SUPPLEMENTARY INFORMATION:

Authority

This document contains proposed additions to 26 CFR part 1 (Income Tax Regulations) addressing the application of the credit available for qualified contributions under section 25F of the Internal Revenue Code (Code),^[1] as added by section 70411 of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA).

The proposed regulations are issued under section 25F(h), which expressly delegates authority to the Secretary of the Treasury or the Secretary's delegate (Secretary) to issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of section 25F, including regulations or other guidance (1) providing for enforcement of the requirements under section 25F(d) and (g), and (2) with respect to recordkeeping or information reporting for purposes of administering the requirements of section 25F. The proposed regulations also are issued under the express delegation of authority in section 7805(a) of the Code, which authorizes the Secretary to prescribe all needful rules and regulations for the enforcement of the Code, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue.

Background

I. Overview

As added by section 70411(a) of the OBBBA, the nonrefundable income tax credit under section 25F (section 25F credit) is allowed to an individual who is a citizen or resident of the United States (within the meaning of section 7701(a)(9)) who makes qualified contributions to scholarship granting organizations. For purposes of the section 25F credit, section 25F(c)(5) defines a “scholarship granting organization” (SGO) as any organization that (1) is a public charity, (2) prevents the co-mingling of qualified contributions with other amounts by maintaining separate accounts, (3) satisfies each of the requirements of section 25F(d), and (4) is included on the list submitted for the applicable covered State under section 25F(g) for the applicable year. Section 25F(c)(3) defines a “qualified contribution” as a charitable contribution of cash to an SGO that uses the contribution to fund scholarships for eligible students (as defined in section 25F(c)(2)) solely within the covered State in which the SGO is listed pursuant to section 25F(g). Section 25F(c)(1) defines a “covered State” as “one of the States, or the District of Columbia,” that, for a calendar year, voluntarily elects to participate under section 25F and to identify the SGOs located in the State, in accordance with section 25F(g). In order for a contribution made by a taxpayer to an organization in a covered State to be a qualified contribution eligible for a section 25F credit, among other requirements, section 25F requires the State to have identified the organization as an SGO that satisfies the requirements of section 25F(c)(5) for the applicable calendar year. Pursuant to section 70411(c)(1) of the OBBBA, the provisions of section 25F apply to taxable years ending after December 31, 2026.

Additionally, for taxable years ending after December 31, 2026, section 139K, as added by section 70411(b) of the OBBBA, excludes from the gross income of individuals or their dependents any amounts received after December 31, 2026, pursuant to SGO-provided scholarships for qualified elementary or secondary education expenses of eligible students. See section 70411(c)(2) of the OBBBA.

II. Amount of Section 25F Credit

Section 25F(a) provides that an individual's credit against the tax imposed by chapter 1 for the taxable year is an amount equal to the aggregate amount of qualified contributions made by the taxpayer during the taxable year. Section 25F(b) provides that the amount of the section 25F credit allowed to a taxpayer for a taxable year is subject to a reduction and limitation. Section 25F(b)(2) provides that the amount allowed as a section 25F credit for a taxable year is reduced by the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year. Section 25F(b)(1) provides that the amount of the section 25F credit allowed to any taxpayer for any taxable year may not exceed $1,700. In addition, section 25F(e) prohibits a double benefit to a taxpayer by providing that any qualified ( printed page 62819) contribution for which a section 25F credit is allowed cannot be taken into account as a charitable contribution for purposes of section 170.

Section 25F(f) provides for the carryforward of unused section 25F credit amounts. Section 25F(f)(1) provides that, if the section 25F credit allowable for any taxable year exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under sections 21, 22, 24, 25, 25A, 25B, 25C, and 25E, such excess is carried to the succeeding taxable year and added to the credit allowable under section 25F(a) for such taxable year. However, section 25F(f)(2) provides that no credit may be carried forward under section 25F(f) to any taxable year following the fifth taxable year after the taxable year in which the credit arose. For this purpose, section 25F(f) provides that section 25F credits are treated as used on a first-in, first-out basis.

III. Requirements for Scholarship Granting Organizations

An organization can qualify as an SGO only if it satisfies each requirement in section 25F(c)(5). Under section 25F(c)(5), the organization must:

(1) Be described in section 501(c)(3), be exempt from tax under section 501(a), and not be a private foundation;

(2) Prevent the co-mingling of qualified contributions with other amounts by maintaining one or more separate accounts exclusively for qualified contributions;

(3) Satisfy each of the requirements of section 25F(d); and

(4) Be included on the list submitted under section 25F(g) for the applicable year by the covered State in which the organization is located.

The requirements in section 25F(d) referred to in section 25F(c)(5)(C) that an SGO also must satisfy are as follows:

(1) Provide scholarships to 10 or more students who do not all attend the same school;

(2) Spend not less than 90 percent of its income on scholarships for eligible students (90 percent of income spending requirement);

(3) Provide scholarships only for qualified elementary or secondary education expenses described in section 530(b)(3)(A) (relating to Coverdell education savings accounts) of an eligible student;

(4) Provide scholarships to eligible students with a priority for:

(a) Students awarded a scholarship the previous school year, and thereafter;

(b) Any eligible students who have a sibling who was awarded a scholarship from such organization;

(5) Not earmark or set aside contributions for scholarships on behalf of any particular student;

(6) Verify the annual household income and family size of eligible students who apply for scholarships to ensure such students meet the area median gross income requirement of section 25F(c)(2)(A) (defining area median gross income “as such term is used in section 42”), and limit the awarding of scholarships to eligible students who are members of a household for which the income does not exceed the amount established under section 25F(c)(2)(A); and

(7) Not award a scholarship to any disqualified person, as determined pursuant to rules similar to the rules of section 4946 (relating to private foundations).

IV. State List of Scholarship Granting Organizations

Section 25F(g)(1)(A) provides that, not later than January 1 of each calendar year (or, with respect to the 2027 calendar year, as early as practicable), a State that voluntarily elects to participate under section 25F must provide to the Secretary a list of the SGOs that meet the requirements described in section 25F(c)(5) and are located in the State. A State's participation under section 25F allows SGOs located in the State and therefore included on the State SGO list to receive qualified contributions for which individuals may be eligible to claim a section 25F credit.

Section 25F(g)(1)(B) provides that the election under section 25F(g) must be made by the Governor of the State or by such other individual, agency, or entity as is designated under State law to make such elections on behalf of the State with respect to Federal tax benefits.

Section 25F(g)(2) provides that the State SGO list submitted under section 25F(g)(1)(A) must include a certification that the individual, agency, or entity submitting such list on behalf of the State has the authority to perform this function.

V. Prior Guidance Relating to the Section 25F Credit

The Treasury Department and the IRS have issued preliminary guidance with respect to the section 25F credit. On November 25, 2025, the Treasury Department and the IRS issued Notice 2025-70, 2025-50 I.R.B. 773, to request comments regarding issues arising under section 25F that should be addressed in guidance, including issues on which guidance is most quickly needed, such as issues relating to the annual certification by a State as well as SGO requirements.

On December 12, 2025, the Treasury Department and the IRS issued Rev. Proc. 2026-6, 2026-2 I.R.B. 314, to provide the exclusive procedure for a State to make an election during 2026 to be a “covered State” prior to identifying SGOs in the State in accordance with section 25F(g).

VI. Public Feedback Received

The Treasury Department and the IRS have received feedback from taxpayers, tax professionals, and other stakeholders regarding section 25F, including feedback received in response to Notice 2025-70. These proposed regulations are informed by these responses. The major areas with respect to which public stakeholders provided feedback are discussed in the following Explanation of Provisions.

Explanation of Provisions

I. Definitions

Proposed § 1.25F-1(a) would provide definitions of terms generally applicable for purposes of applying section 25F and §§ 1.25F-0 through 1.25F-5 (section 25F regulations), including certain defined terms for which additional context is provided in this part of the Explanation of Provisions.

As noted in part IV of the Background section of this preamble, section 25F(g)(1)(A) states that an electing State must provide a list of the SGOs that meet the requirements described in section 25F(c)(5) and are located in the State. Many stakeholders suggested that “located in the State” should mean registered to do business in the State and in compliance with otherwise applicable State laws for nonprofit organizations. Some of these stakeholders stated that requiring physical headquarters or in-State staff would be unnecessary, inconsistent with existing State tax credit programs, and would significantly hinder effective multistate SGOs that are well-positioned to deliver scholarships at scale.

Other stakeholders stated that an SGO should be required to have a physical presence in the State if required by State law, arguing that “located in the State” straightforwardly means headquartered in the State, rather than simply being authorized or registered to solicit donations there. These stakeholders stated that the phrase “located in the State” appears in more than 90 sections of the U.S. Code and that none could be read to mean “authorized to operate.” Many of these stakeholders expressed the concern that allowing large multistate SGOs to be located in a State ( printed page 62820) where they did not have a physical presence might limit a State's ability to implement its educational policies.

Proposed § 1.25F-1(a)(10) would, for purposes of section 25F, define an organization as “located in a State” if the organization is authorized to do business in the State and is in compliance with the generally applicable State laws and requirements for charitable organizations in the State, including provisions for transparency, accountability, and fraud prevention.^[2] The Treasury Department and the IRS have determined that this definition is consistent with the legislative purpose of section 25F to increase access to scholarship funds.

Proposed § 1.25F-1(a)(12) would provide that a “qualified contribution” is a charitable cash contribution made by an individual to an SGO to the extent it is designated as such by the donor at the time of contribution. If the SGO provides any goods or services as consideration for any part of the contribution, then the value of those goods and services must be subtracted from the amount of the charitable contribution to arrive at the amount of the qualified contribution.

For this purpose, the term “cash” would mean physical currency, check, money order, electronic transfer (including, for example, by credit or debit card), after-tax payroll deduction, or other similar method, in each case all in U.S. dollars, but would not include any digital assets.

Under this proposed rule, the donor would be required to designate to the recipient SGO, at the time of making the contribution, that the contribution is intended to be a qualified contribution, which would require the SGO to deposit the contribution into the SGO's section 25F segregated account as part of the SGO's compliance with sections 25F(c)(3) and 25F(c)(5)(B) and proposed § 1.25F-3(b)(2) or (c)(3) (as applicable, for single-State SGOs and multistate SGOs, respectively). If the SGO is a multistate SGO, the donor would be able to direct the recipient SGO to allocate the qualified contribution to the multistate SGO's section 25F segregated account for any of the covered States on whose State SGO list the SGO appears. Once a qualified contribution has been deposited into an SGO's section 25F segregated account, the SGO must use the funds in accordance with the operational requirements in section 25F(d) and proposed § 1.25F-3(c) to maintain its status as an SGO.

In response to Notice 2025-70, stakeholders asked that SGOs be allowed to verify that scholarships are spent on qualified elementary or secondary education expenses by using a third-party vendor that verifies the expenses and prevents duplication, which stakeholders referred to as a digital wallet. These proposed regulations would allow the use of a qualified digital wallet to establish that the SGO verified that scholarships are spent on qualified elementary or secondary education expenses. Proposed § 1.25F-1(a)(13) would define a “qualified digital wallet” as an electronic payment platform in which a third-party provider provides a streamlined interface for managing the administration of section 25F scholarships by having eligible students and their families submit purchase requests, by tracking approved expenses, and by maintaining controls to ensure that all payments are made for qualified elementary or secondary education expenses by pre-approving vendors and paying vendors directly or requiring timely submission of receipts. The Treasury Department and the IRS request comments on this definition of qualified digital wallet and whether additional safe harbors for verification that scholarships are spent on qualified elementary or secondary education expenses should be included in the final regulations.

Section 25F(c)(4) provides that a “qualified elementary or secondary education expense” is any expense of an eligible student that is described in section 530(b)(3)(A), which describes such qualified expenses as being related to elementary or secondary school enrollment or attendance. Section 530(b)(3)(B) provides that the term “school” means any school that provides elementary education or secondary education (kindergarten through grade 12), as determined under State law. In addition, section 25F(c)(2) states that an “eligible student” must, among other things, be eligible to enroll in a public elementary or secondary school, and section 25F(d) requires an SGO to provide scholarships to 10 or more students who do not all attend the same school.

Section 25F(c)(5) provides that a scholarship granting organization is any organization described in section 501(c)(3), exempt from tax under section 501(a), and not a private foundation, which prevents the co-mingling of qualified contributions with other amounts by maintaining one or more separate accounts exclusively for qualified contributions; satisfies each of the requirements of section 25F(d); and is included on the list submitted under section 25F(g) for a particular calendar year by the covered State in which the organization is located.

Proposed § 1.25F-1(a)(16) would provide that a “scholarship granting organization” or “SGO” is an organization as defined in section 25F(c)(5) and proposed § 1.25F-3(b). Accordingly, donations made to an organization that generates State tax credits may or may not give rise to a section 25F credit, depending on whether the organization separately satisfies the Federal tax law requirements to be an SGO for purposes of the section 25F credit. For example, a contribution to an organization that qualifies for State tax credits but is not included on the State SGO list, as would be defined in proposed § 1.25F-1(a)(24), of one or more covered States in which the SGO is located, does not give rise to the section 25F credit.

Notice 2025-70 recognized that organizations may fundraise and award scholarships in more than one State and distinguished an organization that is located in only one State (single-State organization) from one that is located in more than one State (multistate organization). The proposed regulations would continue this distinction in proposed § 1.25F-1(a)(20), defining a “single-State SGO” as an organization that is included on the State SGO list of only one covered State, and proposed § 1.25F-1(a)(11), defining a “multistate SGO” as an SGO that is included on the State SGO list of more than one covered State.

Although proposed § 1.25F-5(e)(2) would clarify that a State may not narrow the required elements of an SGO as described in section 25F(c)(5) and proposed § 1.25F-3(b) and (c), any particular SGO may narrow its own focus and adopt more stringent requirements than those applicable under section 25F. For example, an SGO may choose to limit its scholarships for qualified elementary and secondary education expenses to specific subject matter areas such as science or foreign languages, or to students whose household income is less than 80 percent of the area median gross income, provided that the SGO meets the statutory and regulatory requirements for SGOs. The Treasury Department and the IRS assume that SGOs will publicize their particular missions, the scope of their scholarships for eligible students, and their successes in achieving better student outcomes in order to attract more qualified ( printed page 62821) contributions from taxpayers supportive of their mission.

Stakeholders requested clarification regarding the meaning of the term “school” for purposes of section 25F. Section 25F does not define the term “school” or separately cross-reference the definition in section 530(b)(3)(B). Section 25F(c)(4), however, defines a “qualified elementary or secondary education expense” as any expense of an eligible student that is described in section 530(b)(3)(A). Each of the three categories of expenses described in section 530(b)(3)(A) depends on the student's enrollment or attendance at, or otherwise being in, a school. For purposes of section 530(b)(3), section 530(b)(3)(B) defines “school” as any school that provides elementary education or secondary education (kindergarten through grade 12), as determined under state law. Accordingly, the definition in section 530(b)(3)(B) applies in determining whether an expense is described in section 530(b)(3)(A) and therefore is a qualified elementary or secondary education expense under section 25F(c)(4).

Section 25F(d)(1)(A) also uses the term “school” in requiring an SGO to provide scholarships to 10 or more students who do not all attend the same school. To provide a consistent rule for purposes of both section 25F(c)(4) and section 25F(d)(1)(A), these proposed regulations provide that the term “school” has the meaning given in section 530(b)(3)(B).

The requirement in section 25F(c)(2)(B) that an eligible student be eligible to enroll in a public elementary or secondary school is distinct from the requirement that an SGO provide scholarships only for qualified elementary or secondary education expenses. The definition of eligible student does not itself require that the student be enrolled in or attending a school at the time of the scholarship application or award. However, an expense is a qualified elementary or secondary education expense only if it satisfies section 530(b)(3)(A), including the applicable connection to a school described in section 530(b)(3)(B). For example, a student who is eligible to enroll in a public school may receive a scholarship during the summer before the school year begins and incur qualified elementary or secondary education expenses in connection with enrollment in a school later that year.

The Treasury Department and the IRS have received many comments requesting guidance under section 530(b)(3) that will clarify the meaning of qualified expenses and schools and intend to issue that guidance as soon as possible so that taxpayers may rely on it.

II. Federal Scholarship Tax Credit for Qualified Contributions

A. In General

Generally, an individual taxpayer who is a United States citizen or a resident of the United States (as would be defined in proposed § 1.25F-1(a)(15)) is allowed a nonrefundable credit against the tax imposed for the taxable year by sections 1 and 55(a) for qualified contributions made by the taxpayer to an SGO during that taxable year. The amount of the credit allowed for a taxable year generally is equal to the aggregate amount of qualified contributions made by the taxpayer during any period of that taxable year in which the taxpayer is a United States citizen or resident of the United States, reduced (but not below zero) by the amount of any State credits claimed for such qualified contributions, and subject to a cap of $1,700. As a nonrefundable credit, the section 25F credit claimed in a particular year cannot exceed the tax liability of the individual taxpayer for that year. Any unused credit may be carried forward for up to five years. In addition, any qualified contribution for which a credit is allowed under section 25F may not be taken into account as a charitable contribution for purposes of section 170.

In making a contribution to claim a credit under section 25F, a taxpayer may contribute to any SGO without regard to the taxpayer's residence and may rely on the donee organization's presence on the IRS SGO list (and not listed as removed from that list) at the time of the contribution to establish that the organization is an SGO, regardless of which covered States included the organization on their respective State SGO lists. For example, a taxpayer residing in State X may contribute to an SGO in State Y so long as the SGO is on State Y's SGO list. See proposed § 1.25F-2(b), described in part II.E. of this Explanation of Provisions.

B. Meaning of the Word “Taxpayer” in Section 25F(a) and (b)

Section 25F(a) provides that an “individual” who is a citizen or resident of the United States may claim a credit based on an amount equal to the aggregate amount of qualified contributions “made by the taxpayer.” Section 25F(b) further provides that (1) the section 25F credit allowed to “any taxpayer” for any taxable year “shall not exceed $1,700” and (2) the amount of the allowed section 25F credit “shall be reduced by the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year.”

C. Married Taxpayers Filing Jointly

A significant number of stakeholders requested that the term “taxpayer” in section 25F(a) and (b) be applied separately to each spouse filing a joint return, which the stakeholders asserted would allow a married couple a combined section 25F credit of up to $3,400 on a joint return.

These stakeholders observed that the Code and regulations thereunder have long recognized that a joint return consists of two taxpayers, absent express statutory language to the contrary. Generally, the Code specifies whether a dollar limitation for a credit or deduction differs based on filing status. See, e.g., sections 22(c) (specifying credit amounts for single individuals, joint filers, and married taxpayers filing separately), 36(b)(1) (providing a first-time homebuyer credit of up to $8,000 or $4,000 for married taxpayers filing separately), and 164(h)(6)(B) (2018) (limiting the deduction for State and local taxes to $10,000 or $5,000 for married filing separately). However, the Code does not always provide for a dollar limitation based on filing status. Moreover, the term taxpayer for purposes of the Code is defined as “any person subject to any internal revenue tax,” and person is defined to include “an individual.” Section 7701(a)(1) and (14).

The Treasury Department and the IRS interpret section 25F to limit the credit amount that may be claimed to $1,700 per individual taxpayer, allowing married couples filing jointly to potentially claim up to $3,400 on their joint tax return provided that each spouse has made qualified contributions of up to $1,700. This interpretation is consistent with other instances in which a joint return is treated as consisting of two individual taxpayers. See, e.g., Treas. Reg. § 1.151-1(b) (“Since, in the case of a joint return, there are two taxpayers (although under section 6013 there is only one income for the two taxpayers on such return, i.e., their aggregate income), two exemptions are allowed on such return, one for each taxpayer spouse.”); § 1.6013-4(b) (“Although there are two taxpayers on a joint return, there is only one taxable income.”). The statutory language of “any taxpayer” without any limitation in section 25F also implies the broadest interpretation and is consistent with how the term taxpayer is defined in section 7701(a). ( printed page 62822)

D. Contributions From Partnerships and S Corporations

The Treasury Department and the IRS interpret the language of section 25F(a) to limit the section 25F credit to individuals making qualified contributions directly to one or more SGOs, rather than through one or more entities. The language used in section 25F(a), including the references to both “individual” and later “taxpayer,” is consistent with the language used in other individual income tax credit provisions in the Code and does not mean that the person making the qualified contribution is intended to differ from the person claiming the credit. See sections 23(a)(1), 25C(a), and 25D(a). This interpretation is consistent with the purpose of section 25F, which is to provide a credit for qualified contributions made by individuals. Thus, proposed § 1.25F-2(a)(3) would provide that, although a partnership or S corporation's contribution to an SGO may be treated as a separately stated charitable contribution under section 170 and deductible under section 170 by the partner or S corporation shareholder, that contribution is not a qualified contribution made by the partner or S corporation shareholder for purposes of section 25F. Therefore, a partner may not take into account such partner's distributive share of the partnership's charitable contributions to an SGO in determining the amount of the partner's qualified contributions under section 25F. Similarly, a shareholder of an S corporation may not take into account such shareholder's pro rata share of the S corporation's charitable contributions to an SGO in determining the amount of the shareholder's qualified contributions under section 25F.

E. Reliance on SGO Status

Section 25F(c)(3) requires a qualified contribution to be, among other things, made to a “scholarship granting organization.” Proposed § 1.25F-2(b) would establish a reliance rule, providing that, in order to ensure that a taxpayer's contribution is being made to an SGO, the taxpayer generally may rely on the IRS SGO list at the time the qualified contribution is made. However, to prevent situations in which a taxpayer could abuse this grant of reliance, proposed § 1.25F-2(b) also would provide that such reliance is not available to a taxpayer if the taxpayer (1) had knowledge that the recipient organization did not satisfy the requirements of section 25F(c)(5) and § 1.25F-3(b) at the time of the contribution; or (2) was at least in part responsible for, or was aware of, the act, the failure to act, or the substantial and material change on the part of the organization that gave rise to the removal of the organization from the IRS SGO list after the date of the taxpayer's contribution.

F. Calculation of the Section 25F Credit

Section 25F(b) limits the section 25F credit allowed by both the amount allowed as a credit on any State tax return of the taxpayer for qualified contributions made by the taxpayer during the taxable year and by a $1,700 annual limitation.

Many stakeholders requested guidance on how to apply the reduction for the amount allowed as a State tax credit for such contributions. Stakeholders identified various possible options, including requiring taxpayers to make separate contributions for State and Federal credits. Some stakeholders requested that taxpayers be allowed to take advantage of both State and Federal tax credits in a way that would not reduce the benefit of either credit.

Section 25F(a) describes the taxpayer's credit allowed as the total “amount of qualified contributions made by the taxpayer during the taxable year,” before the application of any limitations under section 25F(b). Although the statute includes the $1,700 limitation in section 25F(b)(1) and the State credit reduction in section 25F(b)(2), the Treasury Department and the IRS do not interpret this ordering of the provisions as reflecting an intent to apply the $1,700 limitation to the amount of a taxpayer's qualified contributions before application of the State credit reduction. Such an interpretation would, for example, limit a taxpayer's section 25F credit for a $2,500 qualified contribution for which the taxpayer claims a $500 State credit to $1,200 (that is, $1,700 in creditable qualified contributions after application of the section 25F(b)(1) limitation less the $500 State credit after the subsequent application of the State credit reduction in section 25F(b)(2)).

The Treasury Department and the IRS view the State credit reduction as intended to prevent a taxpayer from receiving combined Federal and State tax benefits exceeding the value of the taxpayer's qualified contributions. It is not otherwise intended to limit the section 25F credit for taxpayers in States that currently provide State credits for their qualified contributions, which would discourage those States from continuing to provide a State tax incentive that would significantly reduce an available Federal tax incentive. Because the Treasury Department and the IRS interpret section 25F(b) as limiting the credit to $1,700 only after applying the State credit reduction, proposed § 1.25F-2(a) and (c)(1) would clarify that the amount of the taxpayer's qualified contributions is reduced by the amount of State credits for such qualified contributions before applying the $1,700 limitation.

Proposed § 1.25F-2(c)(1) would provide that the section 25F credit for qualified contributions is the lesser of the following two amounts:

(1) The aggregate amount of the taxpayer's qualified contributions for the taxable year made while the taxpayer was a United States citizen or a resident of the United States reduced (but not to below zero) by the sum of any State credits with regard to those qualified contributions; or

(2) $1,700.

In general, the following steps would be performed to calculate a taxpayer's section 25F credit: first, the taxpayer determines the aggregate amount of the taxpayer's qualified contributions for the taxable year; second, subtract from that amount the sum of any State credits that were allowed with regard to those qualified contributions; and third, determine the lesser of $1,700 or the amount computed in the second step. In computing the State credits in the second step described in the preceding sentence, only the credits allowed based on qualified contributions would be taken into account; any credit allowed for a contribution that is not a qualified contribution would not be taken into account.

Because a taxpayer may be allowed a State credit for a contribution that includes both a qualified contribution and an amount that is not designated as a qualified contribution, proposed § 1.25F-2(c)(2) would provide that, for purposes of that second step, a State credit is treated as being allowed first from the donor's contributions that are not qualified contributions, and only thereafter from the donor's qualified contributions. This ordering rule preserves the maximum amount of qualified contributions available for a section 25F credit.

Because proposed § 1.25F-1(a)(22) would define a State credit as any tax credit offered by a State for making a contribution to an SGO that is allowed (as defined in § 1.25F-1(a)(22)) on the taxpayer's State tax return, the allowance of a deduction (as opposed to a credit) for State income tax purposes generally would not affect the amount of the section 25F credit.

Although section 25F(e) and proposed § 1.25F-2(f) provide that a qualified contribution for which a credit is ( printed page 62823) allowed under section 25F may not be taken into account as a charitable contribution for purposes of section 170, the portion of a qualified contribution not taken into account in determining the section 25F credit may be deductible as a charitable contribution if such contribution meets the requirements of section 170 and the regulations thereunder.

G. Tax Liability Limitation

Section 25F(a) provides that the section 25F credit is allowed against “the tax imposed by this chapter for the taxable year,” and section 25F(f) clarifies that the credit allowable for any taxable year may not exceed the limitation imposed by section 26(a) for such taxable year, reduced by the sum of the credits allowable under subpart A (other than sections 25F, 23, and 25D).

Proposed § 1.25F-2(d) would clarify that the credit allowed under section 25F for a taxable year may not exceed the taxpayer's tax liability as defined in section 26(a), based on the tax imposed for such taxable year as reduced by the sum of the nonrefundable personal credits that may not be carried forward (specifically, the credits allowed under sections 21, 22, 24, 25, 25A, 25B, 25C, and 25E).

H. Carryforward of Unused Credits

Similar to sections 23(c) (adoption credit carryforward) and 25D(c) (residential clean energy credit carryforward), section 25F(f) provides for a carryforward of the unused section 25F credit to enable taxpayers to claim the unused section 25F credit against a future tax liability. Although a taxpayer cannot claim a section 25F credit of more than $1,700 for any taxable year, the cumulative amount of section 25F(f) credit carryforwards can be used against a tax liability of more than $1,700 for a single taxable year. See proposed § 1.25F-2(h) ( Example 5).

Proposed § 1.25F-2(e) would provide rules on the application of this carryforward provision, including a prohibition on carrying forward any credit to a taxable year following the fifth taxable year after the taxable year in which the credit arose. This provision also would provide that credits carried forward to a taxable year would be used on a first-in, first-out basis and would be used prior to current year credits.

I. Reporting and Substantiation of Qualified Contributions

Section 25F(h) provides that the Secretary shall issue such regulations or other guidance as the Secretary determines necessary to carry out the purposes of section 25F, including with respect to recordkeeping or information reporting for purposes of administering the requirements of section 25F.

Notice 2025-70 solicited comments regarding reporting and recordkeeping requirements for SGOs, including requirements relating to qualified contributions. In response, stakeholders and commenters asked that SGOs be required to provide electronically a written statement to the donor about the contribution. Moreover, several expressed concerns with collecting and reporting a donor's taxpayer identification number (TIN). The Treasury Department and the IRS share the stakeholders' concern that requiring taxpayers to provide TINs to SGOs when making a qualified contribution would be burdensome, could chill an individual's desire to make contributions to an SGO, and might result in unnecessary exposure of sensitive taxpayer information. At the same time, the ability to match contribution information provided by SGOs with that provided by individual taxpayers is important both to ensure effective administration of the section 25F credit and to facilitate the States' monitoring of SGO compliance with the operational requirements under section 25F(d) and § 1.25F-3(c), including the 90 percent of income spending requirement.

Thus, proposed § 1.25F-4(c)(1), also discussed in part IV.C. of this Explanation of Provisions, would provide special rules relating to the reporting of qualified contributions to SGOs that would include the use of a unique donor number provided by the SGO. Proposed § 1.25F-4(c)(1) would require an SGO to generate a unique donor number and to provide it to the donor as part of a timely written acknowledgement no later than January 31 of the calendar year following the calendar year in which the donor made a qualified contribution to the SGO. Because each SGO will be generating its own unique donor numbers, a taxpayer making qualified contributions to more than one SGO would receive a different donor number from each SGO. Proposed § 1.25F-2(g)(1) would require a taxpayer who is attempting to claim a section 25F credit to substantiate the taxpayer's credit on Form 8525, Federal Scholarship Tax Credit (or successor form), by reporting such information as may be required in the form instructions, including, for each SGO to which the taxpayer has made a qualified contribution during the taxable year, the unique donor number that the SGO was required to provide as part of a timely written acknowledgement.

If the taxpayer fails to report the required unique donor number on the taxpayer's Form 8525, Federal Scholarship Tax Credit (or successor form), proposed § 1.25F-2(g)(2) would create a presumption that the taxpayer did not make a qualified contribution to that SGO. However, this presumption may be rebutted by the taxpayer's submission of the timely written acknowledgement from the SGO that includes such unique donor number or other evidence satisfactory to the Commissioner of the amount of the contribution(s) from the taxpayer and the fact that the contributions were designated as qualified contributions, all within the response time prescribed in a written request from the IRS.

J. Examples

Many stakeholders requested that the proposed regulations provide examples of the calculation of the section 25F credit. Proposed § 1.25F-2(h) would provide five such examples.

III. Scholarship Granting Organizations

A. Overview

Section 25F(c)(5) defines the term “scholarship granting organization” and requires compliance with the operational requirements in section 25F(d). Proposed § 1.25F-3(a) would provide a roadmap for the rules in proposed § 1.25F-3; proposed § 1.25F-3(b) would define the term SGO; proposed § 1.25F-3(c) would provide operational requirements for SGOs; and proposed § 1.25F-3(d) would define disqualified persons with respect to an SGO.

B. Definition of Scholarship Granting Organization

As provided in section 25F, proposed § 1.25F-3(b) would define a “scholarship granting organization” as an organization that: (1) is described in section 501(c)(3), is exempt from tax under section 501(a), and not a private foundation, as defined in section 509(a); ^[3] (2) prevents the co-mingling of qualified contributions with other amounts by maintaining a section 25F segregated account; (3) satisfies the operational requirements of section 25F(d)(1) and proposed § 1.25F-3(c); (4) does not award scholarships to any disqualified person; (5) is included on the State SGO list of one or more covered States in which the SGO is located; and (6) satisfies the reporting ( printed page 62824) and recordkeeping requirements in § 1.25F-4.

Proposed § 1.25F-3(b)(2) would require each SGO to prevent the co-mingling of qualified contributions with other amounts by depositing all qualified contributions into a section 25F segregated account and would require the SGO to maintain a complete set of books and records for the section 25F segregated account. A contribution designated by a donor as a qualified contribution would need to be deposited in this section 25F segregated account regardless of whether the donor ultimately receives a tax credit for the qualified contribution. Once a qualified contribution is designated as such by a donor, neither the donor nor the recipient organization would be permitted to revoke such designation to reduce administrative burden and provide certainty.

C. Operational Requirements for Scholarship Granting Organizations

Proposed § 1.25F-3(c)(1) would provide operational requirements for SGOs, proposed § 1.25F-3(c)(2) would provide a safe harbor for a single-State SGO whose activities are 85 percent scholarship granting activities (operational requirement safe harbor), and proposed § 1.25F-3(c)(3) would provide the operational requirements that multistate SGOs would need to satisfy.

Proposed § 1.25F-3(c)(1) would provide that the organization would need to: (1) provide scholarships to 10 or more students who do not all attend the same school; (2) satisfy the 90 percent of income spending requirement described in part III.D of this Explanation of Provisions; (3) verify that scholarships are used solely for qualified elementary or secondary education expenses; (4) verify that scholarships are awarded only to eligible students; (5) verify that the recipient eligible students are solely within the State; (6) award scholarships with a priority for eligible students awarded a scholarship for the previous school year and, thereafter, for any eligible students who have a sibling who was awarded a scholarship from such SGO; and (7) not earmark or set aside contributions for scholarships on behalf of any particular student.

Proposed § 1.25F-3(c)(2) would provide an operational requirement safe harbor. If at least 85 percent of a single-State SGO's activities consist of scholarship granting activities (whether pursuant to section 25F, in accordance with State tax credit scholarship rules, or any other scholarship granting activities), then the SGO may apply the operational requirements to the organization's section 25F segregated account, rather than to the organization as a whole. For example, for a single-State SGO using the operational requirement safe harbor, the requirement that an SGO verify that scholarships are used solely for qualified elementary and secondary education expenses would apply only to scholarships granted with funds disbursed from the SGO's section 25F segregated account.

For purposes of this activity test, administrative, fundraising, governance, investment, compliance, outreach, and other activities are treated as scholarship granting activities to the extent each such activity is conducted in support of scholarship granting activities. This activity test, applied to the organization as a whole, is intended to measure the organization's mission and purpose, and is separate from the 90 percent of income spending requirement, for which only expenditures on scholarships for eligible students are taken into account.

While section 25F(b)(2) contemplates that an SGO may be conducting activities giving rise to a State credit for qualified contributions received during the taxable year, section 25F(d) contemplates that an SGO meets the operational requirements organization-wide. To allow SGOs to conduct section 25F scholarship activities alongside State scholarship activities giving rise to a State credit, and to allow SGOs to raise funds for administrative costs that would not count toward the 90 percent of income spending requirement, the operational requirement safe harbor would be a narrow administrative accommodation for organizations whose overall operations overwhelmingly consist of granting scholarships.

If at least 85 percent of the organization's activities are scholarship granting activities, then the organization's overall mission and operations would be considered aligned with the statutory scholarship purpose behind the section 25F credit. The operational requirement safe harbor would be limited to organizations whose activities are at least 85 percent scholarship granting activities because, for organizations with more than 15 percent of non-scholarship activities, the section 25F segregated account would not be a reliable proxy for the statutory phrase “organization.” The Treasury Department and the IRS have determined that such a result would be inconsistent with section 25F(d)(1), which applies the SGO requirements at the organization level.

Recognizing that the proposed operational requirement safe harbor may require the formation of new organizations to conduct section 25F activities, these proposed regulations provide relief for tax-exempt entities whose exempt status is pending with the IRS, as discussed in part V.D. of this Explanation of Provisions.

Proposed § 1.25F-3(c)(3) would provide operational requirements for multistate SGOs. Because section 25F(c)(5)(B) requires an SGO to maintain one or more separate accounts exclusively for qualified contributions, a multistate SGO would be required to maintain a separate section 25F segregated account for each covered State on whose State SGO list the organization appears, and would need to meet the requirements of proposed § 1.25F-3(c)(1) separately for its section 25F segregated account for each covered State on whose State SGO list the SGO appears. The SGO must allow donors to designate how their qualified contribution should be allocated among one or more of the covered States on whose State SGO list the SGO appears and all qualified contributions must be deposited in accordance with donor designations. Consistent with the intent of the statute that the organization be a scholarship granting organization, at least 85 percent of a multistate SGO's activities would be required to be scholarship granting activities.

The Treasury Department and the IRS request comments as to whether further guidance is needed regarding how an organization measures its scholarship-granting activities, including whether the determination should be based on receipts, expenditures, staff time, program-service activity, or another administrable metric, as well as whether 85 percent is a reasonable threshold to ensure that the organization's overall mission and operations are aligned with the statutory scholarship purpose behind the section 25F credit.

D. 90 Percent of Income Spending Requirement

Section 25F(d)(1)(B) provides that an SGO must spend not less than 90 percent of “the income of the organization” on scholarships for eligible students.

1. Definition of Income

Many stakeholders advocated that the term “income of the organization” apply only to qualified contributions, citing concerns that an SGO might not be able to operate if its overhead was limited to 10 percent of the organization's entire income. ( printed page 62825)

The Treasury Department and the IRS have determined that the best reading of the statutory term “income of the organization” is the total gross receipts of the organization from all sources, computed using the cash receipts and disbursements method of accounting during its annual accounting period, unreduced by any expenses, regardless of the overall method used by the organization in its books and records, and proposed § 1.25F-3(c)(4)(ii)(A) would adopt this definition. The separate account requirement found in section 25F(c)(5)(B) is a tracing and anti-commingling rule for qualified contributions; it does not limit the income denominator in section 25F(d)(1)(B) to qualified contributions or earnings on those contributions.

However, in response to stakeholder concerns, and consistent with the purpose of section 25F that an SGO should be using the vast majority of its income for awarding scholarships, proposed § 1.25F-3(c)(4)(ii)(B) would provide that, for a single-State SGO using the operational requirement safe harbor, income of the organization, for purposes of the spending requirement, means the total amount of qualified contributions received by, and earnings credited to, the section 25F segregated account during the taxable year. For a multistate SGO, income of the organization, for purposes of this spending requirement, means the total amount of qualified contributions received by, and earnings credited to, the section 25F segregated account during the taxable year and is determined separately for each section 25F segregated account in each covered State.

2. Timing of 90 Percent of Income Spending Requirement

Stakeholders noted that the statute does not provide a timeframe for this spending requirement and asked that the proposed regulations provide that the income may be spent over more than one year. Stakeholders said that the 90 percent rule may pose a challenge for SGOs in the startup phase, as many administrative costs will be fixed. Stakeholders also pointed out that, although the SGO list is based on a calendar year, many SGOs operate on a fiscal year. Some stakeholders suggested permitting timely spending to occur during the “current or next fiscal year” of the nonprofit entity; be calculated on a rolling average; or be subject to a phase-in period to accommodate start-up costs. Other stakeholders stated that regulations should not provide special accommodation for income or expense fluctuations, including start-up costs or multi-year smoothing.

In response to this feedback, proposed § 1.25F-3(c)(4)(iii)(A) would require an organization to meet the 90 percent of income spending requirement as of the last day of the taxable year following the taxable year in which such income is received. Thus, although the 90 percent of income spending requirement ultimately would need to be met for an SGO's first year of operation, that requirement may be satisfied, from a timing perspective, by the end of the SGO's second year of operation.

3. Accounting for the 90 Percent of Income Spending Requirement

To simplify calculations and increase administrative efficiency, proposed § 1.25F-3(c)(4)(iii)(B) would provide that amounts are treated as spent when paid under the cash method of accounting.

Given this cash method of accounting requirement, funds allocated for future disbursements (for example, multi-year scholarships) would not be considered “spent” until they are paid. Thus, any award for a future year would only count toward satisfaction of the 90 percent of income spending requirement for the year in which it is paid. This is consistent with the annual accounting and eligibility principles reflected in the statutory requirements of section 25F, including the requirement that the SGO determine the “annual” household income and family size of eligible students and that the scholarship recipient be an eligible student located in the State, in each case as of the time when the scholarship is paid.

Further, provided an SGO does not retain ownership of funds transferred to a third party for disbursement through a qualified digital wallet, the SGO will be treated as having spent the transferred funds as of the date of transfer for purposes of the 90 percent of income spending requirement.

Proposed § 1.25F-3(c)(4)(iii)(C) would provide that amounts are treated as paid from contributions and other income received in the earliest year first, and then from subsequent years in chronological order; and proposed § 1.25F-3(c)(4)(iii)(D) would provide that, if an SGO receives a return of any payments made to a school or vendor that are in excess of the student's costs or that were disbursed in error, the return would be treated as income received in the year of the return and would need to be spent by the end of the taxable year following the year of the return.

Finally, proposed § 1.25F-3(c)(4)(iii)(E) would provide that in no event would any amount spent by an SGO be treated as spent in more than one year.

E. Verification That Scholarships Are Used Solely for Qualified Elementary or Secondary Education Expenses

Many stakeholders noted that waste, fraud, and abuse have been found in some existing State-level scholarship credit programs and said that States need to be able to implement safeguards designed to prevent, identify, and address such behaviors. Stakeholders stated that the primary sources of fraud and abuse in existing scholarship programs are the awarding of more than one scholarship to the same student for the same qualified elementary or secondary education expense if the total of the awards exceeds the expense and the misuse of scholarships for unqualified expenses or for extravagant expenses that are only nominally related to the student's educational needs.

Accordingly, proposed § 1.25F-3(c)(5) would require SGOs to implement reasonable procedures for the prevention and detection of fraud and abuse, including systems to prevent and detect the duplication of scholarship awards to the same student for the same qualified elementary or secondary education expense. In addition, proposed § 1.25F-3(c)(5) would require an SGO to verify that scholarship funds are used exclusively for qualified elementary or secondary education expenses in accordance with the allowable methods of payment described in proposed § 1.25F-3(c)(5)(ii) through (v).

First, proposed § 1.25F-3(c)(5)(ii) would provide that no money may be paid to the family of the eligible student other than as qualified reimbursements. A qualified reimbursement would be a reimbursement of an expense for which the family of the eligible student provides a receipt, and the SGO verifies that the payment was made, that the expense is a qualified elementary or secondary education expense, and that the reimbursement satisfies the SGO's procedures to prevent a single expense from being reimbursed for more than the total cost by more than one source.

Proposed § 1.25F-3(c)(5)(iii) would require that tuition, fees, room and board, and other similar expenses described in section 530(b)(3)(A) that are charged by the school must be paid directly to the school. Proposed § 1.25F-3(c)(5)(iii) would further require the SGO to require the school to return any payments from the SGO that are in excess of the student's costs, or that are disbursed by the SGO in error. ( printed page 62826)

Proposed § 1.25F-3(c)(5)(iv) would allow an SGO to pay other vendors directly if the vendor has been verified as an appropriate provider of such services or items; is not related, directly or indirectly, to the scholarship recipient; and is required to return any payments from the SGO that are in excess of the student's costs or that were disbursed by the SGO in error.

Proposed § 1.25F-3(c)(5)(v) would allow an SGO to use a “qualified digital wallet,” as defined in proposed § 1.25F-1(a)(13), to pay qualified elementary or secondary education expenses.

The Treasury Department and the IRS note that section 25F(c)(5)(A) requires that an SGO must be a public charity under section 501(c)(3) (section 501(c)(3) public charity); therefore, scholarships provided by an SGO must further exempt purposes. Section 25F(c)(4) defines a qualified elementary or secondary education expense as any expense of an eligible student that is described in section 530(b)(3)(A), providing the outer boundaries of qualified expenses; however an SGO must award scholarships only for those expenses that are reasonably necessary to further the organization's charitable exempt purposes.

In addition, an organization is not described in section 501(c)(3) if it provides goods or services that confer more than incidental private benefit or otherwise exceed what is reasonably necessary to accomplish those purposes. For example, Rev. Rul. 69-175, 1969-1 C.B. 149, concluded that a nonprofit organization, formed by parents of pupils attending a private school that provides school bus transportation for its members' children, serves a private rather than a public interest and does not qualify for exemption under section 501(c)(3).

Section 501(c)(3) organizations that make distributions of their funds to individuals must establish that such distributions are made on a true charitable basis in furtherance of the purposes for which they are organized. See, e.g., Rev. Rul. 56-304, 1956-2 C.B. 306. In the context of private foundation scholarships, § 53.4945-4(c) requires grant procedures that are reasonably calculated to ensure the funds are used for the intended charitable purpose and tie scholarship expenditures to the purpose of the grant. In the context of private foundation grants under an employer-related scholarship program, Rev. Proc. 76-47 provides that a scholarship must be motivated by a disinterested educational purpose, not by private or business interests.

The Treasury Department and the IRS request comments on how section 501(c)(3) requirements interact with section 25F and whether any clarifications are needed in the final regulations.

Multiple stakeholders requested clarification regarding the scope of the category of education expenses allowed to be paid for with scholarships provided from qualified contributions to SGOs, and they offered many suggestions of the types of expenses that would be beneficial to eligible students. Section 25F defines these permissible expenses by reference to qualified elementary or secondary education expenses as described in section 530(b)(3)(A). The Treasury Department and the IRS recognize that guidance describing the types of expenses permitted is critical to States, SGOs, eligible students, and other stakeholders. Such guidance will be issued separately under section 530. As indicated previously, the Treasury Department and the IRS are working on the development of that guidance and are treating the issuance of that guidance as a high priority.

F. Method of Verifying That a Student's Household Income Is Not Greater Than 300 Percent of Area Median Gross Income

Section 25F(d)(1)(F) requires an SGO to verify the annual household income of eligible students who apply for scholarships. This includes verifying that the student is an individual who is a member of a household with an income that, for the calendar year prior to the date of the application for a scholarship, is not greater than 300 percent of the area median gross income.

Many stakeholders addressed how income should be measured for these purposes. One stakeholder suggested that the forthcoming regulations clarify the relevant timeframe for measuring the student's household income. Some stakeholders suggested using information reported on Form 1040 and identifying members of the student's household based on who claims the eligible student as a dependent. Other stakeholders expressed concern with using section 42, the statutory provision for determining the Federal low-income housing credit, for determining income and family size because the section 42 definition encompasses all individuals who might be living in the same residence, including multiple generations of a family or unrelated individuals living together in the same location. Moreover, certain stakeholders suggested allowing SGOs to rely on eligibility determinations from other means-tested, public assistance programs. Other stakeholders suggested allowing SGOs to rely on a combination of tax returns, wage statements, and similar information in order to verify student eligibility.

In defining an eligible student, section 25F(c)(2)(A) incorporates the term “area median gross income (as such term is used in section 42).” Proposed § 1.25F-3(c)(6) would define area median gross income in a manner consistent with the rules applicable to section 42. Additionally, these proposed rules would define household income based on the rules applicable to section 42, but with a slight modification as explained in part III.F.1 of this Explanation of Provisions. Under section 42(g)(4), the rules in section 142(d)(2)(B) are applicable to these income determinations. Section 142(d)(2)(B)(i) then refers to Section 8 of the United States Housing Act of 1937 (Public Law 75-896) for determinations of annual income and area median gross income. Accordingly, proposed § 1.25F-3(c)(6) would require determining area median gross income and household income in a manner that generally is consistent with determinations under Section 8, including adjustments for family size. To assist SGOs in verification of household income, the IRS anticipates publishing the applicable limitations by geographic area and family size annually in guidance published in the Internal Revenue Bulletin.

Stakeholders asked that the proposed regulations clarify that an SGO is not required to give scholarships to students in a household with income up to 300 percent of area median gross income. The statute allows an SGO to give scholarships up to that income limit, but an SGO may focus on students below that limit. For example, an SGO that limits scholarships to students that are members of households with an income not greater than 50% of area median gross income, and that otherwise meets all the requirements under section 25F to be an eligible SGO, would be an eligible SGO for purposes of section 25F.

1. Household Income

The regulations issued by the Department of Housing and Urban Development relating to Section 8 are found in 24 CFR part 5. The definition of “household income” used in 24 CFR 5.609 is broader than the Federal tax definition of “income” and includes items such as child support, alimony received, and the imputed returns on assets (based on the current passbook savings rate) if the value of a family's net assets exceeds $50,000 and the actual returns from a given asset cannot ( printed page 62827) be calculated. Thus, the definition includes certain items not received in the form of cash, including unrealized appreciation in a home.

Although this Section 8 definition forms the basis of the definition in the proposed regulations to determine the income limit specified in section 25F(c)(2)(A), in the interest of sound Federal tax administration, the proposed regulations would modify this definition for purposes of measuring a particular household's income against the 300 percent statutory limit. Specifically, in determining the household income of an eligible student, the proposed regulations would disregard items not received in cash by a member of the household because such items are unlikely to be documented and verifiable. The proposed regulations, therefore, would disregard the amount of a Section 8 housing allowance, any imputed return on assets, and other items not received in cash. The Treasury Department and the IRS have proposed this approach after consideration of the purpose of section 25F and the fact that approximately 95 percent of the children in the United States are in households with income below the 300 percent of area median gross income limit provided in section 25F(c)(2)(A). This proposed definition of a particular household's income would be expected to simplify the income verification process for families and SGOs by disregarding non-cash items (such as imputed returns on home equity) that generally would not be shown on any tax or financial documents and may be dependent on current valuations.

2. Household

The Section 8 regulations at 24 CFR 5.100 define the term “household” as “family, foster children and adults, and PHA-approved live-in aide.” This definition then refers to 24 CFR 5.403 for the definition of “family,” which focuses on who is living together; it could be a single person or “a group of persons residing together.” Accordingly, for purposes of proposed § 1.25F-3(c)(6), proposed § 1.25F-1(a)(4)(iii) would define “household” as including the individual seeking to be an eligible student and the group of persons residing with that individual.

For purposes of determining the number of members of the student's household in situations in which the student resides in more than one household during the year (for example, in cases of shared custody), proposed § 1.25F-3(c)(6)(ii)(B) would identify the relevant household as the one in which the student resides for the longest period of time during the year. If the time spent by the student in each residence is equal, then the household of the taxpayer with the highest household income would be the relevant household for purposes of section 25F.

3. Verification of Household Income

For purposes of verifying that a scholarship recipient satisfies the household income requirement, proposed § 1.25F-3(c)(6) would require SGOs to use either the direct income verification method, the categorical eligibility verification method, or one of two safe harbors: the low-income-area tutoring and special-needs safe harbor, and the foster-child safe harbor. The categorical eligibility method, the low-income-area tutoring and special-needs safe harbor, and the foster-child safe harbor are intended to reduce burdens for families and SGOs by not requiring SGOs to collect more sensitive household-income information than is necessary if other reliable indicators of household income are present, while including administrable documentation and audit safeguards that will allow for the appropriate administration of section 25F.

Under the direct income verification method, an SGO would verify income through review of written documentation provided by scholarship applicants, including pay stubs, prior year Federal or State tax returns, IRS transcripts, Forms W-2, evidence of other income not reflected on such documents (such as child support and alimony not reported as income), or a certification that would verify income through other relevant data sources.

Under the categorical eligibility verification method, an SGO would verify that the household income did not exceed 300 percent of area median gross income through review of written documentation, such as an award letter, dated within the last 12 months, documenting that an individual in the student's household currently is approved for assistance from or participation in Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), Section 8 housing, or Supplemental Security Income (SSI)). This safe harbor responds to comments requesting a streamlined eligibility method for eligible students who are highly unlikely to be members of a household with income above 300 percent of area median gross income, thus reducing administrative burden by relying upon eligibility determinations that have already been made by government agencies. Because the statute requires that this determination be made on a household basis, eligibility for participation in reduced-price or free lunch programs that apply to an entire school, rather than on an individual level, is not considered adequate verification for this purpose.

The Treasury Department and the IRS request comments on other needs-based programs, such as State or Tribal programs, that also should be included in this categorical eligibility verification method.

Additionally, proposed § 1.25F-3(c)(6)(iii)(C) would provide a safe harbor for SGOs awarding individual scholarships for academic tutoring or special needs services at schools in low-income areas. Pursuant to this safe harbor, if an SGO provides scholarships to individual students at schools in a low-income area for individual academic tutoring, or for special needs services in the case of a special needs student, and the individual students receiving those services are selected by the school on the basis of the particular student's academic or special need, the recipient students would be treated as meeting the household income requirement regardless of whether the student's household income is verified. These proposed regulations would provide two situations where the safe harbor could be used to streamline verification of household income. First, if the school is located in a qualified census tract, as identified at www.huduser.gov/​portal/​sadda/​sadda_​qct.html (or successor website), or in guidance published in the Federal Register or Internal Revenue Bulletin ( see §§ 601.601(d)(2) and 601.602 of this chapter) or, as appropriate, in forms, instructions, and publications available on www.irs.gov. Second, if the school certifies that at least 80 percent of its students reside in such a qualified census tract, regardless of the location of the school.

In order to avail itself of this safe harbor, however, proposed § 1.25F-3(c)(6)(iii)(C) would require that the SGO annually obtain and provide to the covered State a third-party audit addressing the SGO's compliance with the safe harbor requirements. The auditor's report would be required to include several certifications, including that the school meets one of the two qualified census tract eligibility requirements described above; that the scholarship recipients were selected by the school based on academic or other need; that tutors or other providers were qualified to render the services obtained with scholarship funds; that the ( printed page 62828) student's need for the services, including the nature and extent of the services needed, is independently diagnosed by a professional not associated with the provider or vendor of the services; and that the services met appropriate quality standards, were provided with a duration and frequency commonly required to produce benefit, and their impact on each individual scholarship recipient was assessed.

Finally, proposed § 1.25F-3(c)(6)(iii)(D) would provide a safe harbor for foster children. Specifically, eligible students who are foster children would be treated as meeting the household income requirement regardless of whether the student's household income is verified. For this purpose, proposed § 1.25F-1(a)(5) would define a “foster child” as a child who has been removed from the custody of a parent or legal guardian and placed under the care or placement authority of, or has become the legal responsibility of, a child welfare agency, regardless of whether the child has been or will be placed with a person by an authorized placement agency or by judgment, decree, custody order, or any other order of any court of competent jurisdiction (other than an order appointing a legal guardian of the child). The term “authorized placement agency” would mean a State, the District of Columbia, a possession of the United States, a foreign country, an Indian Tribal government (as defined in section 7701(a)(40)), or an agency or organization that is authorized by a State (including a non-federally recognized Tribe that otherwise is authorized to act on such matters under applicable State law), or a political subdivision of any of the foregoing, to place children for legal adoption or in foster care.

G. Students Solely Within the State

Section 25F(c)(3) defines a qualified contribution as a charitable contribution of cash to an SGO “that uses the contribution to fund scholarships for eligible students solely within the State in which the organization is listed pursuant to subsection (g).” However, it is unclear whether “solely within the State” limits the eligible students who may receive scholarships, the use of the scholarships, or both. This distinction is consequential: if the phrase modifies eligible students, contributions may qualify so long as the scholarships benefit only students residing in the State in which the SGO is listed. On the other hand, if it instead modifies the scholarships, only expenses incurred in the State in which the SGO is listed would qualify, regardless of the residence of the eligible student.

Some stakeholders have suggested that the proposed regulations allow scholarships to be awarded to students residing within the State in which the SGO is listed, even if the student is attending school in another State. Other stakeholders suggested allowing scholarships to be awarded to students attending school within the State in which the SGO is listed, even if they reside in a different State. These stakeholders stated that Congress intended the provisions of section 25F to be broadly applied to benefit the highest number of eligible students. These stakeholders also cited a desire for maximum flexibility for children in military families, children attending boarding schools, and children living near a State border and attending school in a State bordering the State of their residence.

Some stakeholders suggested that the intent of the statute appears to be focused on where students attend school, rather than where students reside, or that a school located outside of a covered State should not be able to receive section 25F scholarship funds, regardless of where the SGO is located.

Another stakeholder proposed that, once a scholarship is awarded by an SGO, the scholarship funds should “attach” to the student and not be restricted with regard to the State in which the funds are used, consistent with West Virginia's Hope Scholarship and with Indiana's voucher program, for example.

The Treasury Department and the IRS interpret the statutory language “eligible students solely within the State in which the organization is listed” to refer to the residence of the student, rather than where a school is located. Accordingly, proposed § 1.25F-3(c)(7) would provide that a contribution is considered used to fund scholarships for eligible students solely within the State in which the organization is listed pursuant to proposed § 1.25F-3(g) only if the students receiving scholarships reside in that State as determined under State law. Exceptions to this rule would be provided for students who are dependents of a member of the Armed Forces of the United States, as well as for students who are dependents of an individual residing on Indian Lands (as defined in 25 U.S.C. 3501(2)).

Proposed § 1.25F-3(c)(7) also would provide examples illustrating the application of these rules.

H. Priority in Awarding Scholarships

Section 25F(d)(1)(D) requires that SGOs, in their award selections, give priority consideration to students awarded a scholarship the previous year, and then to any eligible student who had a sibling who was awarded a scholarship by that SGO.

Proposed § 1.25F-3(c)(8) would provide that an SGO has flexibility to consider the particular needs of potential scholarship recipients and the type of expenses for which the scholarship is being awarded. For example, a prior scholarship recipient should be given priority with regard to an award for tuition, fees, and room and board, to ensure that the eligible student is able to continue attending the same school. Similarly, the siblings of such an award recipient should be given priority so that siblings are able to attend the same school. However, if a scholarship is awarded based on need for individual academic tutoring or special needs services, the fact that a student was a previous scholarship recipient, or that a student has a sibling who was a previous scholarship recipient, may not be relevant and priority instead can be based on need for the services.

I. Disqualified Persons

Notice 2025-70 requested comments on the definition of a disqualified person for purposes of section 25F(d)(2). Stakeholders generally supported treating SGO officers and directors as disqualified persons, but some suggested that family members of such officers and directors should remain eligible for scholarships. Some stakeholders specifically suggested that exceptions should be permitted if the SGO employs uniform, blind, or anonymized scholarship selection procedures.

The Treasury Department and the IRS have determined that such an exception is inconsistent with section 25F. Section 25F(d)(2)(B)'s incorporation of the term “rules similar to” those of section 4946 reflects the same Congressional choice embodied in the self-dealing rules of section 4941: categorical prohibitions are preferred to exceptions relying on inquiries into procedural safeguards or benign intent. Allowing for “blind” or “anonymized” selection procedures to modify the otherwise categorical prohibitions would present a significant and unjustified deviation from the rules set forth in section 4946. Moreover, section 25F requires that SGOs prioritize students awarded a scholarship the previous year and students with a sibling who was awarded a scholarship by such organization, meaning that truly “blind” or “anonymized” selection procedures are impossible. ( printed page 62829)

Some stakeholders suggested that selection committee members or anyone with influence over the awarding of scholarships should be considered disqualified persons. Others suggested that selection committee members should not be disqualified if they are not compensated or have no material financial interest in the SGO.

The Treasury Department and the IRS have determined that individuals who participate in the awarding of scholarships by the SGO should be treated as disqualified persons and that an exception for uncompensated members with no financial interest in the SGO is unwarranted. The relevant concern is not whether an individual has a financial interest in or compensation from the SGO, but whether such individual has the ability to confer a financial benefit on themselves or a family member by influencing scholarship awards.

Several stakeholders addressed how to define “substantial contributor” for purposes of section 25F. Many recommended that the definition be consistent with section 4946, under which a substantial contributor is generally any person who contributed an aggregate amount of more than $5,000, if such amount is more than 2 percent of the total contributions the organization received before the end of the taxable year in which that person's contributions were received. Notice 2025-70 requested comments on whether to exclude the $5,000 threshold and rely solely on the 2 percent threshold, the aim of which would be to prevent the development of small organizations intended to benefit small groups of related people without explicitly violating the earmarking prohibition. Stakeholders suggested this approach could disproportionately harm small or start-up SGOs and reduce scholarship availability.

Upon further consideration, the Treasury Department and the IRS have concluded that the stated concern is addressed by the existing private benefit doctrine, which would prevent such an organization from properly being recognized as described in section 501(c)(3), thus causing it to be unable to qualify as an SGO. Accordingly, proposed § 1.25F-3(d)(2)(i) adopts the 2 percent and $5,000 thresholds, consistent with section 4946.

However, consistent with the operational requirement safe harbor, which allows SGOs to simplify compliance with the section 25F operational requirements by measuring them at the section 25F segregated account level, these proposed regulations also would apply the disqualified person requirement at the section 25F segregated account level. Application at the section 25F segregated account level ensures that scholarships are not awarded to disqualified persons measured at the same operational level at which the SGO otherwise satisfies section 25F(d). Thus, proposed § 1.25F-3(d)(2) would provide that a substantial contributor means any person who contributed an aggregate amount of more than $5,000 to a section 25F segregated account during the taxable year, if such amount is more than 2 percent of the total contributions received by that section 25F segregated account during the taxable year.

One stakeholder recommended removal of the substantial contributor rule altogether or alternatively incorporating a higher threshold to be considered a disqualified person. The proposed regulations would not eliminate the substantial contributor rule or increase the dollar threshold, as substantial contributors may be able to exercise influence over an SGO by virtue of the size of their contribution relative to the size of total contributions.

Some stakeholders suggested that the substantial contributor calculation should be considered each year based on contributions from that year only, rather than cumulative contributions from the organization's inception. The proposed regulations would adopt this approach based on the view that it better reflects the expected giving patterns to SGOs and more accurately identifies those donors whose current level of contributions may give them meaningful influence. Accordingly, proposed § 1.25F-3(d)(2) would determine substantial contributor status based on contributions received during the taxable year.

A few stakeholders suggested a rule completely prohibiting SGOs from providing scholarships to the family members of any donors. The proposed regulations do not adopt the recommendation. The substantial contributor framework already addresses this concern by identifying those donors who may have meaningful influence over the SGO. Extending this status to all donors regardless of contribution size would sweep in contributors with no meaningful influence and could deter contributions in a manner inconsistent with section 25F's broader goals.

For purposes of determining persons who are substantial contributors, a person would be treated as making all contributions made by his or her spouse. A person's status as a substantial contributor is determined as of the close of each taxable year. Further, proposed § 1.25F-3(d)(4) would provide that once an individual is treated as a substantial contributor for a given taxable year of the SGO, such individual will be treated as a substantial contributor for that taxable year as well as the immediately succeeding taxable year of the SGO.

Evaluating substantial contributor status at taxable year end could result in an SGO unknowingly awarding scholarships to individuals who become disqualified persons by virtue of contributions made after the award of the scholarship. To reduce the risk of an SGO losing its SGO status by inadvertently awarding a scholarship to a disqualified person, proposed § 1.25F-3(d)(2)(ii) would indicate that a scholarship awarded to a disqualified person will not be treated as such if, at the time the scholarship was awarded, two requirements are met for that taxable year. First, the recipient would not have been a disqualified person had the substantial contributor determination been made as of the date of the award based on contributions received by the organization through that date. Second, the SGO did not know or reasonably expect that the recipient would become a disqualified person. Proposed § 1.25F-3(d)(5) would provide examples illustrating the rules addressing disqualified persons.

One stakeholder proposed a rule prohibiting board members, officers, and substantial contributors from having financial interests in recipient schools. The Treasury Department and the IRS have determined that such a prohibition is not required by section 25F. Board members, officers, and substantial contributors would be defined as disqualified persons and conflicts that may arise as a result of their relationships with recipient schools would be subject to scrutiny under other provisions of the Code, such as sections 501(c)(3) and 4958.

Accordingly, proposed § 1.25F-3(d)(1) provides the following list of those included in the definition of a disqualified person for purposes of section 25F: substantial contributors to the SGO or to the 25F segregated account; officers, directors, or trustees of the SGO (or individuals with similar powers and responsibilities); any individual participating in the selection of scholarship recipients, including as a member of a committee; and members of the families of any such person. Proposed § 1.25F-3(d) would clarify that, for these purposes, members of one's family include only spouses, ancestors and descendants of the individual or the individual's spouse, siblings of the individual or the ( printed page 62830) individual's spouse, the descendants of siblings, and the spouse of any of these individuals. Descendants would be defined to include legally adopted children and stepchildren of any individual.

IV. Reporting and Recordkeeping Requirements for SGOs

A. Overview

Proposed § 1.25F-4 would provide reporting and recordkeeping requirements for organizations for purposes of section 25F that supplement the general recordkeeping requirements under section 6001 imposed on all persons liable for a tax imposed under Title 26. Proposed § 1.25F-4(b) would describe the mandatory registration process for organizations through the IRS SGO portal. Proposed § 1.25F-4(c) would provide the requirements for an organization's acknowledgement, recordkeeping and reporting for the receipt of amounts designated as qualified contributions. Proposed § 1.25F-4(d) would describe the rules relating to an SGO's annual reporting requirements. Proposed § 1.25F-4(e) would describe an organization's annual financial and programmatic audit requirement.

B. Mandatory Registration Through IRS SGO Portal

In determining how to enforce and administer the requirements of section 25F, the Treasury Department and the IRS considered paper or electronic communications and determined that an IRS SGO portal would provide the most efficient way to timely interact with SGOs. Proposed § 1.25F-4(b) would require an organization to register electronically through the IRS SGO portal, which will allow each organization to obtain instructions for creating a unique donor number, based on a uniform format to be used by all SGOs, and report qualified contribution information to the IRS. The organization also would use the IRS SGO portal to periodically authorize disclosure of the organization's name and identifying information on the IRS SGO list for a calendar year, available on www.irs.gov. An organization must authorize such disclosure if it wants the IRS to publish such information on the IRS SGO list.

Because an organization would not be able to generate the unique donor number to provide it to a donor until the organization registers in the IRS SGO portal, and because a donor would need that unique donor number to substantiate a qualified contribution, proposed § 1.25F-4(b)(2) would require an organization to complete the registration process with the IRS as soon as possible and preferably before the organization appears on any State SGO list. Until the organization has registered in the IRS SGO portal, the organization will not be able to comply with the acknowledgement and reporting requirements, and that compliance is a necessary part of substantiating that a donor's qualified contribution is eligible for the credit allowed under section 25F.

Proposed § 1.25F-4(b)(3) would describe the information required to register, specifically: the organization's name, IRS employer identification number (EIN), address, telephone number, and year of formation; the name of a person whom the IRS may contact if there is an issue with the organization's registration; the organization's taxable year; and any other information the IRS deems necessary for purposes of administering the requirements of section 25F as provided in guidance. Proposed § 1.25F-4(b)(4) would provide that the IRS will review the information provided to verify that all the required information has been submitted and will provide instructions to the organization for creating a unique donor number in a uniform format to be used by all SGOs, for each donor who has designated at least one payment to the organization as a qualified contribution to the SGO during the calendar year.

C. Donor Acknowledgement and Reporting of Qualified Contributions Received by SGOs

Notice 2025-70 asked what information SGOs should be required to provide to their donors, including whether SGOs should be required to provide the donor with written substantiation in order for the donor to take the section 25F credit. Many stakeholders recommended that SGOs provide a standardized donor acknowledgement form to taxpayers that would include the donor's name and address, the name of the SGO and its EIN, and the amount of the qualified contribution. Other stakeholders suggested that SGOs should not be responsible for reporting the particulars of a donation, other than informing donors that the donation could be eligible for the section 25F credit.

Proposed § 1.25F-4(c)(1) would require the organization to transmit a timely written acknowledgement to each donor with respect to qualified contributions made by such donor during the calendar year. Proposed § 1.25F-4(c)(1)(i) would require the timely written acknowledgement to include: the organization's EIN; the total amount of contributions made by the donor to the organization during the calendar year that the donor designated as qualified contributions; the unique donor number provided to the donor; a statement as to whether the organization provided any goods or services in consideration for any qualified contributions made by the donor; and a description and good faith estimate of the value of any such goods or services. Proposed § 1.25F-4(c)(1)(ii) would require organizations to provide the timely written acknowledgement to the donor no later than January 31 of the calendar year following the calendar year in which the donor made a qualified contribution. The timely written acknowledgement may be provided in writing or in any other form acceptable to the donor, including by electronic delivery if the donor consents to receiving the statement electronically and has not withdrawn the consent before the statement is furnished.

Proposed § 1.25F-4(c)(2) would require organizations to report information about qualified contributions to the IRS. Proposed § 1.25F-4(c)(2)(i) would require the following information to be reported with respect to each unique donor number assigned by the organization: the donor's name and address, the aggregate amount of qualified contributions made by the donor to the organization during the calendar year; and any other information the IRS deems necessary for purposes of administering the requirements of section 25F, as may be described in further guidance. Proposed § 1.25F-4(c)(2)(ii) would require organizations to report this information no later than February 28 of the year following the calendar year in which such qualified contributions were made. Unless otherwise provided in guidance, the reporting would be required to be done through the IRS SGO portal in accordance with the instructions provided therein.

D. Reporting Operational Information to the IRS

Some stakeholders had suggested relying on an SGO's “sworn compliance affidavit” in determining whether an organization meets the criteria and requirements of being an SGO. Other stakeholders insisted that an SGO's self-attestation alone should not be sufficient, but suggested that an individual responsible for the operation of the SGO, or an approved third party, could attest that the SGO complied with all statutory requirements. ( printed page 62831)

Other stakeholders advocated for the regulations to provide a “standard Federal checklist,” as States vary in their capacity to review nonprofit organizations and many have no existing SGO oversight programs.

In accordance with the concept of such a checklist, these proposed regulations would provide that SGOs must annually certify that they meet the criteria and requirements of being an SGO. Stakeholders stated that, absent a standard Federal checklist, allowing each State to interpret and enforce Federal eligibility requirements would likely result in a patchwork of standards, procedures, and reporting obligations that would significantly increase administrative complexity and compliance costs, particularly for SGOs operating in multiple States.

Thus, proposed § 1.25F-4(d) would require an organization that was an SGO for any part of its taxable year to provide an annual certification to the IRS. Proposed § 1.25F-4(d)(2)(i) would require the organization to annually certify, with respect to its taxable year or the period within its taxable year during which it was an SGO, that such organization: was described in section 501(c)(3) and exempt from tax pursuant to section 501(a), and not a private foundation, as defined in section 509; prevented the co-mingling of qualified contributions with other amounts by maintaining a section 25F segregated account, which must contain only qualified contributions and the earnings therefrom, for each covered State on whose State SGO list the SGO appears, deposited all qualified contributions into that section 25F segregated account, and maintained a complete set of books and records for each of its section 25F segregated accounts; satisfied the operational requirements of section 25F(d)(1) and proposed § 1.25F-3(c); did not award a scholarship to any disqualified person; was located in each State on whose State SGO list the organization was listed; provided each donor a timely written acknowledgement; and commissioned a financial and programmatic audit as described in part IV.E. of this Explanation of Provisions by a qualified independent third party (or, for organizations with annual receipts of $500,000 or less, a committee of independent persons unrelated to the organization's management) and provided the audit report to each covered State on whose State SGO list the organization was listed.

Proposed § 1.25F-4(d)(2)(ii) would provide additional certifications relating to operational requirements. Proposed § 1.25F-4(d)(2)(ii)(A) would provide that a single-State SGO must certify that it provided scholarships to 10 or more students, not all of whom attended the same school; spent not less than 90 percent of the income of the organization on scholarships for eligible students; verified that scholarships were used solely for qualified elementary or secondary education expenses; verified that scholarships were awarded only to eligible students who were members of an eligible household and who were eligible to enroll at a public elementary or secondary school; verified that the recipient eligible students were solely within the State; awarded scholarships with a priority (as defined in the proposed regulations) for eligible students awarded a scholarship for the previous school year and, thereafter, for any eligible students who have a sibling who was awarded a scholarship from such SGO; did not earmark or set aside contributions for scholarships on behalf of any particular student; and, if the organization used the safe harbor found in proposed § 1.25F-3(c)(6)(iii)(C) for providing individual scholarships for individual academic tutoring or special needs services at schools in low-income areas, that it obtained a third-party audit and provided the audit report to the covered State in accordance with proposed § 1.25F-3(c)(6)(iii)(C)( 2).

Proposed § 1.25F-4(d)(2)(ii)(B) and (C), respectively, would require an organization that was either a single State SGO using the safe harbor in § 1.25F-3(c)(2) or a multistate SGO for any part of a calendar year within its taxable year to annually certify that at least 85 percent of such organization's activities during the taxable year were scholarship granting activities and that each of the elements of proposed § 1.25F-4(d)(2)(ii)(A) was met separately with respect to the organization's section 25F segregated account for each covered State on whose State SGO list the SGO appeared.

Proposed § 1.25F-4(d)(3) would describe the information an organization that was a single-State SGO for any part of a calendar year within its taxable year is annually required to report to the IRS. The information described in proposed § 1.25F-4(d)(3) would assist States, the IRS, and taxpayers considering making a qualified contribution in determining the organization's compliance with the requirements of section 25F, its size, and its mission.

Proposed § 1.25F-4(d)(3)(i) would require an organization to report, with respect to its taxable year, or the period within its taxable year during which it was an SGO, the following information: (1) the number of students that applied for a scholarship; (2) the number of students selected for a scholarship in accordance with the safe harbor in proposed § 1.25F-3(c)(6)(iii)(C); (3) the number of scholarships awarded; (4) the highest, lowest, and average amount of the scholarships awarded; (5) the number of schools at which the scholarship recipients were enrolled; (6) aggregate data on each category of qualified elementary and secondary education expenses for which scholarship funds were used; (7) the amount of the organization's income; (8) with regard to the amounts spent on scholarships for eligible students solely within the State during the taxable year: the total amount spent during the year; and of the total amount spent during the year, the amount counted as satisfying the 90 percent of income spending requirement for the prior year, and the amount counted as satisfying that requirement for the current year; (9) the percentage of the prior year's income spent on scholarships for eligible students solely within the State, taking into account the amounts spent in both the prior and current years; (10) the percentage of the current year's income spent on scholarships for eligible students solely within the State; and (11) any other information required in accordance with guidance.

Proposed § 1.25F-4(d)(3)(ii) would require a single-State SGO using the safe harbor found in proposed § 1.25F-3(c)(2) to report the information described in proposed § 1.25F-4(d)(3)(i) with respect to its section 25F segregated account, rather than with respect to the organization as a whole.

Proposed § 1.25F-4(d)(3)(iii) would require a multistate SGO to report this information separately with regard to its section 25F segregated account for each covered State on whose State SGO list the SGO appears.

Proposed § 1.25F-4(d)(4) would provide the time and manner of reporting the annual certification and information. Except to the extent otherwise provided in guidance, the certification and information would need to be provided at such time and in such manner as the IRS may prescribe by publication, form, or instructions, and attached to the annual Form 990 for those SGOs required to file Form 990. This requirement would be consistent with feedback advocating for the use of the Form 990 as an efficient mechanism for reporting SGO activity due to its standardization, transparency, and consistency across jurisdictions.

For organizations required to file an annual information return under section 6033(a), the required form must be included as an attachment. An organization that is not required to file ( printed page 62832) an annual information return under section 6033(a) must provide this form separately to the IRS on or before the 15th day of the 5th calendar month following the close of the period for which the form reports the required certifications and information. Organizations must concurrently provide a copy of the form to each State on whose State SGO list the organization appears in accordance with guidance.

E. Required Audits

Some stakeholders suggested periodic SGO audit requirements, noting the need for lenience in an SGO's first year on a State SGO list. Another stakeholder suggested that new SGOs should receive “heightened scrutiny” compared to those with a proven track record of managing donations and administering student scholarships. Stakeholders suggested that, in years after the first year of operation, SGOs should be subject to periodic audits, mandatory reporting requirements, and immediate removal upon noncompliance.

In considering what regulations or other guidance would best carry out the purposes of section 25F, including for purposes of enforcing the SGO operational requirements in section 25F(d) and ensuring the integrity of the State lists of SGOs in section 25F(g), the Treasury Department and the IRS have attempted to balance the need for State oversight of SGOs with the burden that such requirement places on State governments. As a result, proposed § 1.25F-4(e) would require each organization that was an SGO during any part of the preceding taxable year to commission and undergo an annual financial and programmatic audit by a qualified independent third party and to provide the audit results to each covered State on whose State SGO list the SGO appeared.

Proposed § 1.25F-4(e)(2) would define “qualified independent third party,” for organizations whose total receipts (whether or not required to be deposited into its section 25F segregated account) for the most recent taxable year were more than $500,000 as an external, independent professional or accredited body that regularly assesses an organization's compliance, financial records, or processes (including internal controls) against specific standards to perform the audit required by proposed § 1.25F-4(e). To provide flexibility and reduce expenses for small entities, proposed § 1.25F-4(e)(2) would permit an organization whose total receipts for the taxable year did not exceed $500,000 to use a committee of independent persons unrelated to the organization's management to conduct the audit, with the report signed under penalties of perjury.

Proposed § 1.25F-4(e)(3) and (4) would describe the content and scope of the required audit, providing a list of the items to be reviewed and addressed.

V. State Election, SGO List, and Certification of SGOs

A. Overview

Proposed § 1.25F-5 would provide rules for a State election and a State's identification and certification of organizations located in the State that are SGOs. Proposed § 1.25F-5(b) describes rules that would apply for the State to register in the IRS State section 25F portal, which, except for the first year for which the State makes an election, may be used for the submission of the State election (including advance election), State SGO list, any changes to the State SGO list, annual certifications, and any other information required in accordance with guidance. Proposed § 1.25F-5(c) describes the requirements that would apply for a State election. Section 1.25F-5(d) provides rules that would apply regarding the State SGO list, including information and certifications a State is required to provide for each organization included on the State SGO list and procedures a State is required to use in determining whether an organization is an SGO. Proposed § 1.25F-5(e) addresses rules that would apply to State administrative requirements for SGOs.

B. IRS State Section 25F Portal

Notice 2025-70 stated that the Treasury Department and the IRS anticipated that the forthcoming proposed regulations would require the State to electronically submit the State election, the State SGO list, and certification to the IRS. Commenters supported an electronic process for States to submit State SGO lists, as they considered electronic submissions to be more efficient and timelier than paper submissions. Thus, proposed § 1.25F-5(b) would require a State that chooses to participate under section 25F to register for and use the IRS State section 25F portal in accordance with the instructions therein.

Proposed § 1.25F-5(b)(2)(i) would provide that the Governor of the State or such other individual, agency, or entity as is designated under State law to make elections with respect to Federal tax benefits on behalf of the State may authorize up to two designated officials to register for and use the IRS State section 25F portal. Proposed § 1.25F-5(b)(2)(ii) would require each designated official to be an elected official, the Director of Taxation, or an appointed official of the State.

Proposed § 1.25F-5(b)(3) would require States to obtain or be assigned a special-purpose EIN for purposes of registering. The IRS will inform States how to obtain this EIN and States will not be required to use a Form SS-4 for these purposes.

Proposed § 1.25F-5(b)(4) would require that the following information be provided to register: the special-purpose EIN; contact information, including the name, official title, telephone number, and email address of the State's designated officials; and any other information the IRS deems necessary for purposes of administering the requirements of section 25F as may be described in future guidance.

At the conclusion of the registration process, a State would be able to electronically transmit through the IRS State section 25F portal its State election (including advance election), State SGO list, any changes to the State SGO list, annual certifications, and any other information required in future guidance.

To mitigate the risk of any State's implementation issues for the first year for which the IRS State section 25F portal will be operational, the IRS is considering the creation of alternative temporary procedures that would be outlined in future guidance to help ensure that all States that wish to participate under section 25F are reasonably able to complete their registration for the IRS State section 25F portal or otherwise submit the State election and State SGO list for calendar year 2027.

C. State Election

1. In General

Proposed § 1.25F-5(c) would provide the procedure for making a State election. Proposed § 1.25F-5(c)(1) would provide that, except as provided in proposed § 1.25F-5(c)(3), the State election may be made either as an advance election that is perfected through the submission of the State SGO list or as an election made with such submission.

Several stakeholders recommended restricting a State's ability to “opt out” after having made an election. Many stakeholders believe that States should not be able to opt out on a year-to-year basis, as families and students will rely on these scholarships for multiple years. However, consistent with the requirement in section 25F(c)(5) that the list submitted for the applicable covered ( printed page 62833) State under section 25F(g) is “for the applicable year,” proposed § 1.25F-5(c)(1) would confirm that an election to participate under section 25F is made only for a single calendar year, and that all of the requirements in proposed § 1.25F-5(c) must be satisfied for each year for which an election is made. The advance election procedure in proposed § 1.25F-5(c)(3), discussed in part V.C.2. of this Explanation of Provisions, would enable a State to opt in for an upcoming calendar year by making an advance election and then later, in effect, opt out by failing to perfect the election in accordance with proposed § 1.25F-5(c)(3)(ii). The Treasury Department and the IRS do not interpret section 25F(g) and (c)(5) as allowing for any revocation once a State has completed its State election, including an advance election that has been perfected.

As described in section 25F(g)(1)(B), proposed § 1.25F-5(c)(2) would specify that an election must be made by the Governor of the State or by such other individual, agency, or entity as is designated under State law to make such elections on behalf of the State with respect to Federal tax benefits.

2. Advance Election Procedure

Notice 2025-70 stated that the Treasury Department and the IRS read section 25F(g) to provide that an election by a State to participate under section 25F may be made prior to or contemporaneously with the submission of the State's list of all organizations located in the State that satisfy the definition of an SGO. On December 12, 2025, the Treasury Department and the IRS issued Rev. Proc. 2026-6, Advance Election to Participate Under Section 25F for 2027, to allow States, including the District of Columbia, to make an Advance Election to participate in a new tax credit for calendar year 2027.

Proposed § 1.25F-5(c)(3) would provide guidance for States on how to submit an election in advance of the submission of the State SGO list, including guidance for States that have submitted an advance election for 2027 on Form 15714, Advance Election to Participate Under Section 25F for 2027. A State's failure to timely perfect its advance election by providing its State SGO list for a calendar year by the specified date in § 1.25F-5(c)(3)(ii) would result in a failure to meet the requirements of section 25F(g), effectively preventing any organization in the State from qualifying as an SGO for the calendar year for which the advance election was not perfected.

Proposed § 1.25F-5(c)(3)(iii) would provide that the IRS will maintain and publish on www.irs.gov a list of States that have made an advance election.

3. Timing of State Elections Under Proposed § 1.25F-5(c)(3)(i) and (c)(4)

Proposed § 1.25F-5(c)(3)(i) would identify the time period during which an advance election may be made and proposed § 1.25F-5(c)(4) would identify the time period during which a State election may be made with the submission of the State SGO list.

Notice 2025-70 stated that the Treasury Department and the IRS anticipated that the forthcoming proposed regulations under section 25F would require each State electing to participate under section 25F for the 2027 calendar year to submit to the IRS, by a specified date before January 1, 2027, the State's list of organizations located in that State meeting the requirements of section 25F(c)(5) for the 2027 calendar year along with the State's certification under section 25F(g)(2), and that those forthcoming proposed regulations would include a similar requirement for submission of an annual list and certification from each electing State for subsequent years.

Proposed § 1.25F-5(c)(3)(i)(A) would provide that, except as otherwise provided in the transition rule in proposed § 1.25F-5(c)(3)(i)(B), a State may submit an advance election through the IRS State section 25F portal on or after January 2 and on or before September 30 of the calendar year immediately preceding the calendar year for which the election is being made. The IRS will acknowledge or otherwise confirm receipt of a State's advance election.

Proposed § 1.25F-5(c)(3)(i)(B) would provide a transition rule for the first calendar year for which the State makes an election. Proposed § 1.25F-5(c)(3)(i)(B)( 1) would provide that, for calendar year 2027, a State must submit an advance election on Form 15714 on or before January 1, 2027. Proposed § 1.25F-5(c)(3)(i)(B)( 2) would provide that, for future years, a State making its first election to participate under section 25F must submit an advance election as provided in future guidance. Consistent with these transition rules, proposed § 1.25F-5(c)(4) would provide that, for the first year in which the State is electing to participate under section 25F, it cannot make its election with the submission of the State SGO list.

During the last three months of the immediately preceding calendar year or on January 1 of the year for which the election is being made, a State may make its election to participate under section 25F either as part of submitting its State SGO list for that year with the required information and certifications, or by perfecting its advance election made under proposed § 1.25F-5(c)(3)(i)(A) by providing its State SGO list for that year with the required information and certifications.

Several stakeholders requested clarification that the deadline for an election to participate for the 2027 calendar year should be after January 1, 2027, consistent with section 25F(g)(1)(A). For calendar year 2027 only, a State must submit its advance election on or before January 1, 2027, however, the State may perfect its advance election by submitting its State SGO list on or before February 15, 2027.

Some stakeholders recommended clarifying that the election deadline for calendar years after 2027 should be no later than 11:59 p.m. on January 1 of the calendar year, to accommodate an election made by a Governor who is newly inaugurated. The Treasury Department and the IRS agree and clarify that, for these purposes, “on or before January 1 of that year” means up to 11:59 p.m. on January 1.

4. Certifications and Other Required Information for State Elections

Proposed § 1.25F-5(c)(5) would require that the person with authority to make the State election, or a designated official, certify that the individual, agency, or entity making the State election has the authority to make the State election on behalf of the State, and the person authorizing any individuals as designated officials under proposed § 1.25F-5(b)(2) has the authority to do so.

In addition, proposed § 1.25F-5(c)(5) would require the person with authority to make the State election or a designated official to:

(1) Provide the enacted statutory or regulatory provisions that are binding on the State and establish the authority of an individual to make the State election on behalf of the State, if the individual making the election is not the Governor of the State (or the Mayor of the District of Columbia);

(2) Provide the required information and certifications for each SGO on the State SGO list;

(3) Certify that the State SGO list includes every organization located in the State that is seeking inclusion on the State SGO list, and that meets the definition of an SGO, and is operating in a manner that satisfies the operational requirements in section 25F(d) and proposed § 1.25F-3(c) and the applicable State requirements;

(4) Provide the certification of State policies and procedures required for its ( printed page 62834) State SGO list in proposed § 1.25F-5(d)(6);

(5) Describe any tax credit (including relevant State statutes, regulations, and other authoritative guidance) available under State law for contributions made to SGOs during the calendar year for which the State is electing to participate under section 25F; and

(6) Provide any other information and certifications described in future guidance.

D. State SGO Lists

1. Overview

Section 3.03 of Notice 2025-70 stated that the Treasury Department and the IRS interpret section 25F(g) as requiring each covered State to verify that each organization on the State's list satisfies all the requirements of section 25F(c)(5). Section 3.04 of Notice 2025-70 further stated that the Treasury Department and the IRS anticipate that States will be required to have implemented, and to comply with, various procedures to verify that the required information submitted by the covered State is accurate and complete. Section 3.04 of Notice 2025-70 requested comments on what types of uniform policies, procedures, recordkeeping, or other requirements would be reasonable to ensure States can reliably verify that each organization meets the requirements of section 25F(c)(5), and, for States with similar programs, how those States determine whether organizations are meeting applicable requirements.

Many stakeholders favored self-attestation by SGOs that they met the requirements of section 25F(c)(5) so as to avoid the need for any State-level review process, stating that requiring States to verify compliance is overly burdensome and could discourage participation. Several stakeholders expressed concern that providing States with significant discretion over organizations seeking certification as an SGO would permit State officials to discriminate against organizations based on factors other than compliance with the requirements of section 25F. Some stakeholders requested explicit limits on State authority to prevent intrusion into SGO operations, as well as an appeals process for any organizations excluded from a State's list based on the State's administration of SGO requirements.

Proposed § 1.25F-5(d) would provide guidance on State SGO lists. Proposed § 1.25F-5(d)(2) and (3) would describe the information and certifications required as part of the State's election or advance election for a calendar year. Proposed § 1.25F-5(d)(4) would provide a transition rule for an organization that has not yet been required to provide information and certifications. Proposed § 1.25F-5(d)(5) would provide a procedure that applies when an organization's application for recognition of tax-exempt status is pending with the IRS. Proposed § 1.25F-5(d)(6) would require a State to make a certification regarding its policies and procedures. Proposed § 1.25F-5(d)(7) would provide rules for changes to a State SGO list, and proposed § 1.25F-5(d)(8) would provide rules for the removal of an SGO from the IRS SGO list. Proposed § 1.25F-5(d)(9) would provide for the publication of the names of covered States and their State SGO lists on www.irs.gov.

2. Information the State Is Required To Provide About Each SGO on Its State SGO List

Proposed § 1.25F-5(d)(2) would set forth the information that a State is required to provide annually with respect to each organization named on the State SGO list, including the name, the EIN, address, and telephone number of the organization; whether the organization has received recognition as a section 501(c)(3) public charity, or has a pending application for such recognition; and any other information the IRS deems necessary for purposes of administering the requirements of section 25F as may be described in future guidance.

3. Certifications the State Is Required To Provide About Each SGO on Its State SGO List

Except as provided by the transition rule described in part V.D.4. of this Explanation of Provisions, proposed § 1.25F-5(d)(3) would require the State to certify that, with respect to each organization included on the State SGO list, the organization is located in the State and the organization prevents the co-mingling of qualified contributions with other amounts by maintaining a segregated section 25F account exclusively for qualified contributions, depositing all qualified contributions into its section 25F segregated account, and maintaining a complete set of books and records for its section 25F segregated account. The State also would be required to certify that the organization satisfies each of the operational requirements in section 25F(d) and proposed § 1.25F-3(c) and that the State has determined whether the SGO is a single-State or multistate SGO, reviewed the annual financial and programmatic audit report the organization is required to provide to the State, reviewed annual certifications and other information the organization is required to provide to the IRS and investigated any failure by the SGO to provide the required certifications and other information, and has become reasonably satisfied that the SGO has corrected the failure, if possible, or has put in place procedures to prevent future failures. Finally, a State would be required to certify that the organization satisfies any other requirements the IRS deems necessary for purposes of administering section 25F as may be described in future guidance.

The Treasury Department and the IRS request comments on the certifications States would be required to make in accordance with proposed § 1.25F-5(d)(3), including any other certifications that should be required for a multistate SGO. Comments are also requested on whether any certification is disproportionately burdensome compared to the benefits to tax administration.

4. Transition Rule for an Organization That Has Not Yet Been Required To Provide Information and Certifications to the IRS

In recognition of the fact that much of the required reporting is of data derived from operations in the prior fiscal year, proposed § 1.25F-5(d)(4) would provide a transition rule for recently formed entities and other organizations without such historical data that have not yet been required to report on their operations as an SGO. This transition rule allows the State to rely on the organization's governing documents or bylaws, written policies and procedures, and other documentation the organization provides to the State as part of its request to be included on its State SGO list, reducing the burden on the State for this type of SGO.

However, for each year for which such an organization is included on the State SGO list during this transition period, proposed § 1.25F-5(d)(4) would require the State to determine that the organization's provisions, policies, and procedures expressly require the organization to satisfy the operational requirements in section 25F(d) and proposed § 1.25F-3(c), and that the documentation and information available to the State evidences the organization's ability and intent to satisfy such operational requirements. Proposed § 1.25F-5(d)(4) also would require the organization to concurrently provide the State with a copy of any information and certifications required to be provided to the IRS before the end of the transition period. ( printed page 62835)

5. Procedure That Would Apply When an Organization's Application for Recognition of Tax-Exempt Status Is Pending With the IRS

Proposed § 1.25F-5(d)(5) would allow a State to include on its State SGO list those organizations whose application for recognition of tax-exempt status is pending with the IRS, but only if the State includes on its State SGO list all organizations seeking inclusion on that list whose application for recognition of tax-exempt status is pending with the IRS, the State has complied with the requirements of proposed § 1.25F-5(d)(4) for each organization, and the State makes the required certifications regarding the organization's tax-exempt status. The required certifications include that the organization has applied for tax-exempt status as a section 501(c)(3) public charity, the organization's tax-exempt status, if granted, will be effective retroactively to a date that is on or before January 1 of the year for which the State SGO list applies, and the State SGO list indicates that such organization's tax-exempt status is pending IRS recognition. The determination of whether tax-exempt status will be effective retroactively to a date on or before that January 1 is determined by the date of the formation of the organization and the date of its application for recognition of tax-exempt status. See section 6.09 of Rev. Proc. 2026-5, 2026-1 I.R.B. 258 (updated annually).

As provided in proposed § 1.25F-5(d)(9)(ii), discussed in part V.D.9 of this Explanation of Provisions, the IRS will add each of these organizations to the IRS SGO list upon determining that the organization qualifies for tax-exempt status as a section 501(c)(3) public charity, if the organization consents to being included on the IRS SGO list.

6. Certification of State Policies and Procedures

Proposed § 1.25F-5(d)(6) would require a State to certify that its policies and procedures, including its procedures for assessing and responding to audit results, enable the State to make its own determination that each organization on the State SGO list is located in the State, is in compliance with section 25F(c)(5)(A) and (B) and § 1.25F-3(b)(1) through (4) and (6) and is operating in a manner that satisfies the operational requirements in section 25F(d) and proposed § 1.25F-3(c) and the applicable State requirements. Proposed § 1.25F-5(d)(6) also would require that a State certify that its policies and procedures provide for the prompt removal of an organization from the State SGO list, and notification to the IRS through the IRS State section 25F portal of such removal, upon a determination that an organization is not an SGO or does not meet the applicable State requirements. A State also would be required to certify that its policies and procedures require any publicly available lists of SGOs maintained by the State to be identical to the most recently submitted State SGO list, include the IRS SGO list's URL (Uniform Resource Locator), and state that a taxpayer may rely on an organization's inclusion on the IRS SGO list in accordance with proposed § 1.25F-2(b). Finally, proposed § 1.25F-5(d)(6) would require that the State certify that its policies and procedures ensure that the State's procedures before and after the removal of an organization from the State SGO list are fairly administered and afford due process in accordance with applicable Federal and State laws.

7. Changes to State SGO List

Proposed § 1.25F-5(d)(7)(i) and (ii) would provide guidance regarding the time period during which a State may replace or supplement its State SGO list for a calendar year. A State would be able to replace or supplement its State SGO list for a calendar year at any time before the deadline for perfecting or completing an election for that year by submitting the change in the IRS State section 25F portal in accordance with guidance published in the Federal Register or Internal Revenue Bulletin (see §§ 601.601(d)(2) and 601.602 of this chapter) or, as appropriate, in forms, instructions, and publications available on www.irs.gov and through the IRS SGO portal or IRS State section 25F portal, as applicable. A State would not be able to make any additions to the State SGO list for a calendar year after that deadline; instead, any additions a State seeks to make after such deadline may be included as part of the State's submission of its State SGO list for the following calendar year.

Proposed § 1.25F-5(d)(7)(iii) would provide that a State may remove an SGO from its State SGO list at any time during the calendar year to which that list applies. If an SGO requests to be removed from a State SGO list, the State would be required to comply.

Many stakeholders requested guidance regarding the State's discretion in removing an SGO from the State SGO list. Stakeholders expressed concern that States could remove SGOs arbitrarily or for political reasons and sought rules to ensure transparency and uniformity regarding the removal process. In response, proposed § 1.25F-5(d)(7)(iii) would provide that a State could remove an organization from its State SGO list if the State determines, through a procedure providing due process to the organization, that the organization is not located in the State, does not satisfy the requirements for an SGO in section 25F(c)(5)(A) or (B) and proposed § 1.25F-3(b), or is not operating in a manner that satisfies the operational requirements in section 25F(d) and proposed § 1.25F-3(c) and the applicable State requirements. In each event, the State would need to indicate the removal and its effective date on its State SGO list and promptly notify the IRS so the IRS can remove the SGO from the IRS SGO list for the current year. The organization would be removed from the relevant part of the IRS SGO list for the current year to ensure that any contributions to the organization after the date of its removal from the State or IRS SGO list are not treated as qualified contributions.

8. Removal of a Non-Compliant Organization From the IRS SGO List

Proposed § 1.25F-5(d)(8) would provide the list of circumstances under which an organization may be removed from the IRS SGO list. Under proposed § 1.25F-5(d)(8)(i), the IRS would remove an organization from the IRS SGO list following its determination that the organization is not a section 501(c)(3) public charity or automatic revocation of the organization's tax-exempt status by function of section 6033(j). Proposed § 1.25F-5(d)(8)(ii) would further provide that the IRS may remove an organization following its determination that the organization has failed to comply with a requirement of section 25F (other than the tax-exempt status requirement in section 25F(c)(5)(A)), or has failed to comply with the regulatory reporting, recordkeeping or audit requirements, including a failure to report qualified contributions in accordance with proposed § 1.25F-4(c). This IRS determination of non-compliance with the requirements of section 25F would be a Federal tax controversy under section 7803(e)(3) and § 301.7803-2, which provides the organization an opportunity to seek review by the IRS Independent Office of Appeals in the time and manner prescribed in applicable forms, instructions, or other administrative guidance. Under proposed § 1.25F-5(d)(8)(iii)(A), the IRS would remove an organization from the part of the IRS SGO list for a particular covered State upon notification that it has been removed from the State SGO list of that covered State. ( printed page 62836)

Finally, proposed § 1.25F-5(d)(8)(iii)(B) would provide that, if a multistate SGO that is removed from a State SGO list under proposed § 1.25F-5(d)(8)(iii)(A) continues to satisfy the operational requirements in section 25F(d) and proposed § 1.25F-3(c) and one or more other covered States' applicable requirements as described in proposed § 1.25F-5(e)(1), the SGO will remain on the IRS SGO list with respect to such other covered States, subject to any further discretionary examination of the SGO by such other covered States or the IRS.

9. Publication of Covered States and State SGO Lists

Proposed § 1.25F-5(d)(9)(i) would provide that the IRS will maintain and publish the IRS SGO list on www.irs.gov. For those SGOs that have authorized the disclosure of their information on the IRS SGO list, the IRS SGO list will contain each SGO included on a State SGO list for each of the covered States for the calendar year and reflect each removal from a State SGO list and the date of the removal. If an SGO does not consent to the disclosure of its information on the IRS SGO list, a taxpayer would not be able to use the reliance offered by the IRS SGO list for purposes of establishing that the taxpayer's contribution to that organization is a qualified contribution. Instead, the taxpayer would need to rely on other evidence to establish that the organization is an SGO. If an SGO is removed from the IRS SGO list, its name and identifying information would be displayed in strike-through text, along with the date of the organization's removal from the list, to provide taxpayers with the information they may need in determining if their contribution is being made, or was made, to a valid SGO and thus is a qualified contribution eligible for the section 25F credit.

Proposed § 1.25F-5(d)(9)(ii) would provide for updating the IRS SGO list to include an organization whose tax-exempt status was pending when the State SGO list was submitted. Upon determining that the organization qualifies for tax-exempt status and that the effective date of such tax-exempt status is on or before January 1 of the calendar year for which the State SGO list applies, the IRS would add the organization to the IRS SGO list for that year as soon as the organization gives permission to be included on that list.

The publication of an IRS SGO list is consistent with feedback requesting that the IRS publish information to facilitate taxpayers' ability to determine which tax-exempt organizations are eligible to receive qualified contributions. See proposed § 1.25F-2(b)(1) (permitting reliance on the IRS SGO list to establish that a contribution is being made to an SGO).

E. State Administrative Requirements

Stakeholders submitted a broad range of comments regarding the level of discretion the State should have in reviewing and certifying SGOs. Concerns were raised that States might seek to prioritize particular types of schools or students or otherwise implement State education policies in a manner inconsistent with section 25F.

Proposed § 1.25F-5(e) would provide guidance on State administrative requirements. Proposed § 1.25F-5(e)(1) would provide that a State must require that SGOs meet all generally applicable State requirements for charitable organizations, including any State requirements that any organization must satisfy to be authorized to do business in the State and to solicit charitable contributions in the State. Additionally, States would be required to impose certain application, documentation and financial reporting requirements that are reasonably tailored to support the State's determination that the organization satisfies the operational requirements in section 25F(d) and proposed § 1.25F-3(c), and to facilitate the prevention and detection of fraud or abuse, including the misuse of scholarship funds such as through the duplication of scholarship awards to the same student for the same qualified elementary or secondary education expense.

Proposed § 1.25F-5(e)(2) would prohibit a State from requiring SGOs to operate in a manner that is more restrictive than the requirements set forth in section 25F(c)(5) and proposed § 1.25F-3(b) and (c), such as by limiting the type of school that scholarship recipients may attend or the types of qualified elementary or secondary education expenses for which scholarship funds may be used. This prohibition would be responsive to stakeholder feedback expressing concern that permitting States to impose additional requirements on SGOs or to exercise discretion to exclude an otherwise qualifying organization from the State SGO list could lead to arbitrary determinations and improper discrimination.

Proposed § 1.25F-5(e)(3) would provide that the procedures a State implements in accordance with proposed § 1.25F-5(e) are subject to Federal review. Upon discovering a pattern of irregularities or noncompliance, the IRS, in its discretion, may require a State to modify its procedures to ensure that its determinations regarding an organization's location in the State, and its satisfaction of proposed § 1.25F-3(b) and of the operational requirements in section 25F(d) and proposed § 1.25F-3(c) are being administered in accordance with the applicable statutory, regulatory, and appropriate State requirements.

Nothing in section 25F or these proposed regulations would alter States' obligations to comply with all other applicable Federal and State law, for example, the requirements under the Individuals with Disabilities Education Act, 20 U.S.C. 1400 et seq.

VI. Proposed Applicability Date

Each of proposed §§ 1.25F-1 through 1.25F-5 is proposed to apply to taxable years ending on or after the date on which the Treasury decision adopting these regulations as final regulations is published in the Federal Register . Taxpayers, organizations, and States may rely on these proposed regulations for qualified contributions made on or after January 1, 2027, in taxable years ending before the date the Treasury decision adopting these regulations as final regulations is published in the Federal Register , provided that taxpayers, organizations, and States follow the portions of the proposed regulations applicable to each in their entirety and in a consistent manner.

Special Analyses

I. Regulatory Planning and Review

Executive Orders 12866 and 13563 direct agencies to assess costs and benefits of available regulatory alternatives and, if regulation is necessary, to select regulatory approaches that maximize net benefits (including potential economic, environmental, public health and safety effects, distributive impacts, and equity). Executive Order 13563 emphasizes the importance of quantifying both costs and benefits, reducing costs, harmonizing rules, and promoting flexibility.

The proposed regulations have been designated by the Office of Management and Budget's (OMB) Office of Information and Regulatory Affairs (OIRA) as subject to review under Executive Order 12866 pursuant to the Memorandum of Agreement (MOA, July 4, 2025) between the Treasury Department and the Office of Management and Budget regarding review of tax regulations. OIRA has determined that the proposed rulemaking is economically significant ( printed page 62837) and subject to review under Executive Order 12866 and section 1(c) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB.

Executive Order 14192, titled “Unleashing Prosperity Through Deregulation,” was issued on January 31, 2025. Section 3(a) of E.O. 14192 requires an agency, unless prohibited by law, to identify at least 10 existing regulations to be repealed when the agency issues a new regulation. In furtherance of this requirement, section 3(c) of E.O. 14192 requires that the “new incremental costs associated with new regulations shall, to the extent permitted by law, be offset by the elimination of existing costs” associated with prior regulations. A significant regulatory action (as defined in section 3(f) of E.O. 12866) that would impose total costs greater than zero is considered an E.O. 14192 regulatory action. This proposed rule, if finalized as proposed, is, therefore, expected to be an E.O. 14192 regulatory action.

Need for Regulation

Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the OBBBA, added new section 25F ( Qualified elementary and secondary education scholarships) to the Code. Section 25F creates a dollar-for-dollar nonrefundable Federal tax credit of up to $1,700 for contributions made by individuals to scholarship granting organizations (SGOs).

The proposed regulations provide clarity to taxpayers, States, and SGOs to make the section 25F credit operable, including defining certain terms found in the statute and establishing procedures that ensure that the qualified contributions that generate the Federal tax credits are implemented in accordance with the statute.

The Statute and the Proposed Regulations

Section 70411 of the OBBBA added section 25F to the Code. Section 25F creates a tax credit for qualified contributions made by individual taxpayers to SGOs. SGOs are a type of charitable tax-exempt organization subject to unique reporting rules and operational and spending restrictions. They are required to focus their spending almost exclusively on the provision of scholarships for students eligible to attend elementary or secondary school who reside in households where the household income falls below a certain threshold. These scholarships are restricted to being used for qualified elementary and secondary school expenses, and the SGO must provide scholarships to at least 10 students per year who do not all attend the same school.

The proposed regulations provide a number of definitions and clarifications to the statutory rules governing section 25F. In particular, the proposed regulations explain the calculation of the credit amount a taxpayer may claim and specify that qualified contributions must be made by individuals to receive the section 25F credit.

In addition, the proposed regulations address operational requirements of SGOs. The proposed regulations provide guidance for tax-exempt organizations that wish to operate as SGOs in multiple States, including what it means to be “located in the State.” Furthermore, the proposed regulations consider the statutory requirement that an SGO spend not less than 90 percent of the organization's income on scholarships. Recognizing the potential for organizations to incur legitimate administrative costs in excess of 10 percent of income, the proposed regulations provide a safe harbor for organizations whose scholarship granting activities are at least 85 percent of the organization's activities. Such organizations may satisfy the 90% of income spending requirement solely on the basis of a section 25F segregated account, rather than on the basis of all of the organization's income. The proposed regulations also provide that an SGO is responsible for verifying that the scholarships awarded from qualified contributions it collects are used only to fund qualified elementary or secondary school expenses for eligible students.

To clarify the definition of an eligible student, the proposed regulations provide guidance regarding the definition of household income and family size and clarify that the income limits specified in the statute will be adjusted for family size. The proposed regulations offer various methods SGOs may use to verify that a potential scholarship recipient meets the eligibility criteria set out in the statute, including safe harbors that do not require SGOs to conduct a full, direct verification of recipients' household income. Under these safe harbors, students qualify as eligible to benefit from section 25F scholarship funds if someone in their household already benefits from one of a few specified needs-based benefit programs, if the student attends a school serving students in certain qualified census tracts and receives a scholarship for academic tutoring or special needs services, or if a student has been placed in foster care.

The proposed regulations further clarify the definition of student eligibility by specifying that students are treated as “solely within the State” if the student is a resident of the State under State law, subject to two exceptions. The proposed regulations also provide rules defining a “disqualified person.”

The proposed regulations provide reporting and recordkeeping requirements for SGOs, including an annual audit requirement. They also set forth procedures for donors to report and SGO to substantiate the amount of qualified contributions made by the donor during the taxable year.

The proposed regulations ensure that SGOs are able to conduct their scholarship-granting activities with the maximum flexibility permitted under the statute. The proposed regulations clarify that States cannot condition inclusion on the SGO list on any additional requirements more stringent than those specified in the statute and in the proposed regulations; nor can a State exercise discretion over which SGOs are included or excluded from the SGO list. The proposed regulations also prevent States from placing restrictions on the definition of qualified elementary or secondary school expenses.

A. Baseline

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

B. Affected Entities and Taxpayers

The proposed regulations would affect taxpayers who make qualified contributions to SGOs and seek to claim the section 25F credit and students who receive scholarships funded with such contributions. They would also affect the SGOs that solicit qualified contributions and award scholarships from these contributions, as well as the States that may choose to participate in the section 25F credit and, in doing so, assess the eligibility of SGOs and authorize SGOs to facilitate such scholarships.

As of August 2026, 30 States have elected to participate in the section 25F credit. The Treasury Department and the IRS estimate that 600 to 700 SGOs ^[4] will operate in these States by 2030. The Treasury Department and the IRS also ( printed page 62838) estimate that more than 11 million taxpayers will make qualified contributions totaling $26 billion to these SGOs annually.^[5] This is expected to allow the SGOs operating in these States to fund 2 million annual ($12,000) ^[6] full-time scholarships, or 5 million part-time ($4,500) scholarships, per year by 2030.

C. Economic Effects of the Proposed Regulations

In general, the proposed regulations would provide clarity to operationalize the section 25F credit. This clarity is expected to benefit the up to 2 million students who are expected to receive a scholarship annually. Research shows that educational choice can lead to increases in college enrollment and test scores, particularly for students from economically disadvantaged backgrounds.^[7] The students who benefit from the proposed regulations are therefore expected to enjoy an increased probability of completing secondary school and attending college. Because the financial return from each additional year of schooling is approximately 10%,^[8] the students who benefit from the proposed regulations are expected to experience a significant increase in lifetime earnings.

The following sections describe in detail the potential economic impacts of certain specific elements of the proposed regulations.

1. Calculation of Tax Credit

Under section 25F(b), the amount of the credit allowed for a taxpayer's qualified contributions is reduced by any State tax credit for such contributions and is limited to a maximum of $1,700. As noted in part II.F. of the Explanation of Provisions, the Treasury Department and the IRS interpret section 25F(b) as limiting the credit to $1,700 after applying the State credit reduction, notwithstanding that the $1,700 limitation in section 25F(b)(1) appears before the State credit reduction in section 25F(b)(2). This interpretation benefits taxpayers by maximizing their ability to claim the section 25F credit if they claim state credits for qualified contributions.

Section 25F(e) states that any qualified contribution for which a section 25F credit is allowed is not to be taken into account as a charitable contribution for purposes of section 170. Section 25F(f) further specifies that the section 25F credit may be carried forward for up to 5 years if the amount of the credit allowable exceeds the taxpayer's tax liability. The proposed regulations provide a stacking order to operationalize these limitations while maximizing the economic benefits for taxpayers relative to an alternative.

Proposed § 1.25F-2(c) provides a clear and taxpayer-favorable methodology consistent with the statutory limitations for calculating the amount of the section 25F credit, beginning with the aggregate amount of qualified contributions. Under the proposed rule, taxpayers must first determine the aggregate amount of qualified contributions for the tax year and then determine which State credits were claimed on the taxpayer's State tax return or otherwise allowed with respect to those qualified contributions. The amount allowable as a credit under section 25F(a) is then the lesser of the aggregate qualified contributions made during the tax year as reduced by any State tax credits allowed for such qualified contributions and $1,700.^[9] The proposed rule clarifies that, if a State credit is allowed with respect to an individual's contributions of cash to an SGO that includes both a qualified contribution and an amount that is not a qualified contribution, then the State credit will be treated as first being allowed with respect to the amount of the donor's contribution that is not a qualified contribution and only thereafter treated as being allowed with respect to the donor's qualified contributions to an SGO.

This proposed rule benefits the taxpayer by adopting an ordering rule that preserves the maximum credit available under the statute. To illustrate this benefit, consider an example taxpayer who lives in a State that allows a 100% tax credit of up to $2,000 for contributions to SGOs. Suppose this taxpayer makes a cash contribution of $5,000 to an SGO and designates $1,700 of this contribution as a section 25F qualified contribution. For simplicity, further suppose that this taxpayer does not itemize the taxpayer's Federal deductions.

The proposed regulation allows the taxpayer to count the $3,300 that is not designated as a “qualified contribution” toward the State tax credit (if otherwise eligible). In this example, the taxpayer could then receive $2,000 in State tax credits and the remaining $1,700 of the qualified contribution would qualify for the section 25F credit, without violating the section 25F(e) denial of double benefit requirement. Under the proposed regulations, this contribution would reduce the taxpayer's Federal tax liability by $1,700, and reduce the State tax liability by $2,000, for a total tax benefit of $3,700.

An alternative interpretation of the statute could have instructed the taxpayer to use State credits to reduce the amount of qualified contributions before the amount of non-qualified contributions. Under this alternative, the taxpayer would have been required to reduce their $1,700 qualified contribution to zero, because the taxpayer claimed $2,000 as a credit against State tax liability. Under this alternative, the taxpayer's $5,000 contribution would not reduce the taxpayer's Federal tax liability, but would reduce the State tax liability by $2,000, for a total tax benefit of $2,000.

By adopting this interpretation of the statute, and providing a corresponding ordering rule, the proposed regulations provide the example taxpayer with a net benefit of $1,700 relative to the alternative interpretation referenced in the previous paragraph. Similar benefits would be conferred upon all taxpayers who avail themselves of both a State and a Federal credit for contributions to SGOs. The Treasury Department and the IRS estimate that approximately 46.5 million taxpayers ^[10] will be eligible to take both a State and a Federal tax credit for contributions to SGOs. At a take-up ( printed page 62839) rate of 10%, this proposed rule is expected to provide a net benefit of at most $1,700 per year to 3.1 million taxpayers, and at most $3,400 per year to an additional 1.55 million married taxpayers.

In addition to the financial benefits that the proposed rule would confer on the taxpayers who claim both Federal and State tax credits for contributions to SGOs, the proposed regulations will benefit all taxpayers by providing clarity regarding the calculation of the credit amount each taxpayer may claim under section 25F. These clarifications will help to preserve horizontal equity between taxpayers. In the absence of the proposed regulations, taxpayers may encounter difficulty in ascertaining which portions of their contribution are eligible for a given tax credit or deduction. Without further guidance, taxpayers in similar tax situations, who make similar gifts to SGOs, may come to different conclusions about how to maximize the economic benefits from their charitable contributions.

2. Definition of Terms Needed To Determine Student Eligibility for Scholarships

The proposed regulations define both income and a family-size adjustment for income. The income definition expands the number of students who would be eligible for a scholarship from an SGO that receives qualified contributions and minimizes compliance burdens relative to alternatives.

Section 25F(c)(2) defines an eligible student as an individual who is a member of a household with a calendar-year income not exceeding 300 percent of the area median gross income, and who is eligible to enroll in a public elementary or secondary school.

Section 25F(c)(2)(A) specifies an income limit for potential scholarship recipients. This income limit is set at “300 percent of the area median gross income (as such term is used in section 42).” Section 42(g)(4) provides that “paragraph (2) (other than subparagraph (A) thereof) . . . of section 142(d) . . . shall apply for purposes of determining whether any project is a qualified low-income housing project and whether any unit is a low-income unit.” Section 142(d)(2)(B)(i) provides a definition of area median gross income as follows:

“The income of individuals and area median gross income shall be determined by the Secretary in a manner consistent with determinations of lower income families and area median gross income under section 8 of the United States Housing Act of 1937 (or, if such program is terminated, under such program as in effect immediately before such termination). Determinations under the preceding sentence shall include adjustments for family size.”

i. Defining a Family Size Adjustment

The proposed regulations use family size adjustments as defined by the Department of Housing and Urban Development (HUD) to administer lower income housing assistance under section 8 of the United States Housing Act of 1937 (Pub. L. 75-896) (Section 8 housing); see Table 1 below. Section 25F(c)(2)(A) specifies the income limit used to determine eligibility as “300 percent of the area median gross income (as such term is used in section 42).” To ensure consistency with the income limits used in section 42, the income limit must be calculated as the product of 300 percent of the area median gross income and the HUD family-size multiplier. For example, if a household of three lived in a location where the area median gross income was $100,000, a child in this household could be eligible to receive a scholarship funded by section 25F if the household's income was less than, or equal to, $270,000 (3 * $100,000 * 0.90). For a household of four living in the same area, this income limit would be $300,000 (3 * $100,000 * 1.0).

Alternative family size adjustments are widely used in a similar fashion to achieve horizontal equity. Other alternatives were not considered for purposes of section 25F, because the statute references the HUD definition of area median gross income, which uses the HUD family size multiplier. The HUD multiplier and potential alternatives all balance adjusting for the higher costs associated with larger family units with the higher returns to scale available to larger family units.

ii. Defining Family Size

The proposed regulations define family size as the number of persons who reside in the same household as the eligible student, including the eligible student. If the eligible student is part of multiple households over the course of the year, the relevant household is the one in which the student resided for the majority of the year. If the student splits time equally among multiple households, the proposed regulation states that the relevant household is the one with the highest household income. This definition is chosen for its consistency with other commonly used definitions of family size. Relative to the alternative of not defining family size, its simplicity is expected to increase administrability and thus alleviate some of the burdens on SGOs and families as they determine which students are eligible to receive a scholarship funded by the section 25F credit.

iii. Defining Household Income

Having defined the income limits as a function of area median gross income and family size, the proposed regulations also provide guidelines for determining whether a student's household income exceeds these limits. As the income limits used to determine eligibility for a section 25F scholarship are closely related to those used by HUD in administration of section 8 housing and section 42 relating to the low-income housing credit, a natural candidate for the definition of household income under section 25F would also follow the definition used by HUD for those purposes. The proposed regulations would adopt this definition of income with one modification: household income includes only cash sources of income, and excludes non-cash sources of income, such as imputed income on net assets. When a family holds net assets of $50,000 or more, and the actual returns of this asset cannot be calculated, the HUD definition of annual income imputes returns on this asset based on the current passbook savings rate.^[11] This ( printed page 62840) condition will often prove irrelevant for families who benefit from section 8 housing vouchers or section 42 rent restrictions: the most recent available data indicates that the median renter has a net worth of only $10,400, far below the threshold for imputing returns on net assets. By contrast, the median homeowner has a net worth of $396,000.^[12] If the section 25F definition of household income were to conform exactly to the definition used by HUD to provide support to renter households, then many students who reside in owner-occupied households would be rendered ineligible to receive section 25F scholarships due to imputed income on family assets.

By using a definition of income that focuses exclusively on cash income, as opposed to the HUD definition of income, the proposed regulations greatly expand the universe of children who would be eligible to receive a scholarship funded through section 25F. The Treasury Department and the IRS estimate that, under the strict HUD definition, 64 percent of elementary and secondary school age children would be expected to be eligible to receive a scholarship, compared to the 95 percent of children expected to be eligible as a result of the exclusion of non-cash income provided in the proposed regulations.

These proposed regulations also benefit taxpayers and SGOs by reducing the burden placed on SGOs to verify eligible students' incomes: they are able to count only cash sources of income, without being required to augment this value with an imputation of the non-cash income received by a student's family or household.

The Treasury Department and the IRS also considered defining household income as adjusted gross income (AGI) as calculated on Form 1040. This alternative was not chosen for several reasons. First, AGI must be calculated based on the income and marital status of a tax unit. The statute contains references to households and families, rather than tax units. In general, a tax unit may consist of a smaller set of individuals than a household or a family.^[13] Second, between 3 and 12 percent of U.S. children are not claimed on Federal tax returns. These unclaimed children are disproportionately concentrated in lower-income households ^[14] and therefore would likely be eligible to receive a scholarship financed by section 25F contributions if they had been claimed on a tax return. If the proposed regulations were to adopt AGI as the definition of income under section 25F, the proposed regulations would introduce inequities between children who are claimed as dependents on a Federal tax return, and those who are not because of potential claimants having insufficient taxable income to require the filing of a return. The Treasury Department and the IRS estimate that using AGI as the definition of household income would have reduced the number of children eligible to receive scholarships by 17%.^[15]

3. Safe Harbor Rules for Student Eligibility

Section 25F(d)(1)(F)(i) specifies that SGOs must verify students' annual household income and family size to ensure that these students meet these eligibility requirements. The proposed regulations further reduce the administrative burden placed on SGOs associated with income verification by specifying certain safe harbors under which a student may be considered eligible. The proposed regulations include three safe harbors: one for students who live with an individual who receives certain specified types of needs-based social assistance; one for students generally who attend school in certain low-income or high-poverty census tracts and receive a scholarship for academic tutoring or special needs services; and one for students in the foster care system.

First, the proposed regulations specify that, if an individual in a student's household currently benefits from specified needs-based benefit programs, then that student may be considered categorically eligible to receive a section 25F scholarship. The Treasury Department and the IRS estimate that 36% of all students are covered by this safe harbor rule. The Treasury Department and the IRS estimate that the creation of this safe harbor will not change the number of students who are eligible to receive scholarships under section 25F.^[16] Rather, the primary economic impact of this safe harbor is to allow SGOs to reduce the burden of satisfying the income verification requirement. With fewer hours and dollars devoted to the income verification process, this safe harbor would benefit the taxpayer by allowing a greater share of dollars received by SGOs to be paid out as scholarships. The Treasury Department and the IRS estimate that the cost savings to SGOs enabled by the proposed safe harbor will allow SGOs to fund nearly 45,000 scholarships (estimated using an average annual scholarship amount of $12,000).^[17]

( printed page 62841)

Second, the proposed regulations specify that, if an SGO provides scholarships to individual students at a school in a low-income area for individual academic tutoring or for special needs services of a special needs student, and the recipient students are selected by the school on the basis of the particular student's need, the SGO may consider those students as having satisfied the income eligibility requirement if either the school is located in, or at least 80% of students at the school reside in, a qualified census tract. A census tract is designated as “qualified” under section 42 if a sufficiently large number of resident households are low-income or if the poverty rate there is sufficiently high.^[18] The Treasury Department and the IRS do not have readily available parameters and models to quantify the number or location of schools that work with SGOs to fund tutoring or other educational services for their students. The Treasury Department and the IRS estimate that the creation of this safe harbor will modestly increase the number of students who are eligible to receive scholarships under section 25F, and that it will facilitate the awarding of scholarships to students whose family may be unlikely to provide sufficient information to allow the SGO to verify the students' household income. This safe harbor would confer eligibility on approximately 170,000 students who would otherwise not be considered eligible. This represents only 0.6% of the estimated number of eligible students, inclusive of this safe harbor.^[19] However, this safe harbor is expected to reduce the barriers to take-up faced by students who live in qualified census tracts, or who attend school in a qualified census tract, and thereby increase these students' access to educational resources provided through section 25F scholarships.^[20]

Finally, the proposed regulations specify that a foster child is categorically eligible to receive a scholarship under section 25F. Nearly 350,000 school-age children were in the foster care system as of December 2024.^[21] The median amount of time a foster child remains in foster care is 15 months,^[22] during which time as many as one-third of foster children will experience at least three separate placements.^[23] If a child is a transitory resident of several different households over the course of the year, most of which do not reflect the true set of resources available to that child,^[24] then an SGO may be uncertain how to verify this child's household income or receive cooperation from all available households. Nevertheless, children in foster care disproportionately come from families with incomes well below 300% of area median gross income, which would make these children eligible to receive a section 25F scholarship.^[25] This proposed rule would reduce the administrative burden associated with verifying household income for foster children by reducing any uncertainty the SGO may face in the income verification process. This would further benefit the taxpayer, eligible students, and SGOs by allowing the SGO to reduce expenses on income verification; the Treasury Department and the IRS estimate that the associated savings total nearly $20 million per year and could be redirected toward scholarships for at least an additional 1,500 children.^[26]

As a result of the choice to define household income as cash income, and the inclusion of these three safe harbors, the Treasury Department and the IRS estimate that 96% of children located in States that have elected to designate SGOs under section 25F will be eligible to receive section 25F scholarship funds. ( printed page 62842)

4. Safe Harbor Rules for Income and Spending Requirements Faced by SGOs

Under section 25F(d)(1)(B), SGOs are required to spend no less than 90% of the income of the organization on scholarships for eligible students. This would be a binding constraint for most SGOs. The proposed regulations would clarify the definition of “income of the organization” and provide several safe harbor rules which would allow for greater participation by SGOs and more scholarships for eligible students. In particular, the proposed regulations would allow the income spending requirement to be satisfied at the level of the section 25F segregated account provided that at least 85 percent of the SGO's activities are scholarship granting activities. This proposed regulation would allow SGOs to spend more than 10% of their income on overhead or other expenses if such income is not part of the section 25F segregated account.

The Treasury Department and the IRS estimate that, among the SGOs currently authorized to administer State-level scholarship programs, program-related expenditures represented 78% of total revenues, on average, in fiscal year 2024. Analysis of Form 990-series data reveals that 72% of existing SGOs spend less than 90% of revenue on program-related expenditures. These program-related expenditures include, but are not limited to, scholarship disbursements. Therefore, nearly three-quarters of SGOs—approximately 450 SGOs in participating States—are expected to benefit from this provision.

The Treasury Department and the IRS expect that the downstream effect of this proposed rule will be a function of its impact on the aggregate flow of donations to SGOs. The proposed rule would have two types of economic effects: the first would increase the number of SGOs, while the second would reduce the contributions made to each individual SGO.

First, the proposed regulation is expected to increase the number of SGOs able to operate under section 25F. In the absence of the regulation, nearly 75% of SGOs would need to make substantial changes to their operations, and many might choose not to be certified as an SGO at all.^[27] The Treasury Department and the IRS do not have readily available parameters and models to assess precisely the number of public charities that would decline to operate as SGOs in the absence of the regulation; however, a conservative estimate suggests that as many as 450 public charities would find the 90% of income rule too burdensome and difficult to satisfy to justify seeking SGO status.^[28] As charitable donations tend to rise with the number of public charities,^[29] this first effect of the regulation should tend to increase the volume of scholarship dollars available to students. Given the conservative estimate of the effect of this regulation on the number of public charities applying to operate as SGOs, the Treasury Department and the IRS estimate that, in the absence of this proposed regulation, SGOs would receive 18% fewer qualified contributions. The proposed regulation is estimated to benefit SGOs and eligible students by increasing qualified contributions by $4 billion per year.^[30]

A second effect of the proposed regulation follows from donors' documented sensitivity to overhead costs.^[31] For the minority of organizations expected to operate as SGOs in the absence of the proposed regulation, the Treasury Department and the IRS estimate that this proposed regulation will increase the overhead ratio by 125%.^[32] This should translate ( printed page 62843) into a 29% reduction in flows of donations to the estimated 28% of public charities that would operate as SGOs regardless of the proposed regulation.^[33] However, the Treasury Department and the IRS anticipate that the reduction in giving to this subset of SGOs would be a reallocation of qualified contributions across the full set of SGOs.

On net, the proposed regulations would therefore benefit students by increasing the flow of qualified contributions available to fund scholarships by up to an estimated $3 billion per year, thus expanding the set of scholarship recipients by approximately 250,000 each year.^[34] The proposed regulations would also benefit the donor by expanding the number and variety of organizations available to them as appropriate recipients of their qualified contributions.

5. Rules Concerning State Elections

Sections 25F(c) and 25F(g) describe the role that States play in facilitating the provision of scholarship funds through SGOs. In particular, States may elect to participate in section 25F and thus become a “covered State.” Covered States must submit a list of SGOs to the IRS. This list must consist of all SGOs in that State that meet the requirements outlined in section 25F(c)(5). The statute defines an SGO as a public charity which also must satisfy additional requirements.

The proposed regulations would further detail the responsibilities incurred by covered States with respect to the State SGO list. They require that the State certify that each SGO meets the requirements outlined in section 25F(c)(5) and specify that this certification process includes State review of the SGO's financial information and program activities. The proposed regulations would require State officials to have policies enabling them to detect and respond to misuse of scholarship funds, including duplication of scholarship awards. If this process were to reveal that an SGO currently included on the State SGO list has failed to meet the requirements set forth in section 25F(c)(5), the proposed regulations would allow the State to remove an organization from its SGO list for the current year. Contributions made after the date of removal from the State SGO list would not be treated as qualified contributions under section 25F, except to the extent a taxpayer may rely on the IRS SGO list. Alternatives to these proposed rules would be to disallow contributions made at any time during the year of removal (thus depriving taxpayers otherwise entitled to the credit for a qualified contribution) or allowing contributions made during the entire year, even after the SGO became disqualified.

These proposed regulations would benefit the taxpayer by assigning responsibility to the States for ensuring that SGOs comply with the requirements of section 25F. The State is responsible for the State SGO list and for ensuring that the SGOs on its list comply with the requirements of section 25F, including that the SGO be located in the State. States regulate entities that are located in their State and, as the statute requires that States administer the State SGO lists, States are best positioned to determine that the SGO is located in the State, and scholarship funds must be disbursed to students located in the State. By explicitly adding enforcement of section 25F(c)(5) requirements to the set of responsibilities held by States, the proposed regulations ensure that SGO compliance will be monitored by entities that already have the infrastructure in place to ensure charitable organizations comply with applicable State charitable law. This represents an efficiency gain to the taxpayer.^[35] As the proposed regulations direct State officials to examine SGO financial records for the SGO's compliance with the section 25F requirements and for SGO-specific forms of fraud, these proposed rules are expected to benefit the taxpayer by reducing opportunities for waste, fraud, and abuse in the provision of section 25F scholarships. The Treasury Department and the IRS do not have readily available parameters or models to estimate the extent of these benefits.

As SGOs are section 501(c)(3) public charities, many SGOs will be required to file a Form 990-series return. The proposed regulations would add a new form on which an SGO must report information on its activities including the number of scholarship applicants, the number of scholarship recipients, the number of schools at which the SGO's scholarship recipients were enrolled, the dollar amount of the scholarships, and the categories of qualified elementary and secondary expenses for which scholarship funds were used. These metrics, which are detailed in § 1.25F-4(d)(3) of the proposed regulations, can be used by States to verify that a particular SGO meets the requirements of section 25F(c)(5) and (d)(1). The Treasury Department and the IRS estimate the reporting requirements will cost nearly $45,000, in the aggregate, each year.^[36]

This proposed regulation would benefit the taxpayer by reducing uncertainty about whether the taxpayer's contributions qualify for the section 25F credit. The proposed regulations state that, in general, a taxpayer may rely on the fact that an organization is listed on the IRS SGO list at the time a contribution is made to establish that the taxpayer's contribution is being made to an SGO.^[37] By empowering States with the ability to remove noncompliant SGOs in the middle of the year and providing guidelines for whether contributions made to SGOs which fall into non-compliance qualify for the section 25F credit, the proposed regulations reduce one major source of uncertainty taxpayers might have faced as they select which SGOs to support.

In the absence of the proposed regulations on SGO accountability, the resulting uncertainty would be expected to reduce the flow of contributions to SGOs.^[38] The Treasury Department and the IRS do not have a precise estimate of the extent of the counterfactual reduction in qualified contributions to SGOs.

( printed page 62844)

6. Rules Concerning SGO Certification

Section 25F(g)(1)(A) requires that a State's SGO list must include all SGOs located in the State that meet the requirements described in section 25F(c)(5). The proposed regulations guarantee the freedom of individual SGOs to offer funding for any type of qualified elementary or secondary school expense. That is, an SGO may choose to specialize in providing one type of qualified expense— e.g., academic tutoring for qualified students in public schools—but the State cannot condition inclusion on the SGO list on the State's approval of such a choice. In the absence of this proposed regulation, the scope of the benefits a qualified student could derive from scholarships awarded from contributions eligible for the section 25F credit would depend on the student's State of residence. This follows from the requirement that SGOs must provide scholarships only to eligible students within the State where the SGO is located. The proposed regulation therefore benefits students by ensuring that States cannot limit the types of benefits that can be made available to eligible students. In particular, the inclusivity requirement is anticipated to broaden school choice, enabling students to attend schools that best match their needs, thus maximizing the lifetime benefits that will accrue to the students as a consequence of receiving a section 25F scholarship.^[39] The Treasury Department and the IRS do not have the models or data to estimate the effects of this inclusivity requirement but expect that it will have broad benefits for many students, taxpayers, and SGOs.

The proposed regulations also provide States with a procedure for when an organization's application for recognition of tax-exempt status is pending with the IRS, as well as a roadmap for evaluating whether an SGO meets the criteria for inclusion on the State SGO list when the organization has not yet been required to provide information and certifications to the IRS. Furthermore, the proposed regulations provide a transition rule, specifying a deadline for States to submit their SGO lists for calendar year 2027, the first year of the section 25F credit. These rules benefit the taxpayer by removing barriers to entry for SGOs.

7. Defining Location of an SGO Within the State

Section 25F(c)(5)(D) requires that, for a tax-exempt charitable organization to be an SGO for purposes of section 25F, the organization must be included on the list of SGOs submitted to the IRS by a covered State for the applicable year. Section 25F(g)(1) requires that this SGO list be limited to organizations that are “located in the State.” However, the statute does not offer any definitions or guidelines that would help States or SGOs determine whether a particular organization is located in the State. The proposed regulations provide that an organization is located in the State if it is authorized to do business in the State and complies with the laws and requirements for charitable organizations in the State. The proposed regulations also provide a framework for SGOs to operate in multiple States at once. These SGOs are referred to as “multistate SGOs” and must maintain a separate section 25F segregated account for each State that includes the organization on its State SGO list.

The proposed regulations would enable SGOs that currently operate in multiple States to facilitate the provision of scholarships using qualified contributions without establishing a separate legal structure for each State in which they operate. By allowing an organization to operate as a multistate SGO, the proposed regulations effectively increase the size of the market that each SGO is able to serve. Instead of limiting each organization to competing to serve the aggregate demand for scholarship funds in a single State, all organizations are free to compete to serve the aggregate demand for scholarship funds in all States that have elected to participate in the section 25F credit. Because charitable organizations may respond to private incentives when deciding whether to enter a market, and such organizations have been shown to value the ability to take credit for providing social benefits, the absence of a multistate rule could produce an inefficiently large number of providers in each State, and all providers will end up inefficiently small.^[40] By expanding each SGO's market size, the proposed regulations would induce a less-than-proportional increase in the number of SGOs. This will benefit taxpayer contributors by reducing inefficient over-entry among SGOs. The Treasury Department and the IRS do not have readily available models or parameters to assess the extent of the increase, generated by the proposed regulation, in market efficiency among SGOs; however, the increase in efficiency is expected to be significant. As of 2026, 11 SGOs operate in multiple States.

8. Defining a Student Solely Within the State

Section 25F(c)(3) defines a qualified contribution as a contribution to an SGO using that contribution to fund scholarships for eligible students solely within the State. The statute does not provide a definition of “solely within the State.” The proposed regulations would define this term, benefiting eligible students and the SGO by providing clarity with regard to its meaning. Section 1.25F-3(c)(7) of the proposed regulations would clarify that “solely within the State” refers to the residency of the student, rather than the location where the student attends school or otherwise procures the items or services paid for with scholarship funds. A student's residency must be determined in accordance with State law. If a student is a resident of a State that is not a covered State but attends school in a covered State, these proposed regulations would prevent that student from receiving a section 25F scholarship from an SGO located in either State.^[41] The Treasury Department and the IRS are not aware of any data that would identify the number of students who have this fact pattern. However, it is expected that the choice to use residency, rather than school attendance or location of item or service provision, to determine location within the State will result in a reallocation of section 25F scholarships among eligible students, leaving the overall number of scholarship recipients unchanged. This aspect of the proposed regulations will therefore have a minimal effect on elementary and secondary student outcomes, or economic growth in general.

The proposed regulation provides two exceptions to this residency rule. First, students who are dependents of a member of the Armed Forces may be treated for this purpose as a resident of both the State in which the student is domiciled and the location where the member of the Armed Forces resides. As of 2024, military families included approximately 821,500 school-age children, roughly 480,000 of whom are ( printed page 62845) in families with at least one active-duty service member.^[42] In the same year, 7% of active-duty spouses reported living apart from their Armed Forces member spouse for reasons not related to deployment.^[43] The Treasury Department and the IRS are not aware of any data that would help to determine how many of these families have at least one member located in a covered State. The Treasury Department and the IRS estimate that, using the above figures, this proposed exception to the residency rule will benefit as many as 33,600 students per year.^[44]

The second exception to this proposed residency rule concerns students who are dependents of an individual residing on Indian Lands. This proposed exception to the residency rule would treat such students as residents of both the State of the student's residence and the State in which the student attends school. The Treasury Department and the IRS estimate that this proposed exception to the residency rule will benefit as many as 6,200 students per year.^[45]

9. Disqualified Person Rules

Section 25F(d)(2) includes a prohibition on self-dealing by SGOs and requires that a “disqualified person shall be determined pursuant to rules similar to the rules of section 4946.” The proposed regulations articulate the application of “rules similar to the rules of section 4946.”

As in section 4946, the proposed regulations state that substantial contributors and members of their families are considered disqualified persons, and that a substantial contributor is any person who contributed an aggregate amount of more than $5,000 to the SGO during the taxable year, if such amount is more than 2 percent of the total contributions received by the SGO during the taxable year. In addition, the proposed regulations provide that any person who contributed an aggregate amount of more than $5,000 to a section 25F segregated account during the taxable year, if such amount is more than 2 percent of the total contributions received by the section 25F segregated account during the taxable year, is also a substantial contributor. An individual is treated as making all contributions made by his or her spouse, and substantial contributor status is determined as of the close of each taxable year of the SGO.

To prevent inadvertent violations in which an SGO awards a scholarship to a student who later becomes a disqualified person, the proposed regulations provide that a scholarship awarded by an SGO to a substantial contributor or a substantial contributor's family member will not be treated as an award to a disqualified person if, at the time the scholarship was awarded, the recipient would not have been a disqualified person had the substantial contributor determination been made as of the date of the award, based on contributions received by the SGO through that date; and the SGO did not know and did not reasonably expect that the recipient would be a disqualified person, based on the substantial contributor determination made as of the close of the taxable year.

Consistent with section 4946, the proposed regulations state that officers, directors, trustees, and individuals with similar powers and responsibilities are disqualified persons, along with members of their families.

The proposed regulations also provide that any individual participating in, including as a member of a committee, the selection of scholarship recipients or the determination of scholarship awards, and members of their families, are considered disqualified persons.

These proposed regulations would benefit SGOs by providing clarity regarding the rules prohibiting self-dealing. The Treasury Department and the IRS estimate that these proposed rules will affect between 70,000 and 80,000 disqualified persons per year.^[46] These proposed rules are anticipated to have minimal direct economic effects but will help to preserve the integrity of the section 25F scholarships and ensure that scholarships are granted and funds are spent in a manner consistent with the statute.

10. Audit Requirements

Section 25F(d) sets forth a set of operational requirements for SGOs. Section 1.25F-4(e) of the proposed regulations would specify that each SGO must undergo an annual third-party financial and programmatic audit. The results of this audit would then be furnished to the State or States in which the SGO is located. This requirement will benefit States by improving the consistency and quality of the information available to them as they consider whether the organization meets the requirements for SGOs outlined in section 25F(d). For SGOs whose total receipts exceed $500,000, the audits must be conducted by an external, independent professional or accredited body; for SGOs whose total receipts do not exceed $500,000, the audit may be conducted by a committee of independent persons unrelated to the SGO's management.

The Treasury Department and the IRS estimate that audit costs faced by an SGO may range between $10,000 and $30,000 annually. Approximately 53% of SGOs are estimated to exceed the $500,000 receipts threshold; these organizations will consequently pay higher audit costs of approximately $30,000 per year. The remaining 47% of SGOs are estimated to fall below the receipts threshold and therefore pay audit costs closer to $10,000 per year.^[47] The total amount of SGO receipts used to satisfy these audit costs is therefore expected to fall between $12 million and $15 million per year. Assuming an average scholarship amount of $12,000 per year, these funds could alternatively have financed scholarships for between 1,000 and 1,250 eligible students per year, assuming that all SGOs comply with their spending requirements in the absence of the audit requirement. The Treasury Department and the IRS expect ( printed page 62846) that the audit requirement will protect the integrity of section 25F against waste, fraud, abuse, and improper use of funds.

As audit costs are likely to be higher for SGOs with total receipts over $500,000, the Treasury Department and the IRS anticipate that some SGOs with receipts near this threshold may refer potential donors to another SGO for a given year, so that the SGO can avoid incurring the higher audit cost.^[48] The Treasury Department and the IRS estimate that the amount of contributions redirected to another SGO to avoid incurring excess audit costs would range from approximately $1.9 million to $2.2 million per year. However, the Treasury Department and the IRS do not anticipate that these donations would be lost; they are instead expected to accrue to organizations whose receipts far exceed, or fall far short of, the audit threshold. This economic effect of the tiered structure of the audit requirement may affect the distribution of eligible students who ultimately receive scholarship funds under section 25F, but is not anticipated to affect the number of eligible students receiving scholarships or the amount of the scholarship.

11. Pass-Through Entities Rule

Section 25F specifies that individual taxpayers who are citizens or residents of the United States may claim credits for qualified contributions to SGOs. The proposed regulations address the question of whether an individual can claim a section 25F credit for qualified contributions made by a pass-through entity in which the individual has an interest. The Treasury Department and the IRS interpret the statute as applying to individual taxpayers. Consequently, the proposed regulations provide that section 25F credits are allowed for qualified contributions made directly by individual taxpayers but are not allowed for qualified contributions made indirectly through pass-through entities. This proposed rule is expected to reduce aggregate contributions made to SGOs, relative to a no-action baseline. The Treasury Department and the IRS do not have readily available models or parameters to assess precisely the amount of foregone contributions associated with this proposed rule. However, because pass-through entities have the alternative of distributing cash to their partners or shareholders, who in turn could contribute directly to SGOs, these effects may be small.

12. Reporting and Substantiation of Qualified Contributions

Section 25F(h) states that “[t]he Secretary shall issue regulations or guidance . . . with respect to recordkeeping or information reporting for purposes of administering the requirements of this section.” To facilitate administration of the section 25F credit, the proposed regulations would require SGOs to issue donors a timely written acknowledgement, no later than January 31 of the calendar year following the calendar year in which a donor made a qualified contribution to the organization. The acknowledgement would need to contain information including the total amount of contributions made by the donor to the organization during the calendar year that the donor designated as qualified contributions and the unique donor number the organization created for the donor. The proposed rules would further require SGOs to report to the IRS through the SGO portal information with respect to each unique donor number assigned by the organization and information about the donor to whom that number was issued, including the donor's name, address, and the amount of the qualified contributions provided by the donor during the calendar year. A taxpayer who claims the section 25F credit on the taxpayer's Federal income tax return would need to substantiate the credit on Form 8525, Federal Scholarship Tax Credit (or successor form), by reporting such information as may be required in the form instructions, including, for each SGO to which the taxpayer has made a qualified contribution during the taxable year, the unique donor number that the SGO was required to provide as part of a timely written acknowledgement. This reporting by SGOs and taxpayers facilitates the administration of section 25F credits by assisting the IRS in identifying potentially improper credit claims. The use of the donor number avoids the need to have SGOs collect and report each donor's taxpayer identification number, such as a social security number.

As SGOs are section 501(c)(3) charitable organizations, these organizations are already required to provide a contemporaneous written acknowledgment for contributions of $250 or more and may be required to report information concerning certain substantial contributors to the IRS.^[49] The proposed reporting requirement represents a relatively minor extension of these organizations' existing reporting responsibilities. As such, the proposed rule is expected to impose only minimal additional costs on SGOs.

This proposed reporting requirement will benefit the taxpayer by reducing a major source of waste, fraud, and abuse in credit claiming, while avoiding any unnecessary exposure of taxpayers' Federal tax information that could arise if the SGO were to require some other form of donor identification, such as a taxpayer identification number. The Treasury Department and the IRS do not have readily available models or parameters to precisely assess the extent of the waste, fraud, and abuse that would be prevented by this proposed regulation. However, the Treasury Department and the IRS anticipate that the benefits to the integrity of section 25F will outweigh the minimal additional costs imposed by the reporting requirements.

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 that collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number. Books or records relating to a collection of information must be retained if their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by section 6103.

The collections of information in these proposed regulations contain reporting, third-party disclosure, and recordkeeping requirements for States, SGOs, taxpayers, and students. Therefore, the likely respondents are State governments, tax-exempt organizations, and individuals. The collection requirements are necessary to administer the section 25F credit for contributions to SGOs. The collections of information generally would be used by the States to be able to identify and certify SGOs in the State; by SGOs to provide information to donors to enable them to qualify for the credit; by SGOs to report on their compliance with the rules of the statute to the IRS; by donors to allow them to report and take the credit on their Federal income tax return; and by the IRS to administer the credit to ensure that only qualified contributions give rise to the tax credit.

A. Collection Requirements Applicable to States

The collections of information applicable to States can be grouped into three categories: (1) registering through the IRS State section 25F portal; (2) electing to participate under section 25F, and (3) submitting the State SGO list and required certifications about the SGOs and the State's policies for certifying SGOs.

1. State Registration

Proposed § 1.25F-5 would provide rules under section 25F(g) for a State's election to participate under section 25F and the State's identification and certification of organizations located in the State that are SGOs. Proposed § 1.25F-5(b) describes the IRS State section 25F portal used for the submission of State elections and State SGO lists.

Proposed § 1.25F-5(b)(1) would require a State that chooses to make an election to participate under section 25F to obtain a special-purpose EIN under the procedures in proposed § 1.25F-5(b)(3) and complete a registration process under the procedures in proposed § 1.25F-5(b)(4) on www.irs.gov to electronically transmit information through the IRS State section 25F portal.

A State will use the IRS State section 25F portal to submit the State election and State SGO list and required certifications and information. To complete its registration, proposed § 1.25F-5(b)(4) would require a State to provide the special-purpose EIN, contact information for the State, and any other information the IRS deems necessary for purposes of administering the requirements of section 25F. The burden associated with State registration and obtaining a special-purpose EIN was approved by the OMB under 1545-2335 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

2. State Election To Participate

Proposed § 1.25F-5(c) would provide rules for State elections. As part of providing an election and the State SGO list, the State would need to provide certain certifications and other required information as described in proposed ( printed page 62848) § 1.25F-5(c)(5), which includes the information and certifications required by proposed § 1.25F-5(d)(2) through (5) for each organization on the State SGO list and a certification that the State SGO list includes every organization located in the State that is described in section 25F(c)(5)(A) and (B), is seeking inclusion on the State SGO list and is operating in a manner that satisfies the operational requirements in section 25F(d) and proposed § 1.25F-3(c) and the applicable State requirements described in proposed § 1.25F-5(e)(1). The State election and its associated burden were approved by the OMB under 1545-2335 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

3. State Submission of State SGO List and Required Certification

The collection of information in proposed § 1.25F-5 includes recordkeeping requirements related to the section 25F credit. A State will use these records to submit its State SGO list and the required certifications and other information. These recordkeeping requirements are considered general tax records under § 1.6001-1(e). For PRA purposes, general tax records and their associated burdens are already approved by OMB under control number 1545-0047 for tax-exempt organizations and governmental entities.

Proposed § 1.25F-5(d)(1) would require a State to provide its State SGO list and include the information and certifications required under proposed § 1.25F-5(d)(2) through (5) as part of its State election. Proposed § 1.25F-5(d)(6) would require a State to provide a certification regarding its policies and procedures for determining whether an organization is an SGO. Proposed § 1.25F-5(d)(7)(iii)(B) would provide rules for a State's removal of an SGO from the State SGO list. Proposed § 1.25F-5(e) would provide general guidance regarding the policies and procedures States adopt for SGOs and Federal review of such policies and procedures. The submission of the State SGO list and required certification, and its associated burden, was approved by the OMB under 1545-2335 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

B. Collection Requirements Applicable to SGOs

The collections of information applicable to SGOs can be grouped into three categories: (1) registering through the IRS SGO portal; (2) providing the donor with a written acknowledgement of the qualified contribution(s) as well as reporting information related to those contributions to the IRS; and (3) recordkeeping and reporting information to the IRS on the SGO's compliance with the requirements of section 25F.

1. SGO Registration

SGOs will need to report information related to contributions and scholarships and information related to the SGO's compliance with the requirements of section 25F(c)(5) through the IRS SGO portal, described in proposed § 1.25F-1(a)(8), in accordance with the instructions provided therein. As such, SGOs will need to register through the IRS SGO portal and provide the information required to complete the registration process.

Proposed § 1.25F-4(b) would provide rules regarding the mandatory registration through the IRS SGO portal that an organization must complete. An organization would need to complete the registration process electronically through the IRS SGO portal and in accordance with the instructions provided therein, providing the information in proposed § 1.25F-4(b)(3). This includes the organization's general information, a point of contact, the organization's tax year, and any other information required in guidance. As part of the registration process, SGOs may authorize the IRS to disclose their information for inclusion on the IRS SGO list, as described in proposed § 1.25F-4(b)(1). The SGO registration, and its associated burden, was approved by the OMB under 1545-2335 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

2. Collections of Information by SGOs Related to Contributions and Scholarships

Proposed § 1.25F-4(c) would provide rules on the reporting, recordkeeping, and third-party disclosure requirements of qualified contributions received by SGOs.

The collections of information in proposed § 1.25F-4(c) include recordkeeping requirements related to the section 25F credit. An SGO will use these records to enable it to provide the donor with a timely written acknowledgement of a contribution and to report to the IRS the necessary information about qualified contributions that the SGO received. These recordkeeping requirements are considered general tax records under § 1.6001-1(e). For PRA purposes, general tax records and their associated burdens are already approved by OMB under control number 1545-0047 for tax-exempt organizations.

Proposed § 1.25F-4(c)(1)(i) would provide that an SGO must provide a timely written acknowledgement to each donor with respect to qualified contributions made by the donor to the SGO during the calendar year. The timely written acknowledgement would need to include the total amount of contributions made by the donor, the unique donor number the SGO created for the donor (pursuant to proposed § 1.25F-4(b)(4)), and a statement as to whether or not the SGO provided any goods or services in consideration, in whole or in part, for any qualified contributions made by the donor and if so, a description and good faith estimate of the value of any goods or services. The SGO can provide timely written acknowledgement in writing or in any other form acceptable to the donor, including by electronic delivery. The timely written acknowledgement must be provided no later than January 31 of the calendar year following the calendar year in which a donor made a qualified contribution to the SGO. The timely written acknowledgement, and its associated burden, was approved by the OMB under 1545-2335 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

Proposed § 1.25F-4(c)(2) would require an SGO to annually report to the IRS, no later than February 28 of the year following the year in which qualified contributions were made, information with respect to each unique donor number assigned by the SGO, including the donor's name and address, and the aggregate amount of qualified contributions made by the donor to the SGO during the calendar year. The SGO would need to report the information to the IRS through the IRS SGO portal in accordance with the instructions provided therein. This information is necessary to allow the IRS to validate donor information collected by SGOs against filed tax returns claiming the section 25F credit. Availability of this information through the portal may facilitate earlier identification and resolution of discrepancies between filed returns and SGO data, allowing for timelier resolution of any disparities and limiting duplication, fraud, or abuse in the operation of the credit. This annual reporting, and its associated burden, was approved by the OMB under 1545-2335 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10. ( printed page 62849)

3. Collections of Information Related to Compliance With the Requirements of Section 25F(c)(5)

SGOs would need to keep records related to their scholarship granting activities to be able to provide the annual certification and information required by proposed § 1.25F-4(d). This includes records to ensure that an SGO spends not less than 90 percent of the income of the organization on scholarships for eligible students solely within the State in accordance with proposed § 1.25F-3(c)(4) and records to allow an SGO to verify whether the amount that any person, who contributed an aggregate amount of more than $5,000 to the organization during the taxable year, contributed more than 2 percent of the total contributions received by the organization through the end of the taxable year. This recordkeeping is necessary to allow the SGO to determine whether the person is a substantial contributor to the SGO, making the person a disqualified person for purposes of section 25F(d)(2).

In addition, proposed § 1.25F-3(c)(5) would require an SGO to verify that scholarship funds are used exclusively for qualified elementary or secondary education expenses; proposed § 1.25F-3(c)(6) would require an SGO to verify the annual household income and family size of students who apply for scholarships using one or more of the methods described in proposed § 1.25F-3(c)(6) to ensure the scholarship applicants meet the definition of an eligible student; and proposed § 1.25F-3(c)(7) would require an SGO to ensure that qualified contributions are used to fund scholarships that are awarded to eligible students solely within the State on whose State SGO list the SGO appears.

The general recordkeeping requirements for SGOs necessitated by these proposed regulations are considered general tax records under § 1.6001-1(e). For PRA purposes, general tax records are already approved by OMB under 1545-0047 for tax-exempt organizations and governmental entities.

Proposed § 1.25F-4(d) would detail an SGO's annual reporting requirements. SGOs would need to annually provide a certification and certain information to the IRS. Proposed § 1.25F-4(d)(2) would provide rules relating to the annual certification. Proposed § 1.25F-4(d)(3) would provide rules relating to information that would need to be reported annually. Proposed § 1.25F-4(d)(4) would provide that an SGO would need to provide the certifications and information required by proposed § 1.25F-4(d)(2) and (3) on an attachment to the annual Form 990 for those SGOs required to file Form 990, Return of Organization Exempt from Income Tax. An SGO that is not required to file a Form 990 will be required to file this form separately with the IRS. SGOs will need to provide a copy of this form to each State on whose State SGO the SGO appears. This annual reporting, and its associated burden, was approved by the OMB under 1545-0047 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

Proposed § 1.25F-4(e) would provide a third-party reporting and disclosure requirement that each SGO must engage a qualified independent third party to conduct an annual financial and programmatic audit and must provide the results of this audit to each covered State on whose State SGO list the SGO appears. This third-party disclosure requirement, and its associated burden, was approved by the OMB under 1545-0047 under the PRA procedures in 5 CFR 1320.13 and will be renewed under the PRA procedures in 5 CFR 1320.10.

C. Individual Taxpayers' Collection Requirements

Proposed § 1.25F-2 would require the taxpayer to keep records of any information needed to calculate the amount of any section 25F credit from the taxpayer's qualified contributions (including any State credit the taxpayer will take on the taxpayer's State tax return with regard to the taxpayer's qualified contributions), as well as any limitations on the amount of the credit based on the taxpayer's tax liability to calculate the amount of credit able to be claimed and to determine any carryforward of unused credits. The recordkeeping requirements are considered general tax records under § 1.6001-1(e). A taxpayer would use these records to establish the taxpayer'seligibility for the section 25F credit and the amount of the credit claimed. For PRA purposes, general tax records are already approved by OMB under 1545-0074 for individuals.

Proposed § 1.25F-2(g) would require a taxpayer who claims the section 25F credit on the taxpayer's Federal income tax return to substantiate the credit on Form 8525 (or successor form) by reporting such information as may be required in the form instructions, including, for each SGO to which the taxpayer has made a qualified contribution during the taxable year, the unique donor number that the SGO was required to provide as part of a timely written acknowledgement in accordance with proposed § 1.25F-4(c).

A taxpayer that does not provide the required donor number(s) on the taxpayer's Form 8525, Federal Scholarship Tax Credit (or successor form), will be presumed not to have made a qualified contribution to that SGO. To rebut this presumption, the taxpayer will need to submit the timely written acknowledgement from the SGO that includes the unique donor number or otherwise provide evidence satisfactory to the Commissioner of the amount of the taxpayer's qualified contribution(s).

These collections will be made by individual taxpayers as part of filing a Form 1040, including completing new Form 8525, Federal Scholarship Tax Credit (or successor form), and attaching the form to the taxpayer's Form 1040 when the taxpayer files the return. The forms and their associated burdens will be accounted for and approved by OMB under 1545-0074 in accordance with the PRA procedures under 5 CFR 1320.10.

To make a qualified contribution as defined in proposed § 1.25F-1(a)(12), a taxpayer would be required to identify, to the recipient SGO at the time of making the contribution, that the contribution is intended to be a qualified contribution and should be deposited in the SGO's section 25F segregated account (or, if the SGO is a multistate SGO, that the qualified contribution should be allocated to the SGO's section 25F segregated account for one or more of the covered States on whose State SGO list the SGO appears). This third-party disclosure requirement will be listed within the instructions for Form 8525, Federal Scholarship Tax Credit (or successor).

These collections will be made by individual taxpayers as part of filing Form 1040 and will be included within OMB control number 1545-0074. The Form 8525 and its Instructions, and their associated burdens, will be accounted for and approved by OMB under 1545-0074 in accordance with the PRA procedures under 5 CFR 1320.10.

D. Student Collection Requirements

Proposed § 1.25F-3(c)(6) would require SGOs to verify students' annual household income and family size, which generally would necessitate students providing certain information for verification. Additionally, proposed § 1.25F-3(c)(7) would require students to provide the SGO with proof of their State residency. The IRS anticipates that students customarily provide this or similar information when applying for ( printed page 62850) scholarships. This information is disclosed by students and maintained by SGOs in the normal course of scholarship administration. Information collection and maintenance in the normal course of business is considered part of usual and customary business activity and is excluded from the definition of burden under 5 CFR 1320.3(b)(2).

III. Regulatory Flexibility Act

The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) (RFA) imposes certain requirements with respect to Federal rules that are subject to the notice and comment requirements of section 553(b) of the Administrative Procedure Act (5 U.S.C. 551 et seq.) and that are likely to have a significant economic impact on a substantial number of small entities. Unless an agency determines that a proposal will not have a significant economic impact on a substantial number of small entities, section 603 of the RFA requires the agency to present an initial regulatory flexibility analysis (IRFA) of the proposed regulations. The Treasury Department and the IRS have not determined whether the proposed regulations, when finalized, will have a significant economic impact on a substantial number of small entities.

This determination requires further study. However, because there is a possibility of a significant economic impact on a substantial number of small entities, these proposed regulations include an IRFA. The Treasury Department and the IRS invite comments on both the number of entities affected by these proposed regulations and the economic impact of these proposed regulations on small entities.

Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel of the Office of Advocacy of the Small Business Administration for comment on its impact on small business.

A. Need for and Objectives of the Rule

Section 25F allows an income tax credit to an individual for qualified contributions to a public charity that meets certain statutory requirements and is included on a covered State's list of SGOs. Section 25F(c)(3) defines a “qualified contribution” as a contribution to an SGO that uses the contribution to fund scholarships for eligible students solely within the State in which the organization is listed pursuant to section 25F(g). For a contribution to be a qualified contribution eligible for a section 25F credit, the State would need to complete an election to participate under section 25F (or perfect an advance election) by including the organization on its State SGO list. An organization is an SGO only if it satisfies each criterion set forth in section 25F(c)(5).

The proposed regulations would provide rules and definitions for determining the amount of the credit, rules on how a State would elect to participate under section 25F by submitting its State SGO list, and rules on how an organization would satisfy each criterion of section 25F(c)(5) so that the organization could appear on a State SGO list. The proposed rules are expected to clarify and implement section 25F, which Congress intended to help meet the stated policy of Executive Order 14191, Expanding Educational Freedom and Opportunity for Families, issued January 29, 2025, to support parents in choosing and directing the upbringing and education of their children. Thus, the Treasury Department and the IRS intend and expect that the proposed rules will provide clear rules to facilitate and support charitable contributions to SGOs, which in turn will make additional scholarships available to allow more parents to make the decisions that best support their goals and objectives for providing high-quality educational opportunities to their children.

B. Affected Small Entities

The RFA generally defines a “small entity” as (1) a proprietary firm meeting the size standards of the Small Business Administration (SBA), (2) a not-for-profit organization that is not dominant in its field, or (3) a small government jurisdiction with a population of less than 50,000. States and individuals are not included in the definition of “small entity.”

The SBA estimated in its 2023 Small Business Profile that 99.9 percent of United States businesses meet its definition of a small business. The applicability of these proposed regulations does not depend on the size of the business, as defined by the SBA. As described more fully in the preamble to these proposed regulations and in this IRFA, the small entities that these rules will primarily affect will be SGOs, some of which may be part of larger charitable endeavors. SGOs may be classified under the North American Industry Classification System (NAICS) code 813211 (Grantmaking Foundations). According to SBA size standards (effective January 1, 2022), entities with average annual receipts of $40 million or less are considered small entities for this NAICS code.

The Treasury Department and the IRS currently estimate that 600 to 700 organizations may be impacted by these proposed regulations because they will accept contributions and use those contributions to fund scholarships for elementary and secondary educational expenses of eligible students for purposes of the credit under section 25F. As SGOs organized to meet the requirements of section 25F do not currently exist, this estimate is based on the current number of organizations providing similar services in States that provide a State tax credit. The Treasury Department and the IRS have determined that currently there are approximately 450 such organizations, spread over 20 different States. It is anticipated that many of these organizations also will apply to be SGOs for purposes of the section 25F credit. As 30 States have submitted an Advance Election to participate under section 25F as of the date of publication of these proposed regulations, and more States may elect to participate prior to 2027, the first year in which the section 25F credit is applicable, the Treasury Department and the IRS believe the number of organizations wanting to be SGOs will be larger than the number of organizations currently engaging in similar activities.

Of the estimated 600 to 700 organizations that may be impacted by these proposed regulations, the Treasury Department and the IRS expect that at least 95 percent of these organizations will likely be considered a small entity. To prepare these estimates, the Treasury Department and the IRS reviewed Tax-Exempt return (Form 990 series) filings for the 2023 taxable year for organizations providing scholarship granting activities.

1. Impact of the Rules

The recordkeeping, reporting, and third-party disclosure requirements under these proposed regulations would apply to SGOs. SGOs would have administrative costs related to reading and understanding the rules as well as recordkeeping, reporting, and third-party disclosure requirements. SGO recordkeeping and reporting arise from the need to register on the IRS SGO portal, verify the eligibility of students applying for a scholarship, file a form with the IRS to report on the SGOs' compliance with the rules of section 25F, and provide the IRS with information on the contributions received. SGO third-party disclosure requirements arise from the need to provide to donors a timely written ( printed page 62851) acknowledgement of a donor's qualified contributions and to provide a copy of the form reporting the SGOs' compliance with the rules of section 25F to each State on whose State SGO list the SGO appears. Although the Treasury Department and the IRS do not have sufficient data to precisely determine the likely extent of the costs of compliance, the estimated burden of complying with the recordkeeping and reporting requirements is described in the Paperwork Reduction Act section of the preamble.

2. Alternatives Considered

The Treasury Department and the IRS considered alternatives to the proposed regulations. However, they are of the view that there are no significant alternatives that would both achieve the policy objectives and goals of these proposed rules and be less burdensome to small entities. For example, some comments in response to Notice 2025-70 favored a self-attestation approach for SGO compliance and enforcement, while others insisted that an SGO's mere self-attestation should not be sufficient. While a self-attestation approach would have been less burdensome, it could lead to SGOs not meeting the requirements of the statute by (i) providing scholarships for non-eligible students or for non-eligible expenses or (ii) not satisfying the 90 percent of income requirement. Accordingly, the proposed regulations require organizations appearing on a State SGO list to certify and provide information demonstrating that the organization fulfilled the criteria and requirements of being an SGO as required by section 25F.

Many of the compliance burdens in the proposed regulations are statutory requirements, but to reduce these burdens the Treasury Department and the IRS considered and included safe harbors in the proposed regulations, such as permitting SGOs to test their separate accounts maintained exclusively for qualified contributions for purposes of satisfying the operational requirements found in proposed § 1.25F-3(c)(1) and for providing individual scholarships for individual academic tutoring or special needs services at schools in low-income areas found in proposed § 1.25F-3(c)(6)(iii)(C). Comments are requested on the requirements in the proposed regulations, including specifically whether there are less burdensome alternatives that adequately mitigate the risk of fraud or improper payment of scholarships under section 25F.

3. Duplicative, Overlapping, or Conflicting Federal Rules

The proposed regulations would not duplicate, overlap, or conflict with any relevant Federal rules. As discussed in the Explanation of Provisions, the proposed regulations would merely provide requirements, procedures, and definitions related to the section 25F credit for qualified contributions to SGOs. The Treasury Department and the IRS invite input from interested members of the public about identifying and avoiding overlapping, duplicative, or conflicting requirements.

IV. Unfunded Mandates Reform Act

Section 202 (2 U.S.C. 1532(a)) of the Unfunded Mandates Reform Act of 1995 (UMRA) requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The Treasury Department and the IRS have concluded that these proposed regulations, and the cross-referenced temporary regulations (TD 10057) published elsewhere in this issue of the Federal Register , 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.

A “Federal intergovernmental mandate” is defined in 2 U.S.C. 658(5)(A), in part, as any provision in legislation, statute, or regulation that would impose an enforceable duty upon State, local, or Tribal governments, except for a duty arising from participation in a voluntary Federal program. Among other things, “federal tax policies that preempt specific state and local tax policies, and administrative rules issued by federal agencies cannot be avoided, [therefore] they are enforceable duties and are covered under UMRA.” Adam G. Levin, Unfunded Mandates Reform Act: History, Impact, and Issues (CRS Report No: R40957) (2021) www.congress.gov/​crs-product/​R40957.

Proposed § 1.25F-5 would provide rules for the State's submission of its election to participate under section 25F and the State SGO list; rules regarding the information and certifications a State is required to provide for each organization included on the State SGO list; requirements that States would need to use in determining whether organizations meet the requirements of section 25F(c)(5) and proposed § 1.25F-3; procedures for notifying the IRS of any determination by the State that an organization on the State SGO list is being removed from such list for not satisfying an applicable requirement.

These rules do not create a Federal intergovernmental mandate as defined in title 2 of the United States Code. First, the rules do not impose an “enforceable duty” on the States. For States that provide a State tax credit for donations to scholarship granting entities, these rules do not replace State laws in this area. Second, even if these rules imposed an “enforceable duty,” that duty arises from a State's voluntary participation in a Federal tax credit. Section 25F(g)(1)(A) provides that a State voluntarily elects to participate under section 25F. If a State does not want to participate, it is not required to do so.

A “Federal private sector mandate” is defined in 2 U.S.C. 658(7)(A), in part, as any provision in legislation, statute, or regulation that would impose an enforceable duty upon the private sector, except for a duty arising from participation in a voluntary Federal program. For this purpose, 2 U.S.C. 658(9) provides that the term “private sector” means “all persons or entities in the United States, including individuals, partnerships, associations, corporations, and educational and nonprofit institutions, but shall not include State, local, or Tribal governments.”

Proposed § 1.25F-4(b) would provide rules for the mandatory registration process through the IRS SGO portal that each SGO would need to complete. Proposed § 1.25F-4(c) would provide the requirements for acknowledgement, recordkeeping, and reporting of qualified contributions received by the SGO.

Proposed § 1.25F-3 would provide rules for scholarship granting organizations under section 25F(c)(5) and (d), including a definition of SGOs and the operational requirements for SGOs. Proposed § 1.25F-4(c) and (d) detail an SGO's annual reporting requirements and proposed § 1.25F-4(e) describes the annual financial and programmatic audit requirements for SGOs. Proposed § 1.25F-2 would provide rules for determining the credit and any credit carryforward under section 25F for qualified contributions made by individuals.

These rules do not create a Federal private sector mandate as defined in title 2 of the United States Code. First, the rules do not impose an “enforceable duty” on any member of the private sector. These rules do not include direct statutory orders, a total or partial ( printed page 62852) preemption, or administrative rules issued by Federal agencies that cannot be avoided. Instead, they fall squarely in the exception for a duty arising from voluntary participation in a Federal tax credit. Tax-exempt organizations are not required to be SGOs, but to the extent that an organization wants to be an SGO, the organization would then be subject to the rules in these regulations. Likewise, an individual taxpayer is not required to claim a credit under section 25F, but to the extent that a taxpayer wants to claim a credit, the taxpayer would need to follow the rules provided in the proposed regulations.

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism) prohibits an agency from publishing any rule that has federalism implications if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The Treasury Department and the IRS conclude that these proposed regulations do not have federalism implications, do not impose substantial direct compliance costs on State and local governments, and do not preempt State law within the meaning of the Executive order.

Section 1(a) of Executive Order 13132 provides that, for purposes of the order, “Policies that have federalism implications” refers to regulations, legislative comments or proposed legislation, and other policy statements or actions that have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities among the various levels of government.” As such, Executive Order 13132 prohibits an agency from publishing a rule if the rule either imposes substantial, direct compliance costs on State and local governments, and is not required by statute, or preempts State law, unless the agency meets the consultation and funding requirements of section 6 of the Executive order. The Tenth Amendment to the United States Constitution provides that “[t]he powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Proposed § 1.25F-5 would make States responsible for ensuring SGOs on their SGO list have complied with the requirements of section 25F, but only if a State “voluntarily elects to participate under” section 25F. These proposed regulations do not violate the Executive order or the Tenth Amendment because States will only need to comply with the guidance if they voluntarily elect to participate under section 25F.

The proposed regulations would not coerce State governments into administering Federal law in violation of the Executive order or the Tenth Amendment because States do not lose any funding or face any other negative consequences if they decline to participate under section 25F. A State that does not want to ensure that organizations have complied with reporting requirements can decline to submit an annual list of SGOs under section 25F(g)(1)(A). If a State does not submit a list of SGOs, it does not need to comply with any guidance related to section 25F.

In addition, section 25F and these proposed regulations would not insulate the Federal or State governments from political accountability, which indicates that the section and guidance would be permissible under the Tenth Amendment. If residents want their State to submit a list of SGOs (and to take on the resulting administrative responsibilities), they can lobby their State government to do so. The same is true for residents who do not want their State to participate under the section. Thus, rather than invading the domain of State authority, section 25F enables States to determine whether to implement a Federal policy. Any State that does not want to participate in section 25F can decline to submit a list of SGOs, which would prevent taxpayers from claiming credits based on contributions to organizations within the State that would otherwise be SGOs.

Further, these proposed regulations do not impose substantial direct compliance costs on State and local governments. While States will incur some costs in complying with the requirements of these proposed regulations, those costs will not be substantial. See the discussion of the RFA and Executive Order 12866 elsewhere in this Special Analyses section.

VI. Executive Order 13175: Consultation and Coordination With Indian Tribal Governments

Executive Order 13175 (Consultation and Coordination With Indian Tribal Governments) prohibits an agency from publishing any rule that has Tribal implications if the rule either imposes substantial, direct compliance costs on Indian Tribal governments and is not required by statute, or preempts Tribal law, unless the agency meets the consultation and funding requirements of section 5 of the Executive order. These proposed regulations do not have a substantial direct effect on one or more federally recognized Indian Tribes and do not impose substantial direct compliance costs on Indian Tribal governments within the meaning of the Executive order. These proposed regulations do not impose substantial, direct compliance costs on Indian Tribal governments, but they have been coordinated with the director, Office of Tribal and Native Affairs, Office of the Treasurer.

Comments and Public Hearing

Pursuant to the Administrative Procedure Act at 5 U.S.C. 553(b)(4), a plain language summary of the rule is available on the rulemaking docket at www.regulations.gov.

Before these proposed regulations are adopted as final regulations, consideration will be given to any comments regarding the notice of proposed rulemaking that are submitted timely to the IRS, as prescribed in this preamble under the ADDRESSES section. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. All comments will be made available at www.regulations.gov. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn.

A public hearing has been scheduled for Tuesday, December 15, 2026, beginning at 10 a.m. ET, in the Auditorium at the Internal Revenue Building, 1111 Constitution Avenue NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. Participants may alternatively attend the public hearing by telephone.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit an outline of the topics to be discussed and the time to be devoted to each topic by December 1, 2026. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing. If no outline of the topics to be discussed at the hearing is received by December 1, 2026, the public hearing will be cancelled. If the public hearing is cancelled, a notice of cancellation of ( printed page 62853) the public hearing will be published in the Federal Register .

Individuals who want to testify in person at the public hearing must send an email to publichearings@irs.gov to have their names added to the building access list. The subject line of the email must contain the regulation number REG-117199-25 and the language TESTIFY in Person. For example, the subject line may say: Request to TESTIFY in Person at Hearing for REG-117199-25.

Individuals who want to testify by telephone at the public hearing must send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-117199-25 and the language TESTIFY Telephonically. For example, the subject line may say: Request to TESTIFY Telephonically at Hearing for REG-117199-25.

Individuals who want to attend the public hearing in person without testifying must also send an email to publichearings@irs.gov to have their names added to the building access list. The subject line of the email must contain the regulation number REG-117199-25 and the language ATTEND In Person. For example, the subject line may say: Request to ATTEND Hearing in Person for REG-117199-25. Requests to attend the public hearing must be received by 5 p.m. ET on Thursday, December 10, 2026.

Individuals who want to attend the public hearing by telephone without testifying must also send an email to publichearings@irs.gov to receive the telephone number and access code for the hearing. The subject line of the email must contain the regulation number REG-117199-25 and the language ATTEND Hearing Telephonically. For example, the subject line may say: Request to ATTEND Hearing Telephonically for REG-117199-25. Requests to attend the public hearing must be received by 5 p.m. ET on Thursday, December 10, 2026.

Hearings will be made accessible to people with disabilities. To request special assistance during a hearing, please contact the Publications and Regulations Branch of the Office of Associate Chief Counsel (Procedure and Administration) by sending an email to publichearings@irs.gov (preferred) or by telephone at (202) 317-6901 (not a toll-free number) no later than Wednesday, December 9, 2026.

Drafting Information

The principal authors of these regulations are Nicole Cammarota of the Office of Division Counsel (Litigation & Advisory), Constance Chien of the Office of Associate Chief Counsel (Income Tax & Accounting), and Andrew Fahmy of the Office of Associate Chief Counsel (Corporate). However, other personnel from the Treasury Department and the IRS participated in their development.

Proposed Amendments to the Regulations

Accordingly, the Treasury Department and the IRS propose to amend 26 CFR part 1 as follows:

Paragraph 1. The authority citation for part 1 is amended by adding entries for §§ 1.25F-1 through 1.25F-5 in numerical order to read, in part, as follows:

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

Section 1.25F-1 also issued under 26 U.S.C. 25F(h).

Section 1.25F-2 also issued under 26 U.S.C. 25F(h).

Section 1.25F-3 also issued under 26 U.S.C. 25F(h).

Section 1.25F-4 also issued under 26 U.S.C. 25F(h).

Section 1.25F-5 also issued under 26 U.S.C. 25F(h).

Par. 2. Sections 1.25F-0 through 1.25F-5 are added to read as follows:

91 FR 62818