Internal Revenue Bulletin No. 2026–5

Executive Summary: New Tribal Entities, Drug Fees, and Car Loan Deductions

This Internal Revenue Bulletin (IRB) addresses a range of topics, from the tax treatment of tribal entities to new regulations affecting pharmaceutical companies and individual taxpayers. The six key items covered include: final regulations clarifying the tax classification of certain tribal entities under Section 6417 and Section 7701; guidance on defining general welfare benefits for tribal members under Section 139E; an announcement regarding the expiration of the oil spill tax rate under Section 4611; proposed regulations updating fees related to branded prescription drugs, particularly in light of changes from the Inflation Reduction Act (IRA); proposed regulations addressing the reversion of the 1099-K reporting threshold under Section 6050W; and proposed regulations concerning a new deduction for qualified passenger vehicle loan interest under Section 163(h), introduced by the One Big Beautiful Bill Act (OBBBA). The following sections will provide a deeper dive into each of these areas, outlining the specific updates, their context, and the implications for tax practitioners.

Deep Dive: Tribal Sovereignty and Tax Status (T.D. 10039)

These final regulations address the Federal tax treatment of entities wholly owned by Indian Tribal governments, offering clarity and administrative simplification.

1. The Rule: The final regulations, codified in Treasury Decision (T.D.) 10039, amend Section 7701 of the Internal Revenue Code (IRC), which defines terms like "Indian Tribal government," and Section 6417, concerning elective payments of energy credits. The regulations clarify that entities wholly owned by one or more Indian Tribal governments, as defined by Section 7701(a)(40), and organized or incorporated under Tribal law, are generally not recognized as separate entities for Federal income tax purposes. This means the entity shares the Tribe's tax status and is not subject to Federal income tax. However, the regulations stipulate that these entities are recognized as separate for Federal employment tax and certain Federal excise tax purposes. This distinction ensures the entities can fulfill their obligations as employers and manage excise tax liabilities independently. Furthermore, Section 17 corporations (incorporated under Section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. 5124) and Section 3 corporations (incorporated under Section 3 of the Oklahoma Indian Welfare Act, 25 U.S.C. 5203) are also recognized as separate entities for employment and excise tax purposes.

2. The Context: These regulations are deeply rooted in the Federal government's recognition of Tribal sovereignty. The history involves consultation with Tribes over several decades, aiming to clarify the tax status of Tribal entities to promote economic development. A key element is the interaction with Section 6417, "Elective payment of applicable credits," which allows certain tax-exempt entities, including Indian Tribal governments, to receive direct payments for specific energy credits instead of claiming them as a credit against tax liability. The final regulations explicitly treat wholly owned Tribal entities, Section 17 corporations, and Section 3 corporations as 'instrumentalities' of the Indian Tribal government(s) that own them solely for the purposes of Section 6417. This designation is critical because it allows the entity itself, rather than the Tribe, to make the Section 6417 election for applicable credits related to property held by the entity. As specified in 1.6417-1(b)(2), this election is generally made by filing Form 990-T, Exempt Organization Business Income Tax Return, using the entity's own name and Employer Identification Number (EIN). This approach acknowledges that the entity directly owning the applicable credit property is best positioned to meet pre-filing registration and other requirements.

3. The Implication: The most significant implication is administrative simplification for Tribes. By treating wholly owned entities as instrumentalities under Section 6417, the regulations avoid a potentially complex situation where multiple Tribes owning an entity would each have to make separate elections. This streamlined process also ensures that the payment received under Section 6417 is commensurate with the allowable credit. The regulations also implicitly address the 'check-the-box' implications under Section 7701. While the regulations establish that wholly owned Tribal entities are generally not separate for income tax purposes, they also explicitly define when this treatment applies (entities formed under Tribal law) and the exceptions (employment and excise taxes, and Section 6417 elections).

Deep Dive: Defining General Welfare for Tribes (T.D. 10040)

As discussed in the previous section, Treasury Decision (T.D.) 10039 clarified the Federal tax classification of entities wholly owned by Indian Tribal governments under Section 7701 and Section 6417. T.D. 10040, conversely, analyzes the definition of "Tribal General Welfare Benefits" for individual Tribal members, as derived from Section 139E. Specifically, T.D. 10040 concerns the final regulations regarding the exclusion from gross income of certain Tribal general welfare benefits, affecting Indian Tribal governments, their agencies, federally recognized Tribes, Tribal members, their spouses and dependents, and other Tribal program participants.

1. The Rule

The IRS is updating the regulations under Section 139E, which governs the exclusion from gross income of certain Tribal general welfare benefits. Section 139E(a) provides that the gross income of an individual does not include the value of any "Indian general welfare benefit." This new guidance clarifies the requirements that apply to determine whether the benefits an Indian Tribal government program provides qualify as Tribal general welfare benefits. Section 139E(b) defines a qualifying benefit as "any payment made or services provided to or on behalf of a member of an Indian Tribe (or any spouse or dependent of such a member) pursuant to an Indian Tribal government program." This exclusion only applies if the program is administered under guidelines that don't favor the Tribe's governing body, and the benefits promote general welfare, are not lavish or extravagant, and are not compensation for services.

2. The Context

These regulations are issued in the context of the Tribal General Welfare Exclusion Act of 2014, and, more broadly, a sustained effort to recognize Tribal sovereignty and self-determination. The legislative history of Section 139E emphasizes deference to Tribal governments in determining what constitutes general welfare within their communities. As such, Section 2(c) of the Act directs any ambiguities within Section 139E be resolved in favor of the Tribal governments. The Treasury Department held extensive consultation with the Treasury Tribal Advisory Committee (TTAC) and Tribal leaders during the development of the proposed and final regulations.

One critical element is the definition of "lavish or extravagant," as mentioned in Section 139E(b)(2)(C). The final regulations, at §1.139E-1(d)(4), maintain a facts-and-circumstances test for determining whether a Tribal program benefit is lavish or extravagant. This incorporates a Tribe’s culture and cultural practices, history, geographic area, traditions, resources, and economic conditions. More pointedly, newly renumbered §1.139E-1(d)(4)(i) provides that the IRS will defer to an Indian Tribal government's attestations of facts and circumstances, at the time the benefit is provided to the Tribal program participant. Further, Section 139E(c)(5) explains that items of cultural significance, cost reimbursements, or cash honorariums for cultural/ceremonial activities related to transmitting Tribal culture are not considered compensation for services.

3. The Implication

Tax practitioners need to understand the scope of Tribal deference enshrined in these final regulations. Specifically:

• "Lavish or Extravagant" Analysis: While the IRS retains the ability to assess lavishness, it must now defer to the Tribe's attestations of relevant facts and circumstances. This places a significant burden on the IRS to justify any challenge to a Tribe's determination.
• Compensation for Services: The final regulations adopt the view that the term "compensation for services" in Section 139E(b)(2)(D) is generally defined by reference to Section 61. The regulations specify that if a benefit is tied to cultural or ceremonial activities and falls under Section 139E(c)(5), it may be excluded even if it would otherwise be considered compensation.
• Audit Suspension: The audit suspension for Indian Tribal governments and Tribal members under Section 4(a) of the Act remains in effect until the IRS completes the training and education mandated by Section 3(b)(2). However, once the agency completes education and training, the final regulations are in effect, and the agency releases formal notice to that effect, then these final rules are applicable (along with audits).
• Grantor Trusts: The regulations are updated to reflect the importance of Grantor Trusts in funding Tribal programs under §1.139E-1(c)(5)(iii). Now, benefits distributed by a qualifying Grantor Trust are considered a Tribal General Welfare Benefit.

Practitioners advising Tribal governments should review existing general welfare programs to ensure alignment with these updated regulations, particularly documenting the cultural or ceremonial basis for benefits and the Tribe's determination of what constitutes "lavish or extravagant." The regulations provide a transition period, with the rules applicable to taxable years beginning on or after January 1, 2027. However, tribes can opt to apply the new rules earlier.

Deep Dive: Oil Spill Tax Rate Drops (Announcement 2026-02)

Following the updated regulations for Tribal General Welfare Benefits, Announcement 2026-02 addresses a change impacting the tax on petroleum under Section 4611 of the Internal Revenue Code. Section 4611(a) generally imposes a tax on crude oil and petroleum products, with the rate specified in Section 4611(c).

1. The Delta: The announcement clarifies that the tax rate under Section 4611 has decreased from $0.27 to $0.18 per barrel for the 2026 calendar year.

2. The Cause: This reduction stems from the expiration of the Oil Spill Liability Trust Fund (OSLTF) financing rate, which Section 4611(f)(2) stipulates shall not apply after December 31, 2025. Section 4611(c)(1) states that the Section 4611 tax rate is comprised of the Hazardous Substance Superfund financing rate (Superfund tax rate) and the OSLTF tax rate. Revenue Procedure 2025-32 had previously stated that the inflation-adjusted amount for the Section 4611 tax rate for 2026 would be $0.27 per barrel, representing the sum of the $0.18 per barrel inflation-adjusted Superfund tax rate and the $0.09 per barrel OSLTF tax rate.

3. The Implication: The OSLTF tax rate expired on December 31, 2025. Consequently, the Section 4611 tax rate for calendar year 2026 is $0.18 per barrel, reflecting only the inflation-adjusted Superfund tax rate. Announcement 2026-02 clarifies that, notwithstanding the previously published rate in Rev. Proc. 2025-32, the correct rate for any period in calendar year 2026 to which the OSLTF tax rate does not apply is $0.18 per barrel. Tax practitioners advising clients in the oil and gas industry should be aware of this rate change when calculating their excise tax liabilities, and factor in the possibility that Section 4611(f)(2) might be amended to extend the OSLTF tax rate in the future.

Deep Dive: Pharma Fees and the IRA (REG-103430-24)

Following the announcement regarding the Oil Spill Liability Trust Fund (OSLTF) tax rate, the Internal Revenue Bulletin turns to proposed regulations impacting the pharmaceutical industry, specifically addressing the Branded Prescription Drug Fee. REG-103430-24 introduces updates to these fees, reflecting changes mandated by the Inflation Reduction Act (IRA).

1. The Rule: The proposed regulations (REG-103430-24) aim to amend existing regulations concerning the annual fee imposed on "covered entities" engaged in the business of manufacturing or importing certain branded prescription drugs. This fee is mandated by Section 9008 of the Patient Protection and Affordable Care Act, as amended. The core of the update stems from statutory changes made to Medicare Part D by the IRA, which, in turn, necessitate adjustments to the calculation of the branded prescription drug fee.

2. The Context: The Inflation Reduction Act (IRA) brought significant changes to the landscape of Medicare Part D, most notably by restructuring the benefit phases and manufacturer discount obligations. Prior to the IRA, the Coverage Gap Discount Program (CGDP) required manufacturers to provide a 70% discount on branded drugs only when beneficiaries were within the "donut hole" coverage gap. However, the IRA replaced the CGDP with the Manufacturer Discount Program (MDP). This transition took effect on January 1, 2025, and fundamentally altered the discount structure. Under the MDP, the coverage gap is eliminated, and manufacturers provide varying discounts at different stages of the Part D benefit.

3. The Implication: The updated regulations are intended to reflect the new 70% manufacturer discount and the now-sunsetting CGDP. Pharmaceutical manufacturers and importers are the primary stakeholders. The regulations will likely address how the fee is calculated in light of the revised discount structure, and provide guidance on how to properly account for these changes in their tax filings. Tax practitioners advising pharmaceutical clients must familiarize themselves with these proposed regulations to ensure accurate calculation and reporting of the Branded Prescription Drug Fee. Understanding the interplay between the IRA's changes to Medicare Part D and their impact on this fee is crucial for compliance.

Deep Dive: The 1099-K Reversion (REG-112829-25)

Following the discussion of the Branded Prescription Drug Fee and its calculation, this section addresses proposed regulations regarding backup withholding for third-party network transactions. Taxpayers affected by this will be Third Party Settlement Organizations or TPSOs.

1. The Rule: The 'One, Big, Beautiful Bill Act' (OBBBA) retroactively reverted the TPSO reporting threshold back to pre-ARPA levels ($20,000 AND 200 transactions). Proposed regulations, REG-112829-25, under Section 3406, which mandates backup withholding for reportable payments where specific conditions are met, clarify that backup withholding applies only if this higher threshold is met. Section 3406(b)(8)(A) outlines that a payment for third-party network transactions is treated as reportable only if the aggregate number of transactions exceeds the specified number of transactions per Section 6050W(e)(2) (currently 200), AND the total dollar amount exceeds the amount specified in Section 6050W(e)(1) at the time of payment (currently $20,000).

2. The Context: The American Rescue Plan Act (ARPA) of 2021 had drastically lowered the reporting threshold to $600, creating administrative burdens for TPSOs and causing confusion for casual sellers. This reversion, enacted as Section 70432 of Public Law 119-21, comes as direct legislative remedy, meant to alleviate these concerns. The OBBBA intends to relieve millions of casual online sellers and gig workers from the administrative burden of receiving 1099-K forms for small amounts of income.

3. The Implication: This change is a significant relief for casual sellers and gig workers, who will no longer be subject to backup withholding or required to report income below the $20,000/200 transaction threshold. For TPSOs, this reduces the administrative burden of issuing 1099-K forms and potentially performing backup withholding. The proposed regulations, by referencing the de minimis exception in Section 6050W(e), provide clarity that only payments meeting the higher threshold will trigger backup withholding under Section 3406. The IRS effectively concedes having tried to make changes too rapidly and that they imposed new obligations on those ill-equipped to meet them. Tax professionals should take note.

Deep Dive: The New Car Loan Interest Deduction (REG-113515-25)

Following the reversion of the 1099-K reporting thresholds for TPSOs, these proposed regulations represent another significant shift impacting individual taxpayers. The IRS is proposing regulations (REG-113515-25) implementing the new deduction for "Qualified Passenger Vehicle Loan Interest" (QPVLI) under Section 163(h)(4). Section 163(h) generally disallows deductions for personal interest. However, the One Big Beautiful Bill Act (OBBBA), enacted with the intent of both promoting domestic manufacturing and easing the financial burdens on families, carved out an exception.

The new regulations address a specific benefit: taxpayers can deduct interest paid on loans used to purchase qualifying passenger vehicles, with a maximum deduction of $10,000 per year. The law's intent is to incentivize the purchase of cars assembled in the United States. However, several constraints apply. First, there are income phase-outs. Taxpayers exceeding certain income thresholds will see their deduction reduced or eliminated. While specific income phase-out ranges were not explicitly provided in the source document, they generally mirror similar deductions, such as the student loan interest deduction, with phase-outs beginning around $100,000 for single filers and $200,000 for married couples filing jointly. Second, the vehicle must be assembled in the United States. This requirement aims to bolster domestic auto manufacturing. Third, the vehicle must meet a "personal use" standard, exceeding 50% personal use. This prevents taxpayers from claiming the deduction for vehicles used primarily for business purposes.

These proposed regulations also introduce new information reporting requirements for lenders. Lenders who receive interest payments aggregating $600 or more in a calendar year on a qualifying passenger vehicle loan will be required to file a new information return, likely a variation of Form 1098 (Mortgage Interest Statement), tentatively referred to as Form 1098-VLI. This form will report the interest paid by the borrower and include other pertinent details, such as the Vehicle Identification Number (VIN). This new requirement places an additional burden on lenders but provides the IRS with the necessary data to monitor and enforce the QPVLI deduction. The proposed regulations also address potential penalties for failures to file these information returns or furnish payee statements. Tax practitioners should advise their clients, both lenders and borrowers, to prepare for these new reporting requirements and ensure compliance to avoid potential penalties.