Summary
- Federal Circuit reverses Court of Federal Claims and rejects treaty-based foreign tax credits against NIIT.
- Treasury proposes rule on racial discrimination for non-profit private schools.
- Treasury and IRS finalize vehicle loan interest deduction regulations.
On September 2, President Trump signed into law H.R. 6500, the Continuing Appropriations and Extensions Act, 2027, containing a continuing resolution to fund the government from October 1 (the start of the 2027 Fiscal Year) through December 11. The House passed the bill on September 1 on the suspension calendar by a vote of 370-248. H.R. 6500 was originally introduced by Committee on Ways and Means Chairman Jason Smith as the African Growth and Opportunity (AGOA) Extension Act (a nonreciprocal U.S. trade preference program providing duty-free imports of certain goods from sub-Saharan Africa) and passed by the House on January 12, 2026. The Senate used the bill as the vehicle for the continuing resolution, which also contained other provisions, including a two-year AGOA extension through December 31, 2028. The bill contains several other items, such as an extension of the Highway Trust Fund (including the Tax Code provisions) and a temporary prohibition on the Office of Management and Budget implementing guidance giving political appointees greater control over Federal grant programs, both also through December 11.
The House and Senate are out this week for Labor Day and are scheduled to return the week of September 14. Although both chambers had been scheduled to be in Washington for three weeks before leaving until after the November elections, the House announced that it will leave after four days.
It has been reported that the Senate Finance Committee hearing to consider the nomination of Jim Gadwood to be the Chief Counsel of the IRS will be held on September 15.
Federal Circuit Rejects Treaty-Based Foreign Tax Credits Against NIIT
On August 31, the Federal Circuit issued companion precedential decisions in Estate of Bruyea v. United States, No. 2025-1563 (Fed. Cir. Aug. 31, 2026), and Christensen v. United States, No. 2024-1284 (Fed. Cir. Aug. 31, 2026), reversing two Court of Federal Claims decisions that had permitted U.S. citizens residing in Canada and France, respectively, to use treaty-based foreign tax credits to offset the 3.8% net investment income tax under section 1411. In Bruyea, the principal opinion, the court held that Tax Code sections 27 and 901 establish a “closed universe” of foreign tax credits applicable to taxes imposed under chapter 1 of the Code; because Congress placed the NIIT in chapter 2A, the Code does not permit a foreign tax credit against it. The court further held that Article XXIV of the U.S.-Canada treaty does not independently override that limitation because the treaty expressly makes its credit mechanism subject to the “provisions and limitations” of U.S. law. The treaty’s section 904 re-sourcing provisions reinforced that conclusion by demonstrating that the treaty drafters expected the Code’s foreign-tax-credit regime to continue to apply except where the treaty expressly provided otherwise.
The court applied the same reasoning in Christensen to the U.S.-France treaty, whose relevant provisions are similar, while separately addressing an argument that had prevailed below: that Article 24(2)(b), applicable specifically to U.S. citizens residing in France, provides a credit unconstrained by the U.S.-law limitation appearing at the beginning of Article 24(2). The Federal Circuit rejected that reading, holding that the limitation operates as an “overarching qualifier” applicable to both subparagraphs 2(a) and 2(b). The panel also rejected arguments based on the treaties’ general purpose of avoiding double taxation, reasoning that the treaties do not guarantee elimination of every instance of double taxation, and in Bruyea declined to rely on Treasury technical explanations, ratification materials or the Canadian competent authority’s position because it regarded the treaty language as unambiguous. Estate of Bruyea, No. 2025-1563, slip op. at 21–25. The decisions therefore resolve, at least in the Federal Circuit, the divergence created by the Court of Federal Claims decisions and align the result with the Tax Court’s earlier decision in Toulouse v. Commissioner, 157 T.C. 49 (2021).
Treasury Proposes Rule on Racial Discrimination for Non-Profit Private Schools
On September 4, 2026, the Treasury Department and the IRS issued proposed regulations that would deny section 501(c)(3) status to a private school that adopts, maintains or enforces any policy or practice that discriminates on the basis of race, color, or national or ethnic origin in administering educational or admissions policies, scholarship or loan programs, athletics, or any other school-administered or school-supported programs. Proposed regulations would provide that the term “private school” would mean any tax-exempt educational institution described in section 170(b)(1)(A)(ii), including any private primary or secondary school, college, professional or trade school, or university, but not any governmental schools. Prop. Reg. § 1.501(c)(3)-2(c).
The main effect would be to delete the current guidance providing:
“A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance will not constitute discrimination on the basis of race when the purpose and effect is to promote the establishment and maintenance of that school’s racially nondiscriminatory policy as to students … scholarships and loans that are made pursuant to financial assistance programs favoring members of one or more racial minority groups that are designed to promote a school’s racially nondiscriminatory policy will not adversely affect the school’s exempt status.”
The next sentence, which would likewise be deleted, provides that “[f]inancial assistance programs favoring members of one or more racial groups that do not significantly derogate from the school’s racially nondiscriminatory policy similarly will not adversely affect the school’s exempt status.” Rev. Proc. 75-50.
The guidance preserves selection based solely on religious affiliation or membership, even when members of the religious community share ancestry or ethnic characteristics. The guidance is proposed to apply to taxable years beginning after May 31, 2027.
It separately preserves selection based solely on religious affiliation or membership, even when members of the religious community share ancestry or ethnic characteristics.
Treasury and IRS Finalize Vehicle Loan Interest Deduction Regulations
Treasury and the IRS issued final regulations, scheduled for publication on September 8, implementing the Tax Code section 163(h)(4)(A) temporary deduction for qualified passenger vehicle loan interest and the related information-reporting requirements under section 6050AA enacted in the OBBBA. The final regulations largely incorporate the proposed regulations issued on December 31, 2025, and described in S&C’s January 5 Tax Policy Update, but with changes to incorporate feedback received from 63 comments and testimony at the February public hearing. The deduction is available for taxable years beginning after December 31, 2024, and before January 1, 2029, including to taxpayers who do not itemize, and is generally limited to $10,000 per return, subject to a modified adjusted gross income phaseout.
Among several other changes, the final regulations clarify that a qualifying first lien is the first voluntary security interest recorded against the vehicle (as opposed to later-priority involuntary liens), certain administrative lien perfection delays, or subsequent releases of liens. The final regulations would also eliminate certain non-statutory weight limits built into the proposed regulations’ definitions for a sports utility vehicle, pickup truck, or motorcycle. Finally, the final regulations clarify that certain financing charges, prepaid interest, and deferred or capitalized interest could constitute qualified interest. The examples of qualifying items customarily financed with a vehicle are expanded, including certain protection products, credit insurance, and vehicle accessories. However, the rules retain the requirement to allocate between qualifying and non-qualifying indebtedness and the exclusion of negative equity.
With regard to the section 6050AA reporting requirements, the final regulations retain the core requirement to report at least $600 of interest on each specified passenger vehicle loan, add examples addressing responsibility for reporting in securitization arrangements, and decline to provide additional safe harbors or extend the transition relief available for calendar year 2025.