.892-3T is amended

by revising paragraph (a)(4) to read as follows:

January 12, 2026

§ 1.892-3T Income of foreign

governments (temporary regulations).

(a) * * *

(4) Financial instrument. For further

guidance, see § 1.892-3(a)(4).

*****

Par. 5. Section 1.892-4 is added to read

as follows:

§ 1.892-4 Commercial activities.

(a) Purpose. The exemption generally applicable to a foreign government

(as defined in § 1.892-2T) for income

described in §§ 1.892-3T and 1.892-3

does not apply to income derived from

the conduct of commercial activity

(whether within or outside the United

States), income received by a controlled

commercial entity or received (directly

or indirectly) from a controlled commercial entity, or income derived from the

disposition of any interest in a controlled

commercial entity. This section provides

rules for determining whether income

is derived from the conduct of commercial activity. The rules in this section also

apply in determining under §§ 1.892-5T

and 1.892-5 whether an entity is a controlled commercial entity.

(b) In general. Except as provided in

paragraph (c) of this section, all activities

(whether conducted within or outside the

United States) that are ordinarily conducted for the current or future production

of income or gain are commercial activities. Only the nature of the activity, not

the purpose or motivation for conducting

the activity, is determinative of whether

the activity is commercial in character.

For purposes of this paragraph (b), activities that constitute a trade or business

for purposes of section 162 or constitute

(or would constitute if undertaken in the

United States) a trade or business in the

United States for purposes of section

864(b) are commercial activities except

as otherwise provided in paragraph (c) of

this section.

(c) Activities that are not commercial—(1) Investments—(i) In general.

Subject to the provisions of this paragraph (c), the following are not commercial activities: investments in stocks,

bonds, and other securities (as defined

in § 1.892-3T(a)(3)); loans; investments

336

in financial instruments (as defined in

§ 1.892-3(a)(4)); the holding of partnership equity interests; the holding of

net leases on real property; the holding

of real property which is not producing

income (other than on its sale or from

an investment in net leases on real property); and the holding of deposits in any

currency in banks. Transferring securities

under a loan agreement which meets the

requirements of section 1058 is an investment for purposes of this paragraph (c)

(1)(i). An activity will not cease to be an

investment solely because of the volume

of transactions of that activity or because

of other unrelated activities.

(ii) [Reserved]

(iii) Banking, financing, etc. For further

guidance, see § 1.892-4T(c)(1)(iii).

(2) Trading. Effecting transactions in

stocks, bonds, other securities (as defined

in § 1.892-3T(a)(3)), partnership equity

interests, commodities, or financial instruments (as defined in § 1.892-3(a)(4)) for

a foreign government’s own account does

not constitute commercial activity. Such

transactions are not commercial activities

regardless of whether they are effected

by the foreign government through its

employees or through a broker, commission agent, custodian, or other independent

agent and regardless of whether or not any

such employee or agent has discretionary

authority to make decisions in effecting

the transactions. Such transactions undertaken as a dealer (as determined under

the principles of § 1.864-2(c)(2)(iv)(a)),

however, constitute commercial activity.

For purposes of this paragraph (c)(2), the

term commodities means commodities of

a kind customarily dealt in on an organized commodity exchange but only if the

transaction is of a kind customarily consummated at such place.

(3) Disposition of a U.S. real property interest. A disposition (including a

deemed disposition under section 897(h)

(1)) of a U.S. real property interest (as

defined in section 897(c)), by itself, does

not constitute the conduct of commercial

activity. As described in § 1.892-3T(a),

however, gain derived from a disposition

of a U.S. real property interest defined in

section 897(c)(1)(A)(i) will not qualify for

exemption from tax under section 892.

(4) Cultural events. For further guidance, see § 1.892-4T(c)(2).

Bulletin No. 2026–3

(5) Non-profit activities. For further

guidance, see § 1.892-4T(c)(3).

(6) Governmental functions. For further guidance, see § 1.892-4T(c)(4).

(7) Purchasing. For further guidance,

see § 1.892-4T(c)(5).

(d) Applicability date. Except as otherwise provided in this paragraph (d), this

section applies to taxable years beginning on or after December 15, 2025. See

§ 1.892-4T, as contained in 26 CFR in

part 1 in effect on April 1, 2025, for the

rules that apply to taxable years beginning

before December 15, 2025. A taxpayer

may choose to apply this section to a taxable year beginning before December 15,

2025, if the period of limitations on assessment of the taxable year is open under

section 6501 and the taxpayer and entities

that are related (within the meaning of

section 267(b) or section 707(b)) to the

taxpayer apply this section and §§ 1.8923(a)(4) and 1.892-5 in their entirety to the

taxable year and all succeeding taxable

years beginning December 15, 2025.

Par. 6. Section 1.892-4T is amended

by revising paragraphs (a), (b), and (c)(1)

(i) and (ii) to read as follows:

§ 1.892-4T Commercial activities

(temporary regulations).

(a) Purpose. For further guidance, see

§ 1.892-4(a).

(b) In general. For further guidance,

see § 1.892-4(b).

(c) * * *

(1) * * *

(i) In general. For further guidance, see

§ 1.892-4(c)(1)(i).

(ii) Trading. For further guidance, see

§ 1.892-4(c)(2).

*****

Par. 7. Section 1.892-5 is revised to

read as follows:

§ 1.892-5 Controlled commercial entity.

(a) In general—(1) General rule and

definition of the term controlled commercial entity. (i) Under section 892(a)

(2)(A)(ii) and (iii), the exemption generally applicable to a foreign government

(as defined in § 1.892-2T) for income

described in §§ 1.892-3T and 1.892-3

does not apply to income received by a

controlled commercial entity or received

Bulletin No. 2026–3

(directly or indirectly) from a controlled

commercial entity, or to income derived

from the disposition of any interest in a

controlled commercial entity.

(ii) For purposes of section 892(a)

(2)(B) and this section, the term entity

includes a corporation, a partnership, a

trust (including a pension trust described

in § 1.892-2T(c)), and an estate.

(iii) The term controlled commercial

entity means any entity (including a controlled entity as defined in § 1.892-2T(a)

(3)) engaged in commercial activities

(as defined in §§ 1.892-4T and 1.892-4)

(whether conducted within or outside

the United States) if the foreign government—

(A) Holds (directly or indirectly) any

interest in such entity which (by value or

voting power) is 50 percent or more of the

total of such interests in such entity; or

(B) Holds (directly or indirectly) any

other interest in such entity which provides the foreign government with effective control of such entity.

(2) Inadvertent commercial activity—

(i) General rule. For purposes of section

892(a)(2)(B) and paragraph (a)(1) of this

section, a tested entity that conducts,

including by attribution, only inadvertent

commercial activity will not be considered to be engaged in commercial activities. However, any income derived from

any foreign government’s inadvertent

commercial activity (including activity

attributed from a partnership) will not

qualify for exemption from tax under section 892. Commercial activity of a tested

entity will be treated as inadvertent commercial activity only if:

(A) Failure to avoid conducting the

commercial activity is reasonable as

described in paragraph (a)(2)(ii) of this

section;

(B) The commercial activity is timely

cured as described in paragraph (a)(2)(iii)

of this section; and

(C) The record maintenance requirements described in paragraph (a)(2)(iv) of

this section are met.

(ii) Reasonable failure to avoid commercial activity—(A) In general. Subject

to paragraphs (a)(2)(ii)(B) and (C) of this

section, whether a tested entity’s failure

to prevent its worldwide activities from

resulting in commercial activity is reasonable will be determined based on all the

337

facts and circumstances. Due regard will

be given to the number of commercial

activities conducted during the taxable

year and the activities in the immediately

preceding taxable year to the extent relevant in characterizing the activities in the

current taxable year, as well as the amount

of income earned from, and assets used in,

the conduct of the commercial activities

in relationship to the tested entity’s total

income and assets. For purposes of this

paragraph (a)(2)(ii)(A) and paragraph (a)

(2)(ii)(C) of this section, where commercial activity conducted by a partnership is

attributed under paragraph (d)(5)(i) of this

section to a tested entity owning an interest in the partnership—

(1) Assets used in the conduct of the

commercial activity by the partnership

are treated as assets used in the conduct of

commercial activity by the entity in proportion to the tested entity’s interest in the

partnership; and

(2) The tested entity’s distributive share

of the partnership’s income from the conduct of the commercial activity is treated

as income earned by the tested entity from

the conduct of commercial activities.

(B) Continuing due diligence requirement. A failure to avoid commercial

activity will not be considered reasonable

unless there is continuing due diligence to

prevent the tested entity from engaging in

commercial activities within or outside

the United States as evidenced by having adequate written policies and operational procedures, within the meaning

of this paragraph (a)(2)(ii)(B), in place

to monitor the tested entity’s worldwide

activities. A failure to avoid commercial

activity will not be considered reasonable if responsible employees have not

undertaken reasonable efforts, based on

all facts and circumstances, to establish,

follow, and enforce such written policies

and operational procedures with respect

to the tested entity. For purposes of this

paragraph (a)(2)(ii)(B), all facts and circumstances are considered in the determination of whether written policies and

operational procedures are considered

adequate, including whether the written

policies and operational procedures:

(1) Prohibit the tested entity from

engaging in commercial activities both

directly and through investments in entities whose commercial activities would

January 12, 2026

be attributed to the tested entity within the

meaning of this section;

(2) Are communicated in writing to

all persons who exercise discretionary

authority, acting alone or as part of a decisional body, to cause the tested entity to

undertake an investment;

(3) Require an advance determination,

by receipt of an opinion of counsel or

otherwise, as to whether an investment is

commercial activity;

(4) Include an annual internal or external audit or review of direct investments

and investments in entities whose commercial activities would be attributed to

the tested entity within the meaning of this

section; and

(5) Require the result of periodic tests

to be reviewed and certified by responsible

employees who have authority and obligation to cause the curing of any commercial

activity disclosed in such procedures.

(C) Safe Harbor—(1) In general.

Provided that adequate written policies

and operational procedures are in place

to monitor the tested entity’s worldwide

activities as required in paragraph (a)

(2)(ii)(B) of this section, the tested entity’s failure to avoid commercial activity

during the taxable year will be considered

reasonable if:

(i) The value of the assets used in, or

held for use in, all commercial activity

does not exceed five percent of the total

value of the assets reflected on the tested

entity’s balance sheet for the taxable year,

determined using the average of the value

of the assets as of the close of each quarter of the taxable year, as prepared for an

applicable financial statement as defined

in section 451(b)(3) and § 1.451-3(a), or, if

the tested entity is not required to prepare

a balance sheet for an applicable financial statement, as reflected in the books of

account or records that are adequate and

sufficient to establish the amount; and

(ii) The income earned by the tested

entity from commercial activity does not

exceed five percent of the tested entity’s

gross income as reflected on its income

statement for the taxable year, as prepared

for an applicable financial statement as

defined in section 451(b)(3) and § 1.4513(a), or, if the tested entity is not required

to prepare an income statement for an

applicable financial statement, as reflected

in the books of account or records that are

January 12, 2026

adequate and sufficient to establish the

amount.

(2) Calculation of total assets and

income. For purposes of paragraph (a)

(2)(ii)(C)(1) of this section, the amount

of total assets includes the value of the

tested entity’s qualified partnership interests under paragraph (d)(5)(iii) of this section, and the amount of total gross income

includes the tested entity’s distributive

share of income, including income derived

from commercial activity, from partnerships in which the tested entity holds a

qualified partnership interest under paragraph (d)(5)(iii) of this section.

(iii) Cure requirement. A timely cure

is considered to have been made if the

tested entity discontinues the conduct of

the commercial activity within 180 days

of the date of discovery of the commercial activity by responsible employees

who are responsible for monitoring and

reviewing the tested entity’s commercial activity pursuant to paragraph (a)(2)

(ii)(B) of this section. For example, if a

responsible employee discovers that the

partnership in which the tested entity

holds an interest as a partner is conducting commercial activity, the entity will

satisfy the cure requirement if, within

180 days of that person discovering the

commercial activity, the tested entity

discontinues the conduct of the activity

by divesting itself of its interest in the

partnership (including by transferring

its interest in the partnership to a related

entity), or the partnership discontinues

its conduct of commercial activity. The

tested entity may, depending on the facts

and circumstances, be able to satisfy the

cure requirement if, within 180 days of

a responsible employee discovering the

commercial activity, the tested entity

exchanges its interest in the partnership

for one that is a qualified partnership

interest, within the meaning of paragraph (d)(5)(iii) of this section, of the

same partnership (including a deemed

exchange from an agreed modification of

terms).

(iv) Record maintenance. Adequate

records of each discovered commercial

activity and the remedial action taken to

cure that activity must be maintained. The

records must be retained so long as the

contents thereof may become material in

the administration of section 892.

338

(v) Definitions. The following definitions apply for purposes of this paragraph

(a)(2).

(A) Tested entity. A tested entity means

an entity that is engaged, including by

attribution under paragraph (d)(5)(i) of

this section, in commercial activity without regard to paragraph (a)(2)(i) of this

section.

(B) Responsible employees. Responsible employees may include employees of

a tested entity or employees of an entity

that controls (within the meaning of paragraph (a)(1) of this section) the tested

entity.

(C) Reasonable efforts. The term reasonable efforts means exercising ordinary

business care and prudence.

(3) Annual determination of controlled

commercial entity status—(i) In general.

If an entity described in paragraph (a)

(1) of this section engages in commercial activities at any time during its taxable year, the entity will be considered a

controlled commercial entity for its entire

taxable year. An entity that is not engaged

in commercial activities during its taxable

year will not be considered a controlled

commercial entity for its taxable year. For

purposes of determining whether an entity

is engaged in commercial activities during

its taxable year, that entity’s activities

during its immediately preceding taxable

year will also be taken into account to the

extent relevant in characterizing the activities in the current taxable year.

(ii) Certain corporate acquisitions—

(A) In general. For purposes of paragraph

(a)(3)(i) of this section, if the assets of a

corporation that is engaged in commercial activity in a taxable year are acquired

by another corporation in an acquisition

described in section 381(a), then, except

as provided in paragraph (a)(3)(ii)(B) of

this section, the acquiring corporation will

not be treated as conducting commercial

activity for the taxable year in which the

acquisition occurs solely by reason of

acquiring and holding the distributor or

transferor corporation’s assets, provided

that the taxable year of the distributor or

transferor corporation ends under section 381(b), and after the acquisition, the

acquiring corporation is not the entity that

directly continues the distributor or transferor corporation’s commercial activity.

If the taxable year of the distributor or

Bulletin No. 2026–3

transferor corporation does not end as a

result of such acquisition, the acquiring

corporation will be treated as conducting

commercial activity for the taxable year in

which the acquisition occurs.

(B) Exception. If the acquisition

described in paragraph (a)(3)(ii)(A) of this

section to which section 381(a) applies is

between corporations that are controlled

by the same foreign sovereign within the

meaning of paragraph (a)(1) of this section, the acquiring corporation will be

treated as conducting commercial activity

for the taxable year of the acquiring corporation in which such acquisition occurs

regardless of whether the taxable year of

the distributor or transferor corporation

ends as described in section 381(b) or

whether the acquiring corporation directly

continues the distributor or transferor corporation’s commercial activity.

(b) Entities treated as engaged in commercial activity—(1) United States real

property holding corporations—(i) General rule. Except as provided in paragraph

(b)(1)(ii) of this section, a corporation that

is a United States real property holding

corporation as defined in section 897(c)

(2), is treated as engaged in commercial

activity and, therefore, is a controlled

commercial entity if the requirements of

paragraph (a)(1)(iii)(A) or (B) of this section are satisfied.

(ii) Exceptions. Paragraph (b)(1)(i) of

this section does not apply to the following—

(A) Corporations that are foreign; or

(B) A corporation that is a United

States real property holding corporation,

as defined in section 897(c)(2), solely by

reason of its direct or indirect ownership

interest in one or more other corporations that are not controlled by the foreign government (as determined under

paragraph (a)(1) of this section). For

this purpose, the phrase solely by reason

of its direct or indirect ownership interest in one or more other corporations

that are not controlled by the foreign

government (as determined under paragraph (a)(1) of this section) means disregarding any ownership interests, held

directly or indirectly, in noncontrolled

corporations (as determined under paragraph (a)(1) of this section), after applying the asset test under section 897(c)(2)

and § 1.897-2.

Bulletin No. 2026–3

(2) Central banks. For further guidance, see § 1.892-5T(b)(2).

(3) Pension trusts. For further guidance, see § 1.892-5T(b)(3).

(c) Control—(1) Attribution. For further guidance, see § 1.892-5T(c)(1).

(2) Effective control. For further guidance, see § 1.892-5T(c)(2).

(d) Related controlled entities—(1)

Brother/sister entities. For further guidance, see § 1.892-5T(d)(1).

(2) Parent/subsidiary entities. For further guidance, see § 1.892-5T(d)(2).

(3) [Reserved]

(4) Illustrations. For further guidance,

see § 1.892-5T(d)(4).

(5) Partnerships—(i) General rule.

Except as provided in paragraphs (d)(5)

(ii) and (iii) of this section, the commercial activities of an entity classified as a

partnership for Federal tax purposes are

attributable to its partners for purposes

of section 892. For example, if an entity

described in paragraph (a)(1)(iii)(A) or

(B) of this section holds an interest as a

general or limited partner in a partnership that is engaged in commercial activities, except as provided in paragraphs

(d)(5)(ii) and (iii) of this section, the

partnership’s commercial activities are

attributed to that entity for purposes of

determining if the entity is a controlled

commercial entity within the meaning of

section 892(a)(2)(B) and paragraph (a)

(1) of this section.

(ii) Trading activity exception. An

entity not otherwise engaged in commercial activities will not be considered to be

engaged in commercial activities solely

because the entity is a member of a partnership (whether domestic or foreign) that

effects transactions in stocks, bonds, other

securities (as defined in § 1.892-3T(a)(3)),

partnership equity interests, commodities

(as defined in § 1.892-4(c)(2)), or financial

instruments (as defined in § 1.892-3(a)(4))

for the partnership’s own account or solely

because an employee of such partnership,

or a broker, commission agent, custodian,

or other agent, pursuant to discretionary

authority granted by such partnership,

effects such transactions for the account of

the partnership. This paragraph (d)(5)(ii)

does not apply to any member in the case

of a partnership that is a dealer in stocks,

bonds, other securities, partnership equity

interests, commodities, or financial instru-

339

ments, as determined under the principles

of § 1.864-2(c)(2)(iv)(a).

(iii) Qualified partnership interest

exception—(A) General rule. An entity

that is not otherwise engaged in commercial activities (including, for example,

performing services for a partnership as

described in section 707(a) or section

707(c)) will not be deemed to be engaged

in commercial activities solely because

it holds a qualified partnership interest

in a partnership, notwithstanding that

the entity may be considered as being

engaged in a trade or business within

the United States under section 875(1).

Nevertheless, pursuant to section 892(a)

(2)(A)(i), a foreign government member’s distributive share of partnership

income will be treated as from commercial activity, and thus will not be exempt

from taxation under section 892 to the

extent that the partnership derived such

income from the conduct of commercial

activity. For example, where a controlled

entity described in § 1.892-2T(a)(3) that

is not otherwise engaged in commercial

activities holds a qualified partnership

interest in a partnership that is a dealer

in stocks, bonds, other securities, partnership equity interests, commodities, or

financial instruments in the United States,

although the controlled entity partner will

not be deemed to be engaged in commercial activities solely because of its

interest in the partnership, its distributive

share of partnership income derived from

the partnership’s activity as a dealer will

not be exempt from tax under section 892

because it was derived from the conduct

of commercial activity.

(B) Qualified partnership interest—(1)

In general. Solely for purposes of paragraph (d)(5)(iii) of this section, an interest

classified as equity in an entity classified

as a partnership for Federal tax purposes is

treated as a qualified partnership interest if

the holder of such interest has limited liability within the meaning of § 301.77013(b)(2)(ii) of this chapter, does not possess the legal authority to bind or to act

on behalf of the partnership, does not control the partnership within the meaning of

paragraph (a)(1) of this section, and does

not have rights to participate in the management and conduct of the partnership’s

business at any time during the partnership’s taxable year.

January 12, 2026

(2) Rights to participate in the management and conduct of a partnership’s

business—(i) In general. Rights to participate in the management and conduct

of a partnership’s business mean rights to

participate in the day-to-day management

or operation of the partnership’s business,

including, for example, the right to participate in ordinary-course personnel and

compensation decisions, or take active

roles in formulating the partnership’s

business strategy or in respect of the partnership’s acquisition or disposition of

a specific investment. The existence of

these rights is determined based on all

facts and circumstances. In addition to the

conduct of relevant parties, such determination shall consider the totality of all

rights arising from all direct or indirect

interests of the holder of the partnership,

including rights provided under the law of

the jurisdiction in which the partnership

is organized, the partnership’s governing

documents, contractual agreements such

as side letters, shareholders’ agreements,

and agreements with creditors of the partnership.

(ii) Rights to participate in the monitoring or protection of a partner’s capital investment. Rights to participate

in the management and conduct of a

partnership’s business generally do not

include participation rights with respect

to monitoring or protecting the partner’s

capital investment in the partnership, but

only if such rights do not include rights

to participate in the day-to-day management or operation of the partnership’s

business and do not result in effective

control under paragraph (a)(1)(iii)(B) of

this section. These rights may, subject to

the limitations of the previous sentence,

include oversight and supervision rights

in the case of major strategic decisions

such as: admission or expulsion of a

partner; hiring or firing key strategic

personnel; amendment of the partnership agreement; dissolution, merger, or

conversion of the partnership; unusual

and non-ordinary course deviations

from previously determined investment

parameters; extending the term of the

partnership’s governing agreement; and

disposition of all or substantially all of

the partnership’s property outside of

the ordinary course of the partnership’s

activities.

January 12, 2026

(iii) Holding more than one interest in

a partnership. If a foreign sovereign holds

directly or indirectly interests in a partnership through one or more integral parts

or controlled entities (within the meaning

of § 1.892-2T) or entities controlled by

such foreign sovereign under paragraph

(a)(1) of this section, then such interests

are aggregated for purposes of this paragraph (d)(5)(iii)(B)(2). For example, if a

controlled entity (within the meaning of

§ 1.892-2T) of a foreign sovereign or an

entity controlled by the foreign sovereign

under paragraph (a)(1) of this section holds

a partnership interest that is not a qualified

partnership interest, then any other equity

interest held in the same partnership by

any other controlled entities of the foreign

sovereign is also not treated as a qualified partnership interest. Furthermore, if

a foreign sovereign directly or indirectly

holds more than one interest in a partnership through one or more integral parts or

controlled entities (within the meaning of

§ 1.892-2T) or entities controlled by such

foreign sovereign under paragraph (a)(1)

of this section and those partnership interests in the aggregate result in a disqualification from qualified partnership interest,

then each such interest in the partnership

is not treated as a qualified partnership

interest.

(C) Safe harbor for de minimis interests. For purposes of this paragraph (d)(5)

(iii), a holder of an interest classified as

equity in an entity classified as a partnership for Federal tax purposes is treated

as holding a qualified partnership interest (within the meaning of paragraph (d)

(5)(iii)(B) of this section) if the holder at

all times during the partnership’s taxable

year:

(1) Has limited liability within the

meaning of § 301.7701-3(b)(2)(ii) of this

chapter;

(2) Does not possess the legal authority

to bind or to act on behalf of the partnership;

(3) Is not the partnership’s managing

partner, managing member, or an equivalent role under applicable law; and

(4) Does not own, directly or indirectly

(under the principles of paragraph (d)(5)

(iii)(B)(2)(iii) of this section), more than

five percent of either the partnership’s

capital interests or the partnership’s profits interests.

340

(D) Tiered partnerships. The rules of

this paragraph (d)(5)(iii) apply in cases

where a partnership (lower-tier partnership) that conducts commercial activity

has a partner that is a partnership (uppertier partnership). If an upper-tier partnership holds no interest in the lower-tier

partnership other than a qualified partnership interest, within the meaning of paragraph (d)(5)(iii)(B) or (C) of this section,

the lower-tier partnership’s commercial

activity is not attributed to the upper-tier

partnership. Nevertheless, the upper-tier

partnership’s distributive share of the lower-tier partnership’s income that is derived

from the conduct of commercial activity

will not be exempt from tax under section

892.

(iv) Illustration. The following examples illustrate the application of this paragraph (d)(5):

(A) Example 1—(1) Facts. K is a controlled

entity of a foreign sovereign under § 1.892-2T(a)

(3). K holds a 20 percent equity interest in Opco,

a domestic limited liability company that is classified as a partnership for Federal tax purposes.

Opco owns and manages an office building that

produces income from rental and advertising

activities that constitute commercial activity under

§ 1.892-4. Under the governing agreement and the

applicable law of Opco, K is not liable for the

debts of or claims against Opco by reason of being

a member, does not possess the legal authority to

bind or act on behalf of Opco, and does not control

Opco within the meaning of paragraph (a)(1) of

this section. K is not the managing member of, and

does not hold an equivalent role under applicable

law in, Opco. Pursuant to a side letter between K

and Opco, K, however, has rights to review and

advise on Opco’s material business contracts and

business expenses.

(2) Analysis. Opco’s commercial activity is

attributable to K under paragraph (d)(5)(i) of this

section unless K’s interest in Opco is a qualified

partnership interest. K’s interest in Opco does not

satisfy the safe harbor under paragraph (d)(5)(iii)

(C) of this section because K holds a 20 percent

equity interest in Opco. Under all facts and circumstances as provided in paragraph (d)(5)(iii)(B)

of this section, K’s rights to review and advise on

Opco’s material business contracts and business

expenses constitutes the right to participate in the

day-to-day management and operation of Opco’s

business. As a result, K’s interest in Opco is not

a qualified partnership interest. Therefore, Opco’s

commercial activity is attributable to K under paragraph (d)(5)(i) of this section, and K will be treated

as a controlled commercial entity.

(B) Example 2—(1) Facts. The facts are the same

as in paragraph (c)(5)(iv)(A) of this section (Example 1), except that K does not have rights to review

and advise on Opco’s material business contracts

and business expenses. Instead, K is a member of

Opco’s member committee that only has the abil-

Bulletin No. 2026–3

ity to make non-binding recommendations, but not

decisions in respect of investor-level strategic matters such as dissolution of the partnership, deviations

from previously determined investment parameters,

and extending the term of the partnership’s governing agreement. The extent of K’s membership and

participation in Opco’s member committee does not

result in control over Opco within the meaning of

paragraph (a)(1) of this section. K does not otherwise

have control over Opco within the meaning of paragraph (a)(1) of this section.

(2) Analysis. Although K is on Opco’s member

committee, the committee only has the ability to

make non-binding recommendations but not decisions of an investor-level nature in respect of strategic matters, and not in respect of Opco’s day-to-day

operations. As a result, Opco’s commercial activities

will not be attributable to K pursuant to paragraph

(d)(5)(iii)(A) of this section. Accordingly, if K is

not treated as engaged in any other activities that

are commercial activities, K will not be a controlled

commercial entity. The portion of K’s distributive

share of income from Opco, however, that is derived

from commercial activity will not be exempt from

tax under section 892.

(e) Applicability date. Except as otherwise provided in this paragraph (e), this

section applies to taxable years beginning on or after December 15, 2025. See

§§ 1.892-5 and 1.892-5T, as contained

in 26 CFR in part 1 in effect on April 1,

2025, for the rules that apply to taxable

years beginning before December 15,

2025. A taxpayer may choose to apply

this section to a taxable year beginning

before December 15, 2025, if the period

of limitations on assessment of the taxable year is open under section 6501 and

the taxpayer and entities that are related

(within the meaning of section 267(b)

or section 707(b)) to the taxpayer apply

this section and §§ 1.892-3(a)(4) and

1.892-4 in their entirety to the taxable

year and all succeeding taxable years

beginning before December 15, 2025.

The rule in paragraph (a)(1)(ii) of this

section applies on or after January 14,

2002.

Par. 8. Section 1.892-5T is amended

by:

a. Revising paragraph (a), the heading

of paragraph (b), and paragraph (b)(1);

b. Removing and reserving paragraph

(d)(3); and

c. Revising paragraph (d)(4).

The revisions read as follows:

Bulletin No. 2026–3

§ 1.892-5T Controlled commercial

entity (temporary regulations).

(a) In general. For further guidance,

see § 1.892-5(a).

(b) Entities treated as engaged in commercial activity—(1) U.S. real property

holding corporations. For further guidance, see § 1.892-5(b)(1).

*****

(d) * * *

(4) Illustrations. The principles of this

section may be illustrated by the following examples.

(i) Example 1. (A) The Ministry of Industry and

Development is an integral part of a foreign sovereign under § 1.892-2T(a)(2). The Ministry is engaged

in commercial activity within the United States. In

addition, the Ministry receives income from various

publicly traded stocks and bonds, soybean futures

contracts and net leases on U.S. real property. Since

the Ministry is an integral part, and not a controlled

entity, of a foreign sovereign, it is not a controlled

commercial entity within the meaning of paragraph

(a) of this section. Therefore, income described in

§ 1.892-3T is ineligible for exemption under section

892 only to the extent derived from the conduct of

commercial activities. Accordingly, the Ministry’s

income from the stocks and bonds is exempt from

U.S. tax.

(B) The facts are the same as in paragraph (d)(4)

(i)(A) of this section, except that the Ministry also

owns 75 percent of the stock of R, a U.S. holding

company that owns all the stock of S, a U.S. operating company engaged in commercial activity. Ministry’s dividend income from R is income received

indirectly from a controlled commercial entity. The

Ministry’s income from the stocks and bonds, with

the exception of dividend income from R, is exempt

from U.S. tax.

(C) The facts are the same as in paragraph (d)

(4)(i)(A) of this section, except that the Ministry is

a controlled entity of a foreign sovereign. Since the

Ministry is a controlled entity and is engaged in commercial activity, it is a controlled commercial entity

within the meaning of paragraph (a) of this section,

and none of its income is eligible for exemption.

(ii) Example 2. (A) Z, a controlled entity of a foreign sovereign, has established a pension trust under

the laws of the sovereign as part of a pension plan for

the benefit of its employees and former employees.

The pension trust (T), which meets the requirements

of § 1.892-2T(c), has investments in the U.S. in various stocks, bonds, annuity contracts, and a shopping

center which is leased and managed by an independent real estate management firm. T also makes securities loans in transactions that qualify under section

1058. T’s investment in the shopping center is not

considered an unrelated trade or business within

the meaning of section 513(b). Accordingly, T will

341

not be treated as engaged in commercial activities.

Since T is not a controlled commercial entity, its

investment income described in § 1.892-3T, with the

exception of income received from the operations of

the shopping center, is exempt from taxation under

section 892.

(B) The facts are the same as paragraph (d)(4)

(ii)(A) of this section, except that T has an interest

in a limited partnership (that is not a qualified partnership interest within the meaning of § 1.892-5(d)

(5)(iii)) which owns the shopping center. The shopping center is leased and managed by the partnership

rather than by an independent management firm.

Managing a shopping center, directly or indirectly

through a partnership of which a trust is a member,

would be considered an unrelated trade or business

within the meaning of section 513(b) giving rise to

unrelated business taxable income. Since the commercial activities of a partnership are attributable to

its partners, T will be treated as engaged in commercial activity and thus will be considered a controlled

commercial entity. Accordingly, none of T’s income

will be exempt from taxation under section 892.

(C) The facts are the same as paragraph (d)(4)(ii)

(A) of this section, except that Z is a controlled commercial entity. The result is the same as in paragraph

(d)(4)(ii)(A) of this section.

(iii) Example 3. (A) The Department of Interior,

an integral part of foreign sovereign FC, wholly

owns corporations G and H. G, in turn, wholly owns

S. G, H and S are each controlled entities. G, which

is not engaged in commercial activity anywhere in

the world, receives interest income from deposits in

banks in the United States. Both H and S do not have

any investments in the U.S. but are both engaged in

commercial activities. However, only S is engaged

in commercial activities within the United States.

Because neither the commercial activities of H nor

the commercial activities of S are attributable to the

Department of Interior or G, G’s interest income is

exempt from taxation under section 892.

(B) The facts are the same as paragraph (d)(4)

(iii)(A) of this section, except that G rather than S is

engaged in commercial activities and S rather than G

receives the interest income from the United States.

Since the commercial activities of G are attributable

to S, S’s interest income is not exempt from taxation.

Frank J. Bisignano,

Chief Executive Officer.

Approved: October 30, 2025

Kenneth J. Kies,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register December 12, 2025, 8:45 a.m., and published in the issue

of the Federal Register for December 15, 2025, 90

FR 57901)

January 12, 2026

Part III

Section 1274.—

Determination of Issue

Price in the Case of Certain

Debt Instruments Issued for

Property

(Also, Sections 42, 280G, 382, 467, 468,

482, 483, 1288, 7520, 7702, 7872.)

Rev. Rul. 2026-2

This revenue ruling provides various

prescribed rates for federal income tax

purposes for January 2026 (the current

month). Table 1 contains the short-term,

mid-term, and long-term applicable fed-

Annual

AFR

110% AFR

120% AFR

130% AFR

3.63%

4.00%

4.37%

4.73%

AFR

110% AFR

120% AFR

130% AFR

150% AFR

175% AFR

3.81%

4.19%

4.57%

4.96%

5.74%

6.71%

AFR

110% AFR

120% AFR

130% AFR

4.63%

5.10%

5.58%

6.04%

Short-term adjusted AFR

Mid-term adjusted AFR

Long-term adjusted AFR

January 12, 2026

eral rates (AFR) for the current month

for purposes of section 1274(d) of the

Internal Revenue Code. Table 2 contains

the short-term, mid-term, and long-term

adjusted applicable federal rates (adjusted

AFR) for the current month for purposes

of section 1288(b). Table 3 sets forth the

adjusted federal long-term rate and the

long-term tax-exempt rate described in

section 382(f). Table 4 contains the appropriate percentages for determining the

low-income housing credit described in

section 42(b)(1) for buildings placed in

service during the current month. However, under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after

July 30, 2008, shall not be less than 9%.

Table 5 contains the federal rate for determining the present value of an annuity, an

interest for life or for a term of years, or

a remainder or a reversionary interest for

purposes of section 7520. Table 6 contains

the deemed rate of return for transfers

made during calendar year 2026 to pooled

income funds described in section 642(c)

(5) that have been in existence for less

than 3 taxable years immediately preceding the taxable year in which the transfer

was made. Finally, Table 7 contains the

average of the applicable federal mid-term

rates (based on annual compounding) for

the 60-month period ending December 31,

2025, for purposes of section 7702(f)(11).

REV. RUL. 2026-2 TABLE 1

Applicable Federal Rates (AFR) for January 2026

Period for Compounding

Semiannual

Quarterly

Short-term

3.60%

3.58%

3.96%

3.94%

4.32%

4.30%

4.68%

4.65%

Mid-term

3.77%

3.75%

4.15%

4.13%

4.52%

4.49%

4.90%

4.87%

5.66%

5.62%

6.60%

6.55%

Long-term

4.58%

4.55%

5.04%

5.01%

5.50%

5.46%

5.95%

5.91%

Annual

2.75%

2.88%

3.51%

REV. RUL. 2026-2 TABLE 2

Adjusted AFR for January 2026

Period for Compounding

Semiannual

2.73%

2.86%

3.48%

342

Quarterly

2.72%

2.85%

3.46%

Monthly

3.57%

3.93%

4.28%

4.64%

3.74%

4.11%

4.48%

4.85%

5.59%

6.51%

4.54%

4.99%

5.44%

5.88%

Monthly

2.71%

2.84%

3.46%

Bulletin No. 2026–3

REV. RUL. 2026-2 TABLE 3

Rates Under Section 382 for January 2026

Adjusted federal long-term rate for the current month

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal

long-term rates for the current month and the prior two months.)

3.51%

3.51%

REV. RUL. 2026-2 TABLE 4

Appropriate Percentages Under Section 42(b)(1) for January 2026

Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after

July 30, 2008, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit

7.98%

Appropriate percentage for the 30% present value low-income housing credit

3.42%

REV. RUL. 2026-2 TABLE 5

Rate Under Section 7520 for January 2026

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,

or a remainder or reversionary interest

REV. RUL. 2026-2 TABLE 6

Deemed Rate for Transfers to New Pooled Income Funds During 2026

Deemed rate of return for transfers during 2026 to pooled income funds that have been in existence for

less than 3 taxable years

4.6%

4.0%

REV. RUL. 2026-2 TABLE 7

Average of the Applicable Federal Mid-Term Rates for 2025

For purposes of section 7702(f)(11), the average of the applicable federal mid-term rates (based on annual compounding) for the

60-month period ending December 31, 2025, is 3.19% rounded to 3%.

Bulletin No. 2026–3

343

January 12, 2026

Section 42.—Low-Income

Housing Credit

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

Section 280G.—Golden

Parachute Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

Section 382.—Limitation

on Net Operating Loss

Carryforwards and

Certain Built-In Losses

Following Ownership

Change

The adjusted applicable federal long-term rate

is set forth for the month of January 2026. See Rev.

Rul. 2026-2, page 386.

Section 467.—Certain

Payments for the Use of

Property or Services

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

January 12, 2026

Section 468.—Special

Rules for Mining and Solid

Waste Reclamation and

Closing Costs

The applicable federal short-term rates are set

forth for the month of January 2026. See Rev. Rul.

2026-2, page 386.

Section 482.—Allocation

of Income and Deductions

Among Taxpayers

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

Section 483.—Interest on

Certain Deferred Payments

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

Section 7520.—Valuation

Tables

The applicable federal mid-term rates are set

forth for the month of January 2026. See Rev. Rul.

2026-2, page 386.

Section 7702.—Life

Insurance Contract

Defined

The average of the applicable federal mid-term

rates for the 60-month period ending December 31,

2025, for purposes of section 7702(f)(11). See Rev.

Rul. 2026-2, page 386.

Section 7872.—Treatment

of Loans With BelowMarket Interest Rates

The applicable federal short-term, mid-term,

and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

Section 1288.—Treatment

of Original Issue Discount

on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of

January 2026. See Rev. Rul. 2026-2, page 386.

344

Bulletin No. 2026–3

Part IV

Notice of Proposed

Rulemaking

Income of Foreign

Governments and of

International Organizations

REG-101952-24

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the taxation of the income of foreign governments

from investments in the United States.

In particular, these proposed regulations

provide guidance for determining when

an acquisition of debt by a foreign government is considered to be commercial

activity, and when a foreign government

has effective control of an entity engaged

in commercial activities. These proposed

regulations will affect foreign governments that derive income from sources

within the United States.

DATES: Written

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