The FAA invites you to send any written relevant data, views, or arguments about this proposal. Send your comments using a method listed under ADDRESSES . Include “Docket No. FAA-2026-7239; Project Identifier MCAI-2025-01804-R” at the beginning of your comments. The most helpful comments reference a specific portion of the proposal, explain the reason for any recommended change, and include supporting data. The FAA will consider all comments received by the closing date and may amend this proposal because of those comments.

Except for Confidential Business Information (CBI) as described in the following paragraph, and other information as described in 14 CFR 11.35, the FAA will post all comments received, without change, to regulations.gov , including any personal information you provide. The agency will also post a report summarizing each substantive verbal contact received about this NPRM.

CBI is commercial or financial information that is both customarily and actually treated as private by its owner. Under the Freedom of Information Act (FOIA) (5 U.S.C. 552), CBI is exempt from public disclosure. If your comments responsive to this NPRM contain commercial or financial information that is customarily treated as private, that you actually treat as private, and that is relevant or responsive to this NPRM, it is important that you clearly designate the submitted comments as CBI. Please mark each page of your submission containing CBI as “PROPIN.” The FAA will treat such marked submissions as confidential under the FOIA, and they will not be placed in the public docket of this NPRM. Submissions containing CBI should be sent to Waqar Shah, Aviation Safety Engineer, FAA, 1600 Stewart Avenue, Suite 410, Westbury, NY 11590. Any commentary that the FAA receives which is not specifically designated as CBI will be placed in the public docket for this rulemaking.

EASA, which is the Technical Agent for the Member States of the European Union, has issued EASA AD 2025-0279, dated December 10, 2025 (EASA AD 2025-0279) (also referred to as the MCAI), to correct an unsafe condition on Airbus Helicopters H160-B helicopters delivered before October 21, 2025 (date of EASA Form 52, or equivalent statement of conformity). The MCAI states that it has been determined that a gap without fire-resistant sealant may be present in the cargo bay near the fuel segregation box on certain helicopters. This condition, if not detected and corrected, could jeopardize the fire-resistant characteristic of the cargo compartment, which could result in reduced control of the helicopter in case of fire.

You may examine the MCAI in the AD docket at regulations.gov under Docket No. FAA-2026-7239.

The FAA reviewed EASA AD 2025-0279, which specifies procedures for inspecting the frame four right side upper corner of the cargo bay for any missing sealant, and if there is any missing sealant, applying sealant.

This material is reasonably available because the interested parties have access to it through their normal course of business or by the means identified in the ADDRESSES section.

These products have been approved by the civil aviation authority (CAA) of another country and are approved for operation in the United States. Pursuant to the FAA's bilateral agreement with this State of Design Authority, that authority has notified the FAA of the unsafe condition described in the MCAI referenced above. The FAA is issuing this NPRM after determining that the unsafe condition described previously is likely to exist or develop on other products of the same type design.

This proposed AD would require accomplishing the actions specified in EASA AD 2025-0279, described previously, as incorporated by reference, except for any differences identified as exceptions in the regulatory text of this AD.

In the FAA's ongoing efforts to improve the efficiency of the AD process, the FAA developed a process to use some CAA ADs as the primary source of information for compliance with requirements for corresponding FAA ADs. The FAA has been coordinating this process with manufacturers and CAAs. As a result, the FAA proposes to incorporate EASA AD 2025-0279 by reference in the FAA final rule. This proposed AD would, therefore, require compliance with EASA AD 2025-0279 in its entirety through that incorporation, except for any differences identified as exceptions in the regulatory text of this proposed AD. Using common terms that are the same as the heading of a particular section in EASA AD 2025-0279 does not mean that operators need comply only with that section. For example, where the AD requirement refers to “all required actions and compliance times,” compliance with this AD requirement is not limited to the section titled “Required Action(s) and Compliance Time(s)” in EASA AD 2025-0279. Material required by EASA AD 2025-0279 for compliance will be available at regulations.gov under Docket No. FAA-2026-7239 after the FAA final rule is published.

The FAA estimates that this AD, if adopted as proposed, would affect 13 helicopters of U.S. registry.

The FAA estimates the following costs to comply with this proposed AD:

The FAA estimates the following costs to do any repairs that would be required based on the results of the proposed inspection. The agency has no way of determining the number of helicopters that might need these repairs.

Title 49 of the United States Code specifies the FAA's authority to issue rules on aviation safety. Subtitle I, section 106, describes the authority of the FAA Administrator. Subtitle VII: Aviation Programs, describes in more detail the scope of the Agency's authority.

The FAA is issuing this rulemaking under the authority described in Subtitle VII, Part A, Subpart III, Section 44701: General requirements. Under that section, Congress charges the FAA with promoting safe flight of civil aircraft in air commerce by prescribing regulations for practices, methods, and procedures the Administrator finds necessary for safety in air commerce. This regulation is within the scope of that authority because it addresses an unsafe condition that is likely to exist or develop on products identified in this rulemaking action.

The FAA determined that this proposed AD would not have federalism implications under Executive Order 13132. This proposed AD would not have a substantial direct effect 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.

For the reasons discussed above, I certify this proposed regulation:

(1) Is not a “significant regulatory action” under Executive Order 12866,

(2) Would not affect intrastate aviation in Alaska, and

(3) Would not have a significant economic impact, positive or negative, on a substantial number of small entities under the criteria of the Regulatory Flexibility Act.

Accordingly, under the authority delegated to me by the Administrator, the FAA proposes to amend 14 CFR part 39 as follows:

This document contains proposed additions and amendments to 26 CFR part 1 (Income Tax Regulations) addressing the application of section 987 of the Internal Revenue Code (“Code”) and related provisions (the “proposed regulations”). The additions and amendments are issued under sections 987 and 989, pursuant to the express delegations of authority provided under those sections. The express delegations relied upon are referenced in the Background section of this preamble. The proposed regulations are also issued under the express delegation of authority under section 7805(a).

Section 987 applies to any taxpayer that has a qualified business unit (“QBU”) with a functional currency other than the dollar. Section 987(1) and (2) provide rules for determining and translating taxable income or loss (“section 987 taxable income or loss”) with respect to a QBU that is subject to section 987 (“section 987 QBU”). In addition, section 987(3) requires proper adjustments (as prescribed by the Secretary) for transfers of property between QBUs of the taxpayer having different functional currencies (including transfers of property between a controlled foreign corporation (“CFC”) and its QBUs). Under section 987(3), a taxpayer that owns a QBU generally must recognize foreign currency gain or loss (“section 987 gain or loss”) upon a remittance from the QBU.

Sections 987 and 989 provide several explicit grants of regulatory authority. Section 987(3) directs the Secretary to prescribe proper adjustments for transfers of property between QBUs of the taxpayer having different functional currencies. Section 989(c) directs the Secretary to “prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subpart.”  1

On December 11, 2024, the Treasury Department and the IRS published Treasury Decision 10016, which contained final regulations under sections 861, 985, 987 through 989, and 1502 (the “2024 final regulations”), in the Federal Register (89 FR 100138). Concurrently with the publication of the 2024 final regulations, the Treasury Department and the IRS published a notice of proposed rulemaking (REG-117213-24) under section 987, which addressed the treatment of frequently recurring disregarded transactions (the “2024 proposed regulations”), in the Federal Register (89 FR 99782).

On February 25, 2026, the Treasury Department and the IRS issued Notice 2026-17, 2026-12 IRB 698, which announced that proposed regulations would be issued under section 987 for the purpose of simplifying the operation of the 2024 final regulations, reducing compliance burdens, and refining the scope of certain rules under section 987 to limit their effect on ordinary course transactions.

The 2024 final regulations provide that section 987(3) and the related regulations apply to CFCs in which at least one United States shareholder (“U.S. shareholder”), within the meaning of section 951(b), directly or indirectly owns stock, within the meaning of section 958(a). See § 1.987-1(b)(1).

The preamble to the 2024 proposed regulations requested comments as to whether the final regulations should be modified to provide that section 987(3) does not apply to CFCs. The preamble explained that, when a United States person (“U.S. person”) owns a section 987 QBU, foreign currency gain or loss must be recognized under section 987(3) in order to accurately measure the U.S. person's accession to wealth in U.S. dollars. By contrast, alternative rules may be appropriate in the case of a section 987 QBU owned by a CFC, because a CFC is permitted to compute its income in a functional currency other than the dollar. See section 985(b).

In the preamble to the 2024 proposed regulations, however, the Treasury Department and the IRS also expressed concern that, if section 987(3) were not applied to a section 987 QBU owned by a CFC, the CFC's basis in assets distributed from the section 987 QBU could be increased or reduced due to exchange rate fluctuations. This is because, in the absence of special rules requiring the CFC to track basis in the section 987 QBU's assets using historic exchange rates, the CFC's basis in assets distributed by the section 987 QBU would be translated at the spot rate on the date of the distribution. If the U.S. shareholders of the CFC were then to ultimately sell their CFC stock in a taxable transaction, the gain or loss recognized on the sale generally would reflect any economic foreign currency gain or loss attributable to the distributed assets. However, in the case of an inbound liquidation or reorganization, asset basis attributable to appreciation in the value of the section 987 QBU's functional currency could be imported into the United States without a corresponding income inclusion. As a result, economic foreign currency gain with respect to the assets distributed by the section 987 QBU would permanently escape U.S. taxation.

The Treasury Department and the IRS received several comments in response to the 2024 proposed regulations. Two of the commenters requested that CFCs be excluded completely from the application of section 987(3). The commenters noted that section 987(3) provides the Secretary with discretion to determine the nature of the proper adjustments required to account for foreign currency gain or loss with respect to a QBU. The commenters asserted that, if section 987(3) did not apply to CFCs, foreign currency gain or loss with respect to a section 987 QBU of a CFC typically would be accounted for under other provisions of the Code (for example, under section 301(c)(3)). Therefore, according to the commenters, it would not be necessary for a CFC to separately recognize section 987 gain or loss.

Notice 2026-17 announced that the Treasury Department and the IRS intend to issue forthcoming proposed regulations that would provide an election under which CFCs generally would not compute or recognize section 987 gain or loss with respect to their section 987 QBUs. The Notice described the rules and procedures for making the election (including consistency requirements) that would apply under the proposed regulations. The Notice explained that, under the rules of the proposed regulations, unrecognized section 987 gain or loss of a CFC arising before the election was made would be amortized over a period of 120 months, consistent with the elective rules for amortizing pretransition gain or loss under the 2024 final regulations. See § 1.987-10(e)(5)(ii). The Notice further explained that the proposed regulations would require taxpayers to account for foreign currency gain (but not loss) in the case of an inbound liquidation or reorganization described in § 1.367(b)-3(a) of a CFC that is subject to the election.

Although Notice 2026-17 summarized the rules that would be provided in the proposed regulations relating to the CFC election and its consequences, the Notice did not describe these rules in detail. In addition, the Notice did not permit taxpayers to rely on the rules relating to the CFC election.

Notice 2026-17 also announced that the proposed regulations would (i) permit taxpayers to determine section 987 taxable income or loss and section 987 gain or loss using an equity and basis pool method that is substantially similar to the method provided in regulations proposed in 1991; (ii) narrow the scope of the loss suspension rules; (iii) simplify the loss-to-the-extent-of-gain rule under which suspended section 987 loss is recognized; (iv) modify the definition of a successor for purposes of the deferral rules; and (v) expand the definition of a section 987 hedging transaction. The Notice described rules expected to be included in the proposed regulations regarding these issues and provided that taxpayers are permitted to rely on these rules. Proposed regulations addressing these provisions of Notice 2026-17 will be included in a future notice of proposed rulemaking.

The Treasury Department and the IRS received a number of comments in response to Notice 2026-17. The commenters generally requested that guidance relating to the CFC election be issued as quickly as possible, so that taxpayers have sufficient time to make the election for the 2025 taxable year. Several of the recommendations made by the commenters are addressed in the Explanation of Provisions section of this preamble. The Treasury Department and the IRS are continuing to evaluate the remaining comments and will address these comments in future guidance.

The 2024 final regulations provide transition rules for the determination and recognition of section 987 gain or loss that arose before the 2024 final regulations became applicable (“pretransition gain or loss”). See § 1.987-10. In particular, under § 1.987-10(e)(5)(ii)(A), taxpayers can elect to recognize pretransition gain or loss ratably over the transition period (the “amortization election”). Under the 2024 final regulations, the transition period is a period of ten taxable years beginning with the first taxable year in which the section 987 regulations apply. Therefore, a taxpayer that makes the amortization election recognizes one tenth of its pretransition gain or loss in each year of the transition period, including short taxable years.

In Notice 2025-72, 2025-51 IRB 840, the Treasury Department and the IRS announced that proposed regulations would modify the effect of the amortization election for short taxable years by providing that pretransition gain or loss is recognized ratably over a period of 120 months. Thus, for example, in a one-month short taxable year, the owner would recognize 1/120th (rather than one tenth) of its pretransition gain or loss.

Consistent with Notice 2026-17, the proposed regulations would permit taxpayers to make an election (“CFC exemption election”) that would limit the application of section 987(3) and the related regulations with respect to CFCs. Proposed § 1.987-15. In a taxable year to which the election applies, a CFC generally would not compute or recognize section 987 gain or loss, except in connection with certain inbound nonrecognition transactions. Proposed § 1.987-15(b). However, the rules of section 987(1) and (2) would continue to apply, for example, for purposes of computing the taxable income and earnings and profits of the CFC.

The CFC exemption election is intended to reduce the compliance and administrative burdens of applying section 987(3) with respect to section 987 QBUs owned by CFCs. Additional flexibility is warranted in this context because, under section 985, many CFCs have a functional currency other than the U.S. dollar; thus, a CFC's income is not necessarily measured by its accession to wealth in U.S. dollar terms. Moreover, if a CFC does not recognize section 987 gain or loss with respect to a section 987 QBU, the economic currency gain or loss with respect to the section 987 QBU generally should be taken into account by the CFC's U.S. shareholders under other provisions of the Code (for example, in the case of a taxable sale of the CFC stock, under section 1001), such that the U.S. shareholders would, over time, recognize the correct amount of total income with respect to the CFC.

Section 987(3) provides broad authority to prescribe proper adjustments for transfers of property between QBUs of the taxpayer having different functional currencies. Section 989(c) also provides broad authority to “prescribe such regulations as may be necessary or appropriate to carry out the purposes” of subpart J. The Treasury Department and the IRS are of the view that this authority allows for special elective rules to be prescribed with respect to CFCs that are different from the rules applicable to U.S. persons.

The proposed regulations would provide that, for taxable years in which the CFC exemption election is in effect, a CFC generally would not compute or recognize section 987 gain or loss. However, as explained in parts I.E and I.G of this Explanation of Provisions, a CFC would continue to compute and recognize section 987 gain or loss that arises in taxable years for which the CFC exemption election is not in effect, and a CFC would be required to recognize section 987 gain in connection with certain inbound transactions when a CFC exemption election is in effect.

A CFC exemption election would be a section 987 election within the meaning of § 1.987-1(g) and, therefore, would be subject to the general rules for making and revoking elections under § 1.987-1(g). In general, the election would be made by filing an election statement before the start of the taxable year. Proposed § 1.987-1(g)(3)(ii)(D)( 3 ). However, as described in part I.B.2 of this Explanation of Provisions, the proposed regulations would provide special rules for taxable years beginning after December 31, 2024, and ending on or before December 31, 2027. The CFC exemption election could not be revoked without the consent of the Commissioner. See § 1.987-1(g)(3)(ii)(A).

Notice 2026-17 stated that the CFC exemption election would generally be made on an original, timely filed return (including extensions). Commenters noted that many calendar year taxpayers will already have finished preparing their original tax returns for the 2025 taxable year by the time the proposed regulations are issued. The commenters asserted that it may be difficult for these taxpayers to make the computations needed to account for the CFC exemption election on their timely filed original tax returns for the 2025 taxable year. Two commenters recommended that, for taxable years beginning in 2025, taxpayers should be permitted to make the CFC exemption election on an amended return filed before a specified date (either the original tax return due date, with extensions, for the 2026 taxable year, or when final regulations are published).

The Treasury Department and the IRS agree that additional flexibility is appropriate in making the CFC exemption election for the 2025 taxable year. In addition, the Treasury Department and the IRS acknowledge that transition issues may also arise for the 2026 and 2027 taxable years. Accordingly, the proposed regulations provide special election timing rules for taxable years beginning after December 31, 2024, and ending on or before December 31, 2027.

In general, for taxable years beginning after December 31, 2024, and ending on or before December 31, 2026, the authorized person (within the meaning of § 1.987-1(g)(1)) would make the CFC exemption election by attaching an election statement to its original, timely filed (including extensions) return. Proposed § 1.987-1(g)(3)(ii)(D)( 1 ). Alternatively, for taxable years beginning in 2025, taxpayers would be permitted to make the CFC exemption election on an amended return filed by October 15, 2027. Id.

For taxable years ending in 2027, the authorized person would make the CFC exemption election by filing the election statement on or before October 15, 2027. Proposed § 1.987-1(g)(3)(ii)(D)( 2 ). Thus, until October 15, 2027, a calendar year taxpayer would be permitted to make the election for the 2025, 2026, or 2027 taxable years.

This timetable is intended to provide sufficient time for taxpayers to determine whether to make the CFC exemption election after the issuance of final regulations providing for the election, while ensuring that the deadline for any of these three taxable years does not fall earlier than the deadline for a preceding taxable year. The general rule contained in proposed § 1.987-1(g)(3)(ii)(D)( 3 ) would apply for taxable years ending after December 31, 2027. Thus, a calendar year taxpayer would be required to make a CFC exemption election for the 2028 taxable year on or before December 31, 2027.

As an alternative to the rules described in parts I.B.1 and I.B.2 of this Explanation of Provisions, for the taxable year in which the CFC exemption election first becomes relevant, the authorized person could also make a CFC exemption election by attaching an election statement to its original, timely filed (including extensions) return. Proposed § 1.987-1(g)(3)(ii)(D)( 4 ). This rule would provide additional time to make the election if the CFC exemption election first becomes relevant for a taxable year ending after December 31, 2026.

For this purpose, the CFC exemption election first becomes relevant in the first taxable year beginning after December 31, 2024, in which the authorized person's section 987 electing group includes a CFC that is the owner of a section 987 QBU. Thus, for example, the alternative rule in proposed § 1.987-1(g)(3)(ii)(D)( 4 ) could apply to a taxable year beginning after December 31, 2024, in which a domestic corporation acquired all the stock of a CFC that owned a section 987 QBU, but only if the domestic corporation did not own a majority of the stock of any other CFC that owned a section 987 QBU in any previous taxable year beginning after December 31, 2024.

Under § 1.987-1(g)(2)(ii), section 987 elections must be made consistently for all members of a section 987 electing group, including all CFCs in which a majority of the stock, by vote or value, is owned (within the meaning of section 958(a)) by the same U.S. shareholder. When a CFC joins a section 987 electing group, it is deemed to make or revoke any section 987 election as necessary to be consistent with the other group members.

The proposed regulations would provide additional consistency requirements to ensure that this election is made on a uniform basis for all CFCs that are commonly controlled by affiliated U.S. shareholders. Under proposed § 1.987-15(c)(2)(i), all domestic corporations that are affiliated (within the meaning of § 1.904(i)-1(b)) would be required to make consistent CFC exemption elections with respect to their majority-owned CFCs. This rule would require consistent CFC exemption elections between certain related but non-consolidated domestic corporations. For example, proposed § 1.987-15(c)(2)(i) would require consistency between separate consolidated groups that are commonly owned by a foreign parent corporation, and between domestic corporations that would be members of the same consolidated group but for the interposition of a partnership. In addition, under proposed § 1.987-15(c)(2)(ii), a U.S. person would be treated as owning CFC stock that it holds indirectly through a domestic partnership (by treating a domestic partnership in the same manner as a foreign partnership in applying section 958(a)).

The proposed regulations also would provide anti-avoidance rules to prevent taxpayers from entering into related-party transactions designed to avoid the consistency requirements or trigger a deemed revocation of a CFC exemption election. Proposed § 1.987-15(c)(3).

A commenter requested additional guidance regarding the application of the consistency rules when a CFC that is not subject to a CFC exemption election (or its U.S. shareholder) is acquired by an unrelated party that has made a CFC exemption election (or vice versa). The commenter noted that, when an acquirer with minimal section 987 exposure acquires a CFC that owns a substantial number of section 987 QBUs, it may not be appropriate for the acquirer's elections to remain in effect. The commenter suggested that guidance be provided either solely with respect to the CFC exemption election or with respect to section 987 elections more generally.

The Treasury Department and the IRS are continuing to study the appropriate application of the consistency rules in § 1.987-1(g) and proposed § 1.987-15(c) to cases in which a CFC (or another domestic or foreign entity) is acquired by an unrelated party. The Treasury Department and the IRS request comments on this issue in general, including whether special rules should be provided for cases in which an acquired CFC's taxable year does not end at the time of the acquisition and to coordinate the consistency rules with the statutory changes (including the modifications to the pro rata share rules) in Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA), and the related regulations.

If a CFC is subject to a CFC exemption election (an “exempt CFC”), the rules of the section 987 regulations relating to the determination and recognition of section 987 gain or loss (for example, §§ 1.987-4 through 1.987-6 and 1.987-11 through 1.987-14) generally would not apply to the exempt CFC. Proposed § 1.987-15(b)(2). However, other parts of the section 987 regulations (for example, § 1.987-3, which relates to the determination of section 987 taxable income or loss) would continue to apply to the exempt CFC. Thus, for example, a taxpayer could make an election to use a spot rate convention under § 1.987-1(c)(1)(ii) or a section 988 mark-to-market election under § 1.987-3(b)(4)(ii) with respect to an exempt CFC.

The applicable rules of the section 987 regulations would be applied by deeming a current rate election to be in effect with respect to each exempt CFC, so that exempt CFCs would not be required to track historic exchange rates. Proposed § 1.987-15(b)(3)(i). As a result, the amount of a section 987 QBU's taxable income or loss would be translated into the owner's functional currency at the yearly average exchange rate, and transfers between a section 987 QBU and its owner would be translated at the spot rate applicable on the date of the transfer.

The 2024 final regulations do not provide detailed rules concerning the determination of section 987 taxable income or loss and section 987 gain or loss in the case of a partnership. Thus, taxpayers must apply sections 987 and 989(a) with respect to partnerships using a reasonable method consistent with the statute, and this method must be applied consistently from year to year. See § 1.987-7(b).

For example, assume a CFC with the U.S. dollar as its functional currency owns an interest in a foreign partnership that would be viewed as using the euro as its functional currency if the partnership were treated as a QBU under section 989(a), and the partnership owns an eligible QBU that uses the Swiss franc as its functional currency. The CFC could apply section 987 using an aggregate approach, under which the CFC is treated as the indirect owner of its proportionate interest in the eligible QBU. Alternatively, under an entity approach, the partnership itself could be treated as a section 987 QBU of the CFC, and the eligible QBU could be treated as a section 987 QBU of the partnership.

The proposed regulations would provide rules relating to the effect of a CFC exemption election when an exempt CFC is a partner in a partnership. These rules generally are intended to provide parity between the treatment of a section 987 QBU that is directly owned by an exempt CFC and the treatment of a section 987 QBU that is owned by (or through) a partnership whose partners are exempt CFCs.

Under proposed § 1.987-7(b)(2), an exempt CFC generally would not compute or recognize section 987 gain or loss with respect to an “exempt partnership QBU,” which would be defined to include (i) a partnership that is treated as a section 987 QBU of an exempt CFC or (ii) a section 987 QBU that is indirectly owned by an exempt CFC through a partnership. Proposed § 1.987-7(b)(2)(iii). However, an exempt CFC would be required to continue to apply the rules of sections 987(1) and (2) and 989(a) with respect to its exempt partnership QBUs in a reasonable manner using a method that is applied consistently from year to year. Proposed § 1.987-7(b)(2).

Similarly, if a partnership is treated as the owner of a section 987 QBU, and at least 80 percent of the capital or profits interests in the partnership are owned by exempt CFCs that are members of the same controlled group (an “exempt partnership”), the section 987 QBU would be an exempt partnership QBU, and the exempt partnership generally would not compute or recognize section 987 gain or loss with respect to the exempt partnership QBU. Proposed § 1.987-7(b)(2)(iii) and (iv). However, the exempt partnership would be required to continue to apply the rules of sections 987(1) and (2) and 989(a) in a reasonable manner using a method that is applied consistently from year to year. Proposed § 1.987-7(b)(2). Thus, an exempt partnership generally would be treated in the same manner as an exempt CFC for purposes of section 987. For this purpose, an exempt CFC would be treated as owning a partnership interest that it holds indirectly through one or more other partnerships. Proposed § 1.987-7(b)(2)(ii).

If a partnership meets the definition of an exempt partnership in the taxable year in which a CFC exemption election is made, the rules of proposed § 1.987-15 would apply to the exempt partnership beginning in that taxable year. If a partnership becomes an exempt partnership in a later taxable year (for example, because an exempt CFC acquires an interest in the partnership), the rules of proposed § 1.987-15 would be applied to the exempt partnership by treating the CFC exemption election as having been made for that taxable year. Proposed § 1.987-15(g)(3)(iii). Similarly, in a taxable year in which a partnership ceases to be treated as an exempt partnership (for example, because an exempt CFC disposes of its partnership interest), the rules of proposed § 1.987-15 would be applied to the partnership by treating the CFC exemption election as having been revoked for that taxable year. Proposed § 1.987-15(g)(3)(iv).

Notice 2026-17 explained that, beginning in the first taxable year in which a CFC exemption election is made, unrecognized section 987 gain or loss that arose in previous taxable years (“pre-election section 987 gain or loss”) would be amortized over a period of 120 months. The Treasury Department and the IRS received several comments recommending that taxpayers be permitted to elect whether or not to compute and recognize pre-election section 987 gain or loss. The commenters posited that, if the CFC exemption election is intended to prevent the application of section 987(3) with respect to exempt CFCs, then exempt CFCs should not be required to account for section 987 gain or loss that arose before the CFC exemption election was made. Further, the comments asserted that the computation of pre-election section 987 gain or loss would be burdensome for taxpayers.

In general, the proposed regulations would require taxpayers to compute and amortize pre-election section 987 gain or loss, and they would not permit taxpayers to elect out of this requirement. 2 See parts I.E.3 and I.E.4 of this Explanation of Provisions for a detailed description of the proposed rules for computing and amortizing pre-election section 987 gain or loss.

Contrary to the commenters' suggestion, the CFC exemption election is intended to narrow, rather than wholly prevent, the application of section 987(3) to exempt CFCs. Thus, the proposed regulations would leave in place the default rule of § 1.987-1(b)(1), which provides that section 987(3) applies to CFCs. However, pursuant to the authority to prescribe proper adjustments under section 987(3), the proposed regulations would provide an election that would limit the circumstances in which an exempt CFC would recognize section 987 gain or loss. An exempt CFC generally would not be required to recognize section 987 gain or loss in taxable years for which the election applies, but it would be required to amortize pre-election section 987 gain or loss, and it may also be required to recognize section 987 gain in the case of an inbound reorganization or liquidation.

The Treasury Department and the IRS are concerned that the election requested by the commenters would allow taxpayers to eliminate previously computed amounts of section 987 gain or loss in a manner similar to the elective “fresh start” transition method that was provided in earlier proposed regulations under section 987 (the “2006 proposed regulations”) that were published in the Federal Register in 2006 (71 FR 52876, September 7, 2006). In response to the 2006 proposed regulations, a commenter asserted that this election was overly favorable to taxpayers and would have one-sided effects that would be detrimental to the fisc. Consistent with this comment, the 2024 final regulations require taxpayers to account for pretransition gain or loss under § 1.987-10 and do not permit use of the fresh start transition method on an elective basis. For similar reasons, the Treasury Department and the IRS are of the view that the election requested by the commenters would expose the government to whipsaw. Taxpayers with substantial pre-election section 987 gain could choose to eliminate the gain, while taxpayers with substantial pre-election section 987 loss could amortize the loss over 120 months.

Accordingly, proposed § 1.987-15(e) generally would require taxpayers that make a CFC exemption election to compute pre-election section 987 gain or loss and amortize this gain or loss over a ten-year period. This rule would ensure that section 987 gain or loss arising before the taxable year of the CFC exemption election is properly taken into account.

Although proposed § 1.987-15(e) generally would require taxpayers to compute and recognize pre-election section 987 gain or loss, the Treasury Department and the IRS acknowledge that, depending on the size of a QBU, the burden of this computation may outweigh its rationale. Therefore, the proposed regulations would provide an exception to the general rule of proposed § 1.987-15(e) for QBUs that hold assets of less than $50 million.

Under proposed § 1.987-15(e)(2)(iii), an exempt CFC would be deemed to have zero pre-election section 987 gain or loss with respect to a QBU that has average assets of less than $50 million for the three-year period preceding the first taxable year for which the election is made. See proposed § 1.987-15(e)(2)(iii)(B)( 1 ). The three-year averaging requirement is intended to prevent inappropriate shifting of assets between QBUs. All QBUs of an exempt CFC or exempt partnership with the same country of residence (as defined in section 988(a)(3)(B)) would be aggregated for purposes of the $50 million threshold. Proposed § 1.987-15(e)(2)(iii)(B)( 3 ).

For this purpose, the amount of a QBU's assets for each of the three years preceding the first taxable year for which the CFC exemption election is made would be equal to the amount of total assets reflected on the QBU's U.S. GAAP balance sheet on the last day of the relevant taxable year (which is reported annually on Form 8858, Schedule F). Proposed § 1.987-15(e)(2)(iii)(B)( 2 ). Unlike the items attributable to an eligible QBU under § 1.987-2(b)(1), these amounts are not adjusted to conform to Federal income tax principles. Based on available data, the Treasury Department and the IRS anticipate that this exception would substantially reduce the overall compliance burden of computing pre-election section 987 gain or loss.

The rules for computing and recognizing pre-election section 987 gain or loss under proposed § 1.987-15(e) generally would not apply if the CFC exemption election is made for the taxable year beginning on the transition date described in § 1.987-10(c)(1) (that is, the first day of the first taxable year to which the 2024 final regulations apply). In this case, because unrecognized section 987 gain or loss arising before the transition date is already accounted for under the transition rules of § 1.987-10, taxpayers would not be required to separately account for pre-election section 987 gain or loss under proposed § 1.987-15(e). However, because the transition rules of § 1.987-10 do not apply to partnerships, an exempt CFC or exempt partnership would compute pre-election section 987 gain or loss under proposed § 1.987-15(e) with respect to an exempt partnership QBU even when the CFC exemption election is made in the taxable year beginning on the transition date. Proposed § 1.987-15(g)(1)(i).

In general, a CFC exemption election would not affect the application of the transition rules in § 1.987-10. Thus, in the taxable year beginning on the transition date, an exempt CFC would apply § 1.987-10 to determine pretransition gain or loss with respect to its section 987 QBUs. Additionally, the rules cross-referenced in § 1.987-10 (for example, the rules of § 1.987-4 that are cross-referenced in § 1.987-10(e)(3)(iii)) would apply for purposes of the transition rules. However, if the CFC exemption election is made for the taxable year beginning on the transition date, an exempt CFC would be deemed to have no pretransition gain or loss with respect to a QBU that does not meet the $50 million asset threshold under proposed § 1.987-15(e)(2)(iii). Proposed § 1.987-15(d)(2).

A taxpayer that makes a CFC exemption election for the taxable year beginning on the transition date would be deemed to also make the amortization election under § 1.987-10(e)(5)(ii) with respect to its exempt CFCs. Proposed § 1.987-15(d)(1)(i). Because an exempt CFC does not recognize section 987 gain or loss under § 1.987-5 at the time of a remittance, this deemed election is needed to provide a mechanism for recognizing an exempt CFC's pretransition gain or loss. A taxpayer that is deemed to make the amortization election by reason of a CFC exemption election would not be required to make the amortization election with respect to QBU owners that are not exempt CFCs. Proposed § 1.987-15(d)(1)(ii).

If a CFC exemption election is made for a taxable year beginning after the transition date, an exempt CFC (or an exempt partnership) generally would be required to compute pre-election section 987 gain or loss with respect to its section 987 QBUs, successor deferral QBUs, and successor suspended loss QBUs as of the last day of the preceding taxable year. Proposed § 1.987-15(e)(2). An exempt CFC's pre-election section 987 gain or loss with respect to a QBU would be equal to the sum of the CFC's net unrecognized section 987 gain or loss, outstanding deferred section 987 gain or loss, and cumulative suspended section 987 loss with respect to the QBU on the last day of the preceding taxable year, reduced by amounts recognized in the preceding taxable year. Id.

Commenters requested clarification concerning the interaction of an annual recognition election with a CFC exemption election. Under proposed § 1.987-15(e)(2), any section 987 gain or loss recognized before the first taxable year in which the CFC exemption election applies would not be taken into account in computing pre-election section 987 gain or loss. Therefore, if a CFC is subject to an annual recognition election before the CFC exemption election is made, and the CFC does not have any outstanding deferred section 987 gain or loss or cumulative suspended section 987 loss, the CFC's pre-election section 987 gain or loss would be zero (because the CFC's net unrecognized section 987 gain or loss would have been recognized in prior taxable years as a result of the annual recognition election).

An exempt CFC would recognize pre-election section 987 gain or loss ratably over a period of 120 months beginning with the first day of the first taxable year in which the election applies. Proposed § 1.987-15(e)(3)(i). In general, the source and character of pre-election section 987 gain or loss would be determined by applying the rules of § 1.987-6 in the last taxable year before the CFC exemption election takes effect. Proposed § 1.987-6(b)(1)(v). However, deferred section 987 gain or loss and suspended section 987 loss would retain the source and character determined in the taxable year of deferral or suspension, respectively. See § 1.987-6(b)(1)(ii) and (iii).

It is possible that a CFC would amortize both pre-election section 987 gain or loss (under § 1.987-15(e)(3)(i)) and pretransition gain or loss (under § 1.987-10(e)(5)(ii)) in certain years. This would be the case, for example, if a calendar year CFC with a transition date of January 1, 2025, made the election to amortize pretransition gain or loss under § 1.987-10(e)(5)(ii) but did not make the CFC exemption election for 2025, and then made the CFC exemption election for 2026. However, if the CFC described in the preceding sentence owned a QBU that held assets of less than $50 million (as determined under proposed § 1.987-15(e)(2)(iii)(B)), the exempt CFC would continue to amortize pretransition gain or loss under § 1.987-10(e)(5)(ii) in 2026 and subsequent years, but would not amortize pre-election section 987 gain or loss with respect to the QBU under proposed § 1.987-15(e)(2)(iii).

In two cases, pre-election section 987 loss would be converted into suspended section 987 loss. First, under proposed § 1.987-15(e)(3)(iv), if pre-election section 987 loss of an exempt CFC is attributable to a QBU that is owned by a different member of the exempt CFC's controlled group (for example, a successor deferral QBU), and the exempt CFC ceases to be related to the owner of the QBU due to a transfer of the exempt CFC's stock, the pre-election section 987 loss would become suspended section 987 loss. This rule is intended to prevent taxpayers from engaging in loss trafficking by selling an exempt CFC with a pre-election section 987 loss attribute to an unrelated person that does not also acquire ownership of the QBU to which the loss is attributable. When this rule applies, the CFC would recognize the suspended section 987 loss only to the extent of section 987 gain recognized in a taxable year in which it is no longer subject to the CFC exemption election.

Second, under proposed § 1.987-15(f)(2)(ii), pre-election section 987 loss would be suspended if the CFC exemption election is revoked (or deemed to be revoked) during the first 60 months of the amortization period. This rule is intended to prevent taxpayers from making the CFC exemption election for a limited period of time in order to accelerate the recognition of section 987 loss.

An exempt partnership generally would be required to compute pre-election section 987 gain or loss in the same manner as an exempt CFC. Proposed § 1.987-15(g)(3)(i). However, the exempt partnership itself would not recognize the pre-election section 987 gain or loss. Instead, each partner in the exempt partnership would take into account its share of the pre-election section 987 gain or loss ratably over a period of 120 months. Proposed § 1.987-15(g)(3)(ii). This rule is designed to prevent pre-election section 987 gain or loss from being shifted to a new partner upon a sale or transfer of a partnership interest.

Under the existing final regulations, when a partner recognizes section 987 gain or loss with respect to a partnership or an eligible QBU of a partnership, the partner's adjusted basis in the partnership must be adjusted under the principles of sections 704(d) and 705. See § 1.987-7(e). Therefore, partnership basis adjustments would be made for each taxable year in which an exempt CFC recognizes pre-election section 987 gain or loss with respect to an exempt partnership QBU (including a taxable year in which an exempt CFC recognizes pre-election section 987 gain or loss of an exempt partnership under proposed § 1.987-15(g)(3)(ii)(A)). The Treasury Department and the IRS request comments on this issue in general, including: whether it would be appropriate for an exempt CFC to instead adjust the basis of its partnership interest by the full amount of its pre-election section 987 gain or loss in the first taxable year in which the CFC exemption election applies; whether the recognition of pre-election section 987 gain or loss should be accelerated when an exempt CFC sells its partnership interest during the 120-month amortization period (including whether rules are needed to ensure that capital loss on the sale of a partnership interest is not converted into ordinary loss); and whether special rules should be provided for cases in which an exempt CFC transfers its partnership interest in a transaction described in section 351 or 721.

In the first year in which a CFC exemption election ceases to apply (for example, because the election is deemed to be revoked under the consistency rules in § 1.987-1(g)(2)), any section 987 QBU owned by the CFC would be deemed to be newly formed on the first day of the taxable year. Proposed § 1.987-15(f)(1). As a result, taxpayers would not be required to compute net unrecognized section 987 gain or loss under § 1.987-4 for previous taxable years in which the CFC exemption election was in effect.

Notice 2026-17 explained that, under the rules to be provided in the proposed regulations, taxpayers would be required to account for foreign currency gain (but not loss) in the case of an inbound liquidation or reorganization of an exempt CFC. In response to the Notice, some commenters asserted that special rules for inbound transactions were not necessary and should not be included in the proposed regulations, or should be narrowly scoped to address transactions entered into with a principal purpose of abuse. Alternatively, the commenters suggested that symmetrical rules should be provided to account for foreign currency loss when the functional currency of a section 987 QBU depreciates in value. However, one commenter acknowledged that inbound transactions of exempt CFCs could present opportunities for importation of excess asset basis attributable to exchange rate fluctuations, which would implicate longstanding concerns of the Treasury Department and the IRS.

The Treasury Department and the IRS are of the view that rules are needed to prevent the importation of excess asset basis resulting from unrecognized foreign currency gains when the assets of an exempt CFC are acquired in an inbound reorganization or liquidation described in § 1.367(b)-3(a) (an “inbound nonrecognition transaction”). In the absence of such rules, an exempt CFC would not currently recognize section 987 gain pursuant to the CFC exemption election, and could also permanently escape U.S. taxation with respect to economic foreign currency gain in the case of an inbound nonrecognition transaction. The related excess asset basis would be imported into the United States and could allow the domestic acquiring corporation to claim excessive deductions or losses in subsequent taxable years. See part II.B of the Background section.

Accordingly, under proposed § 1.987-16, when the assets of an exempt CFC (a “transferor CFC”) are acquired in an inbound nonrecognition transaction, the transferor CFC would compute and recognize gain equal to the amount of its “section 987 asset basis.” Conceptually, section 987 asset basis is intended to reflect the amount by which the aggregate basis of the assets acquired in the inbound nonrecognition transaction has been increased due to appreciation in the value of a section 987 QBU's functional currency. This rule is consistent with one of the purposes of § 1.367(b)-3, which is to ensure that any asset basis repatriated in an inbound nonrecognition transaction either reflects earnings and profits that have already been subject to tax, or gives rise to an inclusion of income or recognition of gain at the time of the inbound nonrecognition transaction.

The Treasury Department and the IRS are of the view that an anti-abuse rule tied to a taxpayer's subjective intent would not sufficiently address concerns regarding the importation of excess asset basis. Because a CFC does not recognize section 987 gain on remittances from a section 987 QBU when a CFC exemption election is in effect, the CFC should recognize foreign currency gain when excess asset basis attributable to the section 987 QBU is imported into the United States, regardless of the taxpayer's reason for entering into the inbound nonrecognition transaction.

In addition, the proposed regulations do not provide rules under which a transferor CFC would recognize foreign currency loss in connection with an inbound nonrecognition transaction. The Treasury Department and the IRS are concerned that, if such rules were adopted, taxpayers could choose to enter into inbound nonrecognition transactions for the purpose of triggering substantial foreign currency losses. This approach is also consistent with the longstanding treatment under § 1.367(b)-3, which, upon an inbound nonrecognition transaction, requires an inclusion of income or recognition of gain and does not permit a deduction or recognition of loss. See §§ 1.367(b)-3(b)(3)(i) and (c)(2) and 1.367(b)-2(d)(1).

Notice 2026-17 identified two potential options for computing section 987 asset basis. Under the first option described in the Notice, section 987 asset basis would equal the transferor CFC's aggregate net unrecognized section 987 gain computed for a lookback period of ten taxable years preceding the inbound transaction, using the simplified method provided in § 1.987-10(e)(3). Under the second option, section 987 asset basis would be equal to the amount of the transferor CFC's excess asset basis computed under § 1.367(b)-3(g)(2)(i).

Two commenters recommended a modified version of the first option described in Notice 2026-17, under which the simplified method provided in § 1.987-10(e)(3) would be applied for only five years (rather than ten) unless taxpayers elected to utilize a ten-year lookback period. Another commenter asserted that the lookback period should not exceed ten years, but did not suggest a shorter period. Some commenters recommended that the simplified method provided in § 1.987-10(e)(3) should be applied using financial statement balance sheets. The commenters requested clarification as to whether adjustments would need to be made to the financial statement balance sheets for this purpose.

Other commenters suggested that section 987 asset basis be computed using a simplified version of the equity and basis pool method described in Notice 2026-17. One commenter requested that taxpayers be provided the option to compute section 987 asset basis by applying the rules of § 1.987-4(d) in their entirety to all taxable years preceding the inbound nonrecognition transaction.

Some commenters criticized the second option described in Notice 2026-17 (which looks to excess asset basis computed under § 1.367(b)-3(g)(2)(i)) because it does not isolate excess asset basis attributable to foreign currency gain with respect to a section 987 QBU. The commenters requested guidance as to how the foreign currency-related component of excess asset basis (“EAB”) could be identified for this purpose. Another commenter, however, asserted that the EAB method would be appropriate for taxpayers that are unable to use other methodologies due to data limitations.

Several commenters suggested that the cumulative translation adjustment (“CTA”) computed under GAAP could be used as a reasonable proxy for the amount of section 987 asset basis. The commenters requested guidance as to adjustments that would need to be made to the CTA amount for this purpose. One commenter recommended that taxpayers be permitted to use the CTA to compute section 987 asset basis only if the CTA methodology used for GAAP purposes is substantially similar to the computations required under section 987. However, the Treasury Department and the IRS also received feedback indicating that, as a result of remittances, disregarded transactions, and other factors, there can be significant book-to-tax differences between the CTA amount and section 987 gain or loss amounts, and it may not be feasible to provide administrable rules for making the necessary book-to-tax adjustments.

The proposed regulations would provide rules for determining a transferor CFC's section 987 asset basis using administrable proxies based on information that is expected to be readily available at the time of the inbound nonrecognition transaction. These rules are intended to avoid the need for retroactive application of the rules of § 1.987-4 (for determining net unrecognized section 987 gain or loss) to prior taxable years based on historical information. The Treasury Department and the IRS are of the view that an approximation is appropriate in this context, given the limited circumstances under which the determination would be necessary (in light of the likely nonrecurring aspect of an inbound nonrecognition transaction) and the potential compliance and administrative burdens of requiring a precise calculation.

In particular, proposed § 1.987-16(c) would require the transferor CFC to determine its section 987 asset basis under one of two methodologies. The transferor CFC would establish its choice of methodology with respect to an inbound nonrecognition transaction by applying that methodology in computing the amount of section 987 asset basis (if any) to be recognized under proposed § 1.987-16(d)(1) with respect to the inbound nonrecognition transaction.

Under the first methodology (the “lookback methodology”), section 987 asset basis would be equal to the aggregate net amount of unrecognized section 987 gain computed using the simplified method provided in § 1.987-10(e)(3) for taxable years ending within the 72-month period preceding the inbound nonrecognition transaction (excluding any taxable year predating the CFC exemption election). Proposed § 1.987-16(c)(2). This approach is expected to capture the appropriate amount of foreign currency gain for those taxable years with a reasonable degree of accuracy. In response to comments, the proposed regulations would provide for a lookback period of only 72 months (rather than ten years) in order to reduce the compliance burden of computing section 987 asset basis.

Under the second methodology, section 987 asset basis would be equal to the amount of EAB with respect to the transferor CFC determined under the rules of § 1.367(b)-3(g)(2)(i) (but without regard to the application of proposed § 1.987-16). Proposed § 1.987-16(c)(3). This approach relies on asset basis amounts determined at the time of the inbound nonrecognition transaction, rather than historical section 987 computations, and therefore may be simpler for taxpayers to apply in some cases. The other components of the EAB formula—earnings and profits and outside stock basis—are also expected to be available at the time of the inbound nonrecognition transaction. However, the Treasury Department and the IRS acknowledge that this approach can result in an imprecise amount of section 987 asset basis (for example, when the transferor CFC has excess asset basis for reasons unrelated to, or in addition to, exchange rate fluctuations).

The Treasury Department and the IRS are continuing to study whether, in addition to the two methodologies described in proposed § 1.987-16(c), other alternative methodologies recommended by commenters could be used to compute a transferor CFC's section 987 asset basis. Accordingly, the comments described in part I.G.2.a of this Explanation of Provisions may be addressed further in future guidance.

Under proposed § 1.987-16(d)(1), a transferor CFC would recognize section 987 gain equal to the amount of its section 987 asset basis immediately before the inbound nonrecognition transaction. This rule aligns with the rules that apply when a CFC exemption election is not in effect. In particular, under § 1.987-8, all section 987 QBUs owned by a CFC are treated as terminated immediately before an inbound nonrecognition transaction, and any net unrecognized section 987 gain is recognized by the CFC at that time.

An example in the proposed regulations would confirm that section 987 gain recognized under proposed § 1.987-16(d)(1) is not gain recognized with respect to property distributed in a liquidation within the meaning of section 334(b)(1)(A) (or gain recognized on a transfer of property within the meaning of section 362(b)). See proposed § 1.987-16(f)(2)(iii). Under proposed § 1.987-16(d)(1), the section 987 gain would be recognized immediately before the inbound nonrecognition transaction, but not as part of the inbound nonrecognition transaction. Therefore, the domestic acquiring corporation's basis in the property received would not be affected by the recognition of section 987 gain under proposed § 1.987-16(d)(1). 3

This result is appropriate because section 987 gain recognized under proposed § 1.987-16(d) is intended to reflect the amount by which a CFC's inside asset basis has previously been increased due to exchange rate fluctuations without gain recognition. If the domestic acquiring corporation's asset basis were increased under section 334(b)(1)(A) (or section 362(b)) due to the recognition of section 987 gain under proposed § 1.987-16(d), that would reintroduce the misalignment between asset basis and taxable income or gain that the rules of proposed § 1.987-16 are meant to address.

The source and character of section 987 gain recognized under § 1.987-16(d) would be determined under § 1.987-6 in the taxable year of recognition. Proposed § 1.987-6(b)(1)(vi). In general, source and character would be determined based on the relative tax book value of all of the transferor CFC's assets. Proposed § 1.987-16(d)(2)(ii). However, stock of a lower-tier subsidiary held by the transferor CFC would not be taken into account for this purpose, because this stock is not attributable to a section 987 QBU under § 1.987-2(b)(2)(i)(A).

In response to Notice 2026-17, the Treasury Department and the IRS received a number of comments regarding the manner in which section 987 asset basis should be taken into account. One commenter recommended that, immediately before the inbound nonrecognition transaction, the basis of the transferor CFC's assets should be reduced by the amount of its section 987 asset basis. Other commenters requested that taxpayers be permitted to elect between different methods for taking into account section 987 asset basis, including (i) gain recognition, (ii) adjustments to asset basis, and (iii) adjustments to the domestic acquiring corporation's net unrecognized section 987 gain or loss following the inbound nonrecognition transaction. The Treasury Department and the IRS are continuing to evaluate these comments. Accordingly, these comments may be addressed in future guidance.

Under the proposed regulations, taxpayers would not be required to compute a transferor CFC's section 987 asset basis, or recognize an amount of section 987 gain equal to the section 987 asset basis, if the aggregate tax basis of the transferor CFC's assets is less than $25 million. Proposed § 1.987-16(e). This de minimis rule is intended to reduce the compliance and administrative burdens of applying § 1.987-16 when a CFC is unlikely to have a significant amount of section 987 asset basis. It is anticipated that the de minimis rule will relieve burdens on small businesses by eliminating the need for taxpayers to determine section 987 asset basis for a significant number of transactions.

In general, the $25 million de minimis threshold is applied with respect to all of a transferor CFC's assets, regardless of whether the assets are attributable to a section 987 QBU at the time of the inbound nonrecognition transaction. This rule is intended to ensure that any assets that may have been previously owned by a section 987 QBU are taken into account for purposes of the de minimis threshold, even if the assets were distributed to the transferor CFC (or the section 987 QBU terminated) before the inbound nonrecognition transaction.

Non-portfolio stock held by the transferor CFC generally would not be taken into account for purposes of the de minimis threshold, because this stock is not attributable to a section 987 QBU under § 1.987-2(b)(2)(i)(A). Proposed § 1.987-16(e)(2). Non-portfolio stock would, however, be taken into account to the extent that other assets of the transferor CFC had been exchanged for such stock (whether or not gain or loss was recognized on the exchange) during the 120-month period preceding the inbound nonrecognition transaction. Thus, for example, if a transferor CFC contributes a section 987 QBU to a lower-tier subsidiary in a section 351 transaction, the basis of the subsidiary stock received by the transferor CFC in exchange for the section 987 QBU would be taken into account under proposed § 1.987-16(e)(2).

The Treasury Department and the IRS received several comments relating to potential de minimis exceptions. One commenter suggested a de minimis rule tied to the amount of the CTA determined for GAAP purposes. Another commenter recommended that a de minimis exception should apply if the transferor CFC's inside asset basis does not exceed 10 percent of the aggregate gross basis of all of the domestic acquiring corporation's assets, or if the amount of section 987 asset basis is less than 10 percent of the transferor CFC's inside asset basis. The Treasury Department and the IRS are continuing to study these comments and will address them in future guidance.

As described in part I.G.2.b of this Explanation of Provisions, the proposed regulations under § 1.987-16 would provide that excess asset basis has the meaning provided in § 1.367(b)-3(g)(2)(i) but is determined prior to the application of § 1.987-16(d). Proposed § 1.987-16(c)(3). To ensure that amounts that give rise to excess asset basis are not double counted (once in applying the proposed regulations under § 1.987-16(d) and again in applying § 1.367(b)-3(g)), § 1.367(b)-3(g)(2)(i) would be modified to provide that excess asset basis generally is determined after the application of § 1.987-16(d).

Consistent with Notice 2025-72, proposed § 1.987-10(e)(5)(ii)(A) would provide that an owner that is subject to an amortization election would recognize pretransition gain or loss ratably over a period of 120 months beginning with the first day of the first taxable year in which the section 987 regulations apply. This rule is intended to prevent distortions that could arise from the accelerated recognition of pretransition gain or loss in a short taxable year.

The proposed regulations generally are proposed to apply to taxable years ending on or after the date final regulations are filed with the Federal Register (the “finalization date”). Proposed § 1.987-10(e)(5)(ii) (relating to the amortization election for pretransition gain or loss) is proposed to apply to taxable years beginning after December 31, 2024, and ending on or after November 25, 2025.

Except as provided in the following sentence, a taxpayer may rely on the proposed regulations for a taxable year beginning after December 31, 2024, and ending before the finalization date, provided that the taxpayer and all members of its consolidated group and section 987 electing group consistently follow the proposed regulations for the taxable year and all subsequent taxable years ending before the finalization date. A taxpayer may rely separately on proposed § 1.987-10(e)(5)(ii) for a taxable year beginning after December 31, 2024, and ending before the finalization date, provided that the taxpayer and all members of its consolidated group and section 987 electing group consistently follow proposed § 1.987-10(e)(5)(ii) for the taxable year and all subsequent taxable years ending before the finalization date.

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. This rule is expected to be an Executive Order 14192 deregulatory action.

The proposed regulations have been designated by the Office of Management and Budget's (OMB's) Office of Information and Regulatory Affairs (OIRA) as subject to review under 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 a significant regulatory action and subject to review under section 3(f) of Executive Order 12866 and section 1(b) of the Memorandum of Agreement. Accordingly, the proposed regulations have been reviewed by OMB.

Section 987 applies when a taxpayer owns a qualified business unit, or QBU, that has a functional currency different from the taxpayer's functional currency. In general, section 987(1) and (2) provide rules for determining and translating the QBU's taxable income or loss, while section 987(3) requires proper adjustments for transfers of property between QBUs with different functional currencies. In practical terms, section 987(3) generally requires the owner of a section 987 QBU to recognize foreign currency gain or loss when the QBU makes a remittance to its owner or is terminated.

The Treasury Department and the IRS have issued several sets of regulations and proposed regulations under section 987. In 1991, Treasury and the IRS issued proposed regulations that provided an earnings and capital method for determining section 987 gain or loss. Under that approach, taxpayers maintained an equity pool in the QBU's functional currency and a basis pool in the owner's functional currency; the equity pool generally represented the QBU's branch equity, and the basis pool generally represented the owner's basis in that branch equity. The pools were adjusted for the QBU's taxable income or loss and for contributions and remittances. During the years following the 1991 proposed regulations, many taxpayers became familiar with this framework.

In 2006, Treasury and the IRS issued new proposed regulations and withdrew the 1991 proposed regulations. The new proposed regulations were later finalized with modifications in 2016. Unlike the 1991 pool-based approach, the 2016 final regulations adopted a more detailed balance-sheet-based framework that required the recognition of currency gain or loss only on financial assets and liabilities, referred to as “marked items,” and not other assets and liabilities, referred to as “historic items.” In general, that framework required taxpayers to determine the items of income, gain, deduction, and loss attributable to a section 987 QBU in the QBU's functional currency and translate those items into the owner's functional currency, with the marked items referencing a spot exchange rate and the historic items referencing the historic exchange rate at which the item was acquired or incurred. The rules also required taxpayers to compute and maintain net unrecognized section 987 gain or loss with respect to each section 987 QBU, based on changes in the QBU's balance sheet, and to recognize a portion of that accumulated currency gain or loss when the QBU made a remittance to its owner. However, the applicability date of the 2016 final regulations was deferred several times, and taxpayers continued to face uncertainty about how to apply section 987 to their QBUs.

In December 2024, Treasury and the IRS finalized regulations under section 987 that retained the balance-sheet-based framework of the 2016 final regulations, with modifications intended to improve administrability, including an election (the current rate election) to recognize currency gain or loss with respect to all of a QBU's assets and liabilities, which eliminates the need to track historic exchange rates for historic items. The 2024 final regulations generally apply to taxable years beginning after December 31, 2024, and apply to CFCs that own section 987 QBUs. Under those rules, a CFC generally must determine section 987 taxable income or loss with respect to a section 987 QBU, compute net unrecognized section 987 gain or loss, and recognize section 987 gain or loss when the QBU makes a remittance or in connection with certain terminations. The 2024 final regulations also provide elections and related rules, including the current rate election, an annual recognition election, loss suspension rules, and transition rules for preexisting section 987 gain or loss.

At the same time, Treasury and the IRS issued 2024 proposed regulations addressing frequently recurring disregarded transactions between a section 987 QBU and its owner. Those proposed regulations also requested comments on the application of section 987 to partnerships and CFCs. In particular, Treasury and the IRS requested comments on whether section 987(3) and the related regulations should apply to CFCs, noting both the potential compliance burden of applying section 987(3) to section 987 QBUs of CFCs and the need to address concerns about excess asset basis in inbound transactions if section 987(3) were not applied to section 987 QBUs of CFCs.

In February 2026, Treasury and the IRS issued Notice 2026-17. The Notice announced forthcoming proposed regulations intended to simplify the operation of the 2024 final regulations, reduce compliance burdens, and limit the effect of certain section 987 rules on ordinary course transactions. In particular, the Notice described an election to use an equity and basis pool method for determining section 987 taxable income or loss and section 987 gain or loss, in lieu of certain balance-sheet-based computations under the 2024 final regulations. Under that method, taxpayers would generally maintain an equity pool in the section 987 QBU's functional currency and a basis pool in the owner's functional currency, with those pools adjusted for QBU income or loss and transfers between the QBU and its owner. In addition, the Notice announced that forthcoming proposed regulations would provide an election under which CFCs generally would not compute or recognize section 987 gain or loss under section 987(3), except in connection with certain inbound nonrecognition transactions.

The proposed regulations in this NPRM implement that CFC exemption election. Under the proposed regulations, taxpayers may elect to not apply section 987(3) and the related regulations generally to CFCs covered by the election (except to the extent provided in the proposed regulations). Section 987(1) and (2) would continue to apply, so CFCs would still determine and translate section 987 taxable income or loss as necessary for Federal income tax purposes. The proposed regulations also provide rules for making and revoking the election, consistency requirements for commonly controlled CFCs, treatment of pre-election section 987 gain or loss, and special rules for inbound nonrecognition transactions. The inbound nonrecognition transaction rules are intended to prevent exchange-rate-driven asset basis increases from being imported into the United States without appropriate recognition of section 987 gain. The other parts of Notice 2026-17 regarding the simplification of the 2024 final regulations will be addressed in other forthcoming proposed regulations.

Proposed regulations are needed to provide taxpayers with operative rules for making and applying the CFC exemption election, in order to reduce the compliance and administrative burdens of applying section 987(3) with respect to section 987 QBUs owned by CFCs. Notice 2026-17 announced that Treasury and the IRS intended to issue rules allowing CFCs generally not to compute or recognize section 987 gain or loss under section 987(3), except in connection with certain inbound nonrecognition transactions, but the Notice functioned as a preview of future guidance rather than a complete set of rules taxpayers could rely on to make the election.

Sections 987 and 989 provide regulatory authority for these rules. Section 987(3) directs the Secretary to prescribe the proper adjustments needed for transfers between QBUs with different functional currencies, and section 989(c) authorizes regulations necessary or appropriate to carry out the purposes of the foreign currency rules, including rules for related-party and QBU transactions.

Absent proposed regulations, taxpayers would not have the specific rules needed to implement the CFC exemption election on tax returns. Taxpayers need guidance on which CFCs are covered, who makes the election, when and how the election is made, whether the election must be applied consistently across commonly controlled CFCs, how pre-election section 987 gain or loss is treated, and what happens in inbound nonrecognition transactions or revocations of the election.

The proposed regulations provide an election, referred to as the CFC exemption election, under which an electing CFC generally would not compute or recognize section 987 gain or loss with respect to its section 987 QBUs, i.e., branches or disregarded entities with functional currencies different from the CFC's functional currency. The election is intended to reduce the compliance and administrative burdens associated with applying the 2024 final regulations to CFCs that own section 987 QBUs.

The proposed regulations do not exempt CFCs from section 987 entirely. Section 987(1) and (2) would continue to apply for purposes of determining and translating section 987 taxable income or loss, including for purposes of computing taxable income and earnings and profits. Thus, the election is targeted at section 987(3) gain or loss recognition, rather than the broader rules for determining QBU income. For example, in taxable years in which the CFC exemption election is in effect, a CFC would continue to translate section 987 taxable income or loss under the applicable section 987 rules, generally using the yearly average exchange rate and by deeming a current rate election to be in effect. But if property is transferred from a section 987 QBU to the CFC owner in a transaction that would be treated as a remittance, the CFC generally would not compute or recognize section 987 gain or loss under section 987(3) as a result of that transfer.

The proposed regulations provide rules for making and revoking the CFC exemption election. In general, the election would be made by the authorized person for the relevant section 987 electing group. Special timing rules would apply for early years to allow taxpayers sufficient time to evaluate the election after issuance of the proposed and final regulations. The proposed regulations also provide that the election generally could not be revoked without the consent of the Commissioner. These rules are intended to make the election administrable and to reduce uncertainty for taxpayers preparing returns for the first years in which the 2024 final regulations apply.

The proposed regulations also include consistency requirements. The CFC exemption election generally must be made consistently for commonly controlled CFCs, including majority-owned CFCs of affiliated domestic corporations. The proposed regulations also include rules addressing CFC stock owned through domestic partnerships and an anti-avoidance rule for related-party transactions designed to avoid the consistency requirements or trigger an inappropriate deemed revocation. These rules are intended to prevent taxpayers from selectively applying the election to CFCs with expected section 987 gains while leaving other CFCs with expected section 987 losses outside the election.

The proposed regulations address section 987 gain or loss that arose before the CFC exemption election became effective. In general, an exempt CFC would compute its pre-election section 987 gain or loss and recognize that amount ratably over a 120-month period beginning with the first month of the taxable year for which the CFC exemption election is made. This rule preserves the tax consequences of section 987 gain or loss that accrued before the election by requiring both pre-election gain and pre-election loss to be taken into account over the same 120-month period. The proposed regulations would provide a mandatory asset basis test for certain smaller section 987 QBUs. Under this test, a QBU with assets of less than $50 million would not be required to compute or recognize pre-election unrecognized section 987 gain or loss in connection with the CFC exemption election. The $50 million threshold would be applied separately to each QBU (or to each group of same-country QBUs), based on the QBU's average assets for the three-year period preceding the first taxable year for which the election is made. This rule is intended to reduce transition-related compliance burdens for smaller QBUs for which the cost of computing pre-election section 987 pools may be relatively high compared to the potential tax amounts at issue.

The proposed regulations also provide rules for partnerships owned by exempt CFCs. If an exempt CFC owns a section 987 QBU through a partnership, or if a partnership is sufficiently owned by exempt CFCs, the proposed regulations generally would extend the CFC exemption election to the relevant QBU as if the QBU were owned directly by an exempt CFC. These rules are intended to provide similar treatment for section 987 QBUs owned directly by exempt CFCs and section 987 QBUs owned through partnerships by exempt CFCs, while continuing to require reasonable and consistent application of section 987(1), section 987(2), and section 989(a).

Finally, the proposed regulations include an important limitation on the election for certain inbound nonrecognition transactions. If an exempt CFC engages in an inbound liquidation or reorganization, the proposed regulations would require the CFC to recognize section 987 gain to the extent exchange-rate fluctuations have increased the basis of assets transferred to a domestic corporation in the transaction. This rule is intended to prevent unrecognized currency gain from increasing the basis of assets transferred to a domestic corporation without a corresponding income inclusion. For this purpose, the proposed regulations would provide two proxy methods for computing the amount of section 987 asset basis, giving taxpayers flexibility to use the method that is more administrable in their circumstances. The first method is based on net unrecognized section 987 gain over a specified historical period, and the second one is based on excess asset basis concepts under section 367(b). The proposed regulations would not provide a corresponding rule allowing an exempt CFC to recognize section 987 loss in an inbound transaction. 4 This limitation is intended to prevent taxpayers from using elective inbound transactions to selectively recognize losses, and is consistent with the longstanding treatment of inbound nonrecognition transactions under section 367(b), which does not permit the recognition of a deduction or loss. A de minimis rule would exclude certain smaller inbound transactions from the requirement to compute and recognize section 987 asset basis.

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.

The proposed regulations would affect U.S. taxpayers that own CFCs with section 987 QBUs. Based on 2023 filing-year data from the IRS Research, Applied Analytics, and Statistics Division, the Treasury Department and the IRS estimate that approximately 1,500 taxpayers would be affected by the proposed regulations. This estimate is based on the number of entities that own at least one CFC with a section 987 QBU.

The taxpayers most directly affected are multinational groups with CFCs that conduct foreign branch operations in currencies different from the functional currency of the CFC owner. These taxpayers may otherwise be required under the 2024 final regulations to compute and track section 987 gain or loss, remittances, transition amounts, and related attributes for their CFC-owned section 987 QBUs. Taxpayers that do not own CFCs with section 987 QBUs, or that do not make the CFC exemption election, generally would not be materially affected by the election rules.

The principal economic effect of the proposed regulations is expected to be a reduction in recurring compliance and administrative burden for taxpayers that make the CFC exemption election. Under the baseline, CFCs generally must compute net unrecognized section 987 gain or loss and recognize section 987 gain or loss on remittances or certain terminations. These computations can require detailed information about section 987 QBU assets and liabilities, transfers between a QBU and its owner, exchange rates, remittances, suspended losses, deferred amounts, and transition items. By contrast, once the CFC exemption election applies, an electing CFC generally would not compute or recognize section 987 gain or loss under section 987(3) for ordinary CFC branch operations.

Public comments on prior section 987 regulations indicate that these computations can impose meaningful taxpayer-specific burdens. One commenter, a public company with approximately 10 to 15 QBUs using a functional currency different from their owner, stated that its historical section 987 monitoring and calculation burden had been approximately 20 hours or less per year, but that the 2016 section 987 regulations would require substantially more work. 5 The commenter estimated at least 80 hours merely to obtain a working knowledge of the rules, elections, and calculations, and at least 80 hours for a single QBU to transition to the Foreign Exchange Exposure Pool (FEEP) method in one example involving historic asset and exchange-rate tracking. The same commenter stated that annual calculations and disclosures would be needed for each QBU and would require weeks of work.

By allowing CFCs covered by the election generally not to compute or recognize section 987 gain or loss under section 987(3), the proposed regulations would reduce the need for ongoing section 987(3) computations for ordinary CFC branch operations. Taxpayers would still need to apply section 987(1) and (2) to determine and translate section 987 taxable income or loss, and certain computations would remain necessary for pre-election gain or loss and inbound nonrecognition transactions. 6 However, for electing taxpayers, the proposed regulations are expected to reduce recurring compliance costs and reduce the administrative burden on the IRS associated with reviewing routine CFC remittance computations.

The exact magnitude of these compliance cost savings is uncertain. Although the compliance burden reduction may encourage some taxpayers to make the CFC exemption election, it is possible not all eligible taxpayers will do so. 7 Further, available tax return data do not directly measure the number of hours taxpayers spend applying section 987(3) to each affected QBU, nor the exact cost associated with those hours worked. Treasury and the IRS therefore consider a range of estimates using three inputs: the number of affected section 987 QBUs, the hours saved per affected QBU, and the hourly labor cost of the tax professionals performing the work.

As noted above, it is estimated that approximately 1,500 entities own at least one CFC with a section 987 QBU. For a lower bound on the number of affected QBUs, it is assumed that two-thirds of the entities make the CFC exemption election, and that each entity owns only one CFC with one section 987 QBU, yielding 1,000 affected QBUs. However, many of these entities in fact own multiple CFCs with section 987 QBUs, and their compliance costs are therefore higher, as they must be incurred for each section 987 QBU. For an upper bound on the number of affected QBUs, it is assumed that all of the entities make the election, and that each owns three QBUs on average, yielding 4,500 affected QBUs.

For the number of hours saved per affected QBUs, Treasury and the IRS consider the compliance activities avoided and the public comment described above. These imply that the proposed regulations may reduce recurring compliance work by approximately 20-60 hours per affected QBU per year. The lower end reflects a conservative recurring burden estimate; the higher end reflects the greater complexity of applying the section 987 regulations to taxpayers with multiple currencies, multiple CFCs, frequent disregarded transactions, remittances, or more complex branch balance sheets. The hourly cost of this work is estimated using a monetization rate of $88.50 per hour, which IRS Research, Applied Analytics, and Statistics applies for certain information collection burdens specifically related to tax filing.

Using a central estimate of 4,500 affected QBUs, 40 hours saved per QBU, and $88.50 per hour of tax professional work, the Treasury and the IRS estimate that the proposed regulations would generate approximately $16 million in annual compliance cost savings.

This estimate should be interpreted as an order-of-magnitude estimate rather than a precise measurement. The actual savings will depend on the number of CFCs and QBUs for which taxpayers make the election, the extent of existing section 987 compliance systems, the number and complexity of currencies and disregarded transactions, the frequency of remittances and restructurings, and the amount of residual work required for pre-election section 987 gain or loss and inbound transactions.

The proposed regulations would require pre-election section 987 gain or loss to be recognized ratably over a 120-month period. This rule applies to taxpayers that make the CFC exemption election after unrecognized section 987 gain or loss has already accrued. It is intended to preserve the tax consequences of currency gain or loss that arose before the election became effective and to prevent asymmetric results under which taxpayers with accrued gains could elect out of section 987(3) and eliminate those gains, while taxpayers with accrued losses could preserve or accelerate those losses.

The 120-month period also smooths the transition into the CFC exemption election. Relative to immediate recognition, ratable recognition reduces the likelihood that making the election would produce a large one-year tax effect for taxpayers with substantial pre-election section 987 gain. Similarly, taxpayers with substantial pre-election section 987 loss would not receive an immediate deduction for the full amount. This treatment reduces the extent to which the election itself creates a timing benefit or cost unrelated to current business operations.

Using months rather than taxable years also avoids acceleration in short taxable years. For a taxpayer with full 12-month taxable years, a 120-month period generally produces the same annual recognition pattern as a 10-year period. For a taxpayer with a one-month short taxable year, however, the monthly rule would require recognition of 1/120th of the relevant amount rather than one-tenth. This reduces the extent to which the occurrence or timing of a short taxable year affects the tax consequences of entering the election.

The proposed regulations would also include a mandatory QBU-level asset-based test intended to reduce transition burden for smaller QBUs. Under this test, a QBU with average assets of less than $50 million for the three-year period preceding the election would not be required to compute or recognize pre-election unrecognized section 987 gain or loss in connection with the CFC exemption election. Because reconstructing historical or pretransition section 987 pools may involve fixed costs per QBU, the test is expected to reduce entry costs for smaller QBUs for which those fixed costs may be large relative to the expected future compliance savings from the election.

Based on Form 8858 returns for tax year 2021, the Treasury Department and the IRS estimate that a $50 million threshold would exempt about 75 percent of section 987 QBUs from calculating pre-election pools, while excluding less than 5 percent of reported QBU assets. Thus, the test would provide broad compliance relief by QBU count while retaining the transition rules for larger QBUs, where the potential tax consequences are more likely to be material.

For QBUs above the asset threshold, taxpayers making the election would need to compute pre-election section 987 gain or loss and track the recognized and remaining unrecognized amounts over the 120-month period. 8 These costs are likely to be greatest for taxpayers that make the CFC exemption election after the transition date, taxpayers with multiple CFC-owned section 987 QBUs, taxpayers with outstanding deferred section 987 gain or loss or cumulative suspended section 987 loss, and taxpayers that own section 987 QBUs through partnerships. These costs are transitional and targeted; they are linked to preserving pre-election amounts while the CFC exemption election generally reduces ongoing section 987(3) computations for ordinary CFC branch operations after the election takes effect.

Overall, the 120-month amortization rule and the QBU-level asset-based test are expected to make the CFC exemption election more administrable while limiting selective tax effects from accrued section 987 positions. The amortization rule preserves pre-election amounts and reduces incentives to time the election to eliminate gains or accelerate losses. The asset-based test reduces the principal transition cost for smaller QBUs—the need to compute historical or pre-election section 987 pools—while retaining the transition rules for QBUs for which the potential tax consequences are more likely to be material.

The proposed regulations include special rules for certain inbound nonrecognition transactions involving exempt CFCs. These rules are intended to prevent exchange-rate-driven increases in asset basis from being imported into the United States without corresponding gain recognition. Without these rules, a CFC exemption election could reduce the compliance burden for ordinary CFC branch operations but also create an opportunity for untaxed section 987 currency gain to be reflected in the basis of assets transferred to a domestic corporation in an inbound liquidation or reorganization. That imported basis could then reduce U.S. taxable income through depreciation, amortization, gain reduction, or loss recognition in later years.

The economic effect of these rules is expected to be targeted. The rules apply only when assets of an exempt CFC are acquired in an inbound nonrecognition transaction, rather than to ordinary-course remittances or ongoing CFC branch operations. In addition, the gain-recognition rule generally approximates the treatment that would apply if the CFC exemption election were not in effect, because the 2024 final regulations generally treat section 987 QBUs owned by a CFC as terminated immediately before an inbound nonrecognition transaction and require recognition of any net unrecognized section 987 gain at that time. Thus, relative to the baseline, the inbound transaction rules principally prevent the CFC exemption election from changing the treatment of a targeted class of restructuring transactions in a way that could allow excess asset basis to enter the U.S. tax system.

The proposed regulations would require recognition of section 987 gain based on two alternative methods for determining section 987 asset basis. These methods are intended to serve as administrable proxies that reduce the need for full historical section 987 computations while preserving gain recognition in transactions where the basis-importation concern is most significant. The first methodology would generally use a six-year lookback computation of net unrecognized section 987 gain, while the second methodology would use excess asset basis concepts under section 367(b). These alternatives may reduce compliance costs by allowing taxpayers to use the method that is more administrable in their circumstances, although either method may be imprecise for some taxpayers. The proposed regulations also include a de minimis rule, which reduces compliance burden for smaller inbound transactions of CFCs with less than $25 million in assets, where any potential basis-importation concern is less likely to be economically significant.

Consistent with the 2024 final regulations' treatment of suspended section 987 losses in inbound nonrecognition transactions, the proposed regulations would not provide a special rule allowing an exempt CFC to recognize section 987 loss in an inbound transaction. This asymmetric treatment may deny loss recognition in some cases, but it reduces the risk that taxpayers could selectively enter into elective inbound transactions to trigger foreign currency losses. This approach is also consistent with the longstanding treatment of inbound nonrecognition transactions under section 367(b), which does not permit the recognition of a deduction or loss.

For these reasons, the inbound transaction rules are expected to have limited effects on ordinary business operations and investment decisions, while reducing opportunities for tax-motivated basis importation in a narrow class of transactions.

The proposed regulations require the CFC exemption election to be made consistently for commonly controlled CFCs and include anti-avoidance rules for related-party transactions designed to avoid those consistency requirements or produce inappropriate deemed revocations. These rules are intended to reduce selective use of the election. In particular, they limit the ability of a taxpayer group to apply the CFC exemption election selectively for tax-motivated reasons. This helps ensure that the election functions as a simplification rule, rather than as a tool for one-sided gain avoidance or loss preservation.

The consistency requirements may reduce flexibility for taxpayers with CFCs that have different section 987 profiles. A taxpayer may have some CFCs with expected section 987 gains and others with expected section 987 losses, or some CFCs with relatively simple branch operations and others with more complex currency exposures. A consistent election rule may therefore cause some taxpayers to forgo the election, especially if the taxpayer values flexibility to recognize losses under the baseline rules or is uncertain about future currency movements, acquisitions, dispositions, or restructurings. The constraint is targeted, however: taxpayers remain able to choose whether to make the election, and the rules primarily limit selective use of the election within commonly controlled groups, where the potential for tax-motivated sorting is greatest.

Absent consistency requirements, taxpayers would have stronger incentives to organize CFC ownership and branch structures around expected section 987 outcomes. A taxpayer could elect exempt treatment for CFCs with built-in or expected section 987 gains while declining the election for CFCs with built-in or expected section 987 losses, producing one-sided results across CFCs that are economically part of the same multinational group. The rules also reduce incentives to alter ownership chains, branch structures, or related-party transactions to separate gain-producing and loss-producing section 987 QBUs into different election groups. By requiring the taxpayer to evaluate the election across its commonly controlled CFC structure, the rules reduce the extent to which tax outcomes depend on formal ownership structure rather than underlying economic activity.

The anti-avoidance rules reinforce the consistency requirements by addressing controlled-group transactions undertaken with a principal purpose of avoiding the requirement to make the CFC exemption election, causing an inappropriate deemed revocation, or causing a partnership to cease to be an exempt partnership. These rules reduce the value of related-party restructuring designed to change election status without a corresponding change in the group's economic position. As a result, they are expected to preserve the compliance-cost reduction objective of the election while limiting the use of related-party transactions to obtain one-sided section 987 outcomes.

Overall, the consistency and anti-avoidance requirements are expected to improve the integrity and administrability of the CFC exemption election. Although they may reduce election uptake at the margin, they also reduce opportunities for selective gain avoidance and loss recognition, limit incentives for tax-motivated restructuring, and promote more consistent treatment among taxpayer groups with similar CFC branch operations and common control relationships.

Overall, the proposed regulations are expected to be taxpayer-favorable and burden-reducing relative to the 2024 final regulations. The principal economic effects are expected to be reduced annual compliance costs of approximately $16 million, greater certainty for return preparation, reduced administrative burden, and targeted protection against basis importation in inbound nonrecognition transactions. The Treasury Department and the IRS invite public comments and additional data on the economic effects that would result from these proposed regulations.

The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA) requires that a Federal agency obtain the approval of the Office of Management and Budget (OMB) before collecting information from the public, whether such collection of information is mandatory, voluntary, or required to obtain or retain a benefit. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a valid control number assigned by the OMB.

The collection of information in the proposed regulations is in proposed § 1.987-1(g)(3). The likely respondents are U.S. shareholders of CFCs that own section 987 QBUs.

The collection of information in proposed § 1.987-1(g)(3) is required only when a taxpayer makes or revokes a CFC exemption election under proposed § 1.987-15. In general, taxpayers can make a CFC exemption election without the Commissioner's consent, but consent is required to revoke the election. The Commissioner's consent may be granted with a private letter ruling. When a taxpayer makes or revokes a CFC exemption election, the collection of information is mandatory. The collection of information required by proposed § 1.987-1(g)(3) will be used by the IRS for tax compliance purposes.

The Treasury Department and the IRS intend that the information described in proposed § 1.987-1(g)(3) will be collected by attaching a statement to Form 8964-ELE. For purposes of the PRA, the reporting burden associated with those collections of information will be reflected in the PRA submissions associated with Form 8964-ELE. The OMB Control Number for Form 8964-ELE will be included within 1545-0123 for business filers, 1545-0074 for individual filers, and 1545-0092 for trust and estate filers in accordance with the PRA procedures under 5 CFR 1320.10.

To the extent that a taxpayer makes or revokes an election by obtaining a private letter ruling, the reporting burden associated with those collections of information will be reflected in the PRA submissions associated with revenue procedures governing private letter rulings. The OMB Control Number for those revenue procedures is control number 1545-1522. The proposed regulations would require taxpayers merely to follow the procedures under Revenue Procedure 2026-1, IRB 2026-1 (or future revenue procedures governing private letter rulings) and would not change the collection requirements of the Revenue Procedure.

Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any Internal Revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.

Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby certified that this rulemaking will not have a significant economic impact on a substantial number of small entities within the meaning of section 601(6) of the Regulatory Flexibility Act.

The proposed regulations affect U.S. shareholders of CFCs with foreign branch operations. The number of small entities potentially affected by the proposed regulations is unknown; however, it is unlikely to be a substantial number because taxpayers that are U.S. shareholders of CFCs are typically larger businesses. The Treasury Department and the IRS estimate that the total number of entities that own a CFC with a foreign branch subject to section 987 is approximately 1,500 (many of which may not make the CFC exemption election). This estimate is based on the number of corporations and partnerships that filed a Form 8858 in 2023 that showed that the filer: (1) owned at least one disregarded entity or branch with a functional currency different from the functional currency of the owner, (2) indicated that the disregarded entity or branch was a section 989 QBU, and (3) indicated that the disregarded entity or branch was owned by a CFC. As shown in the following table, only a small percentage of those filers are small entities.

A portion of the economic impact of the proposed regulations may derive from the collection of information requirements imposed under proposed § 1.987-1(g)(3). The Treasury Department and the IRS have determined that the average burden is 1.95 hours per response. The IRS's Research, Applied Analytics, and Statistics division estimates that the appropriate wage rate for this set of taxpayers is $88.50 per hour. Thus, the annual burden per taxpayer from each collection of information requirement is $172.60.

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

Section 202 of the Unfunded Mandates Reform Act of 1995 requires that agencies assess anticipated costs and benefits and take certain other actions before issuing a final rule that includes any Federal mandate that may result in expenditures in any one year by a State, local, or Tribal government, in the aggregate, or by the private sector, of $100 million in 1995 dollars, updated annually for inflation. The proposed regulations do not include any Federal mandate that may result in expenditures by State, local, or Tribal governments, or by the private sector in excess of that threshold.

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

IRS Revenue Procedures, Revenue Rulings, Notices, and other guidance cited in this document are published in the Internal Revenue Bulletin or Cumulative Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

Before these proposed regulations are adopted as final regulations, consideration will be given to comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Treasury Department and the IRS request comments on all other aspects of the proposed regulations. Any comments submitted will be made available at https://www.regulations.gov or upon request. Pursuant to the Administrative Procedure Act at 5 U.S.C. 553(b)(4), a plain language summary of the proposed rule is also available at https://www.regulations.gov.

A public hearing concerning the proposed regulations will be scheduled if requested in writing by any person who timely submits electronic or written comments. Requests for a public hearing are also encouraged to be made electronically. If a public hearing is scheduled, notice of the date and time for the public hearing will be published in the Federal Register .

The principal authors of these proposed regulations are Raphael J. Cohen and Mark T. Terrell of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in their development.

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

In accordance with 5 U.S.C. 553(b)(4), a summary of this rule may be found at https://www.regulations.gov/docket/TTB-2026-0005.

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act provides that these regulations should, among other things, prohibit consumer deception and the use of misleading statements on labels and ensure that labels provide the consumer with adequate information as to the identity and quality of the product. The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers the FAA Act provisions pursuant to section 1111(d) of the Homeland Security Act of 2002, as codified at 6 U.S.C. 531(d). The Secretary has delegated the functions and duties in the administration and enforcement of these provisions to the TTB Administrator through Treasury Order 120-01.

Part 4 of the TTB regulations (27 CFR part 4) authorizes TTB to establish definitive viticultural areas and regulate the use of their names as appellations of origin on wine labels and in wine advertisements. Part 9 of the TTB regulations (27 CFR part 9) sets forth standards for the preparation and submission of petitions for the establishment or modification of American viticultural areas (AVAs) and lists the approved AVAs.

Section 4.25(e)(1)(i) of the TTB regulations (27 CFR 4.25(e)(1)(i)) defines a viticultural area for American wine as a delimited grape-growing region having distinguishing features as described in part 9 of the regulations and, once approved, a name and a delineated boundary codified in part 9 of the regulations. These designations allow vintners and consumers to attribute a given quality, reputation, or other characteristic of a wine made from grapes grown in an area to the wine's geographic origin. The establishment of AVAs allows vintners to describe more accurately the origin of their wines to consumers and helps consumers to identify wines they may purchase. Establishment of an AVA is neither an approval nor an endorsement by TTB of the wine produced in that area.

Section 4.25(e)(2) of the TTB regulations (27 CFR 4.25(e)(2)) outlines the procedure for proposing an AVA and allows any interested party to petition TTB to establish a grape-growing region as an AVA. Section 9.12 of the TTB regulations (27 CFR 9.12) prescribes standards for petitions to establish or modify AVAs. Petitions to establish an AVA must include the following:

• Evidence that the area within the proposed AVA boundary is nationally or locally known by the AVA name specified in the petition;

• An explanation of the basis for defining the boundary of the proposed AVA;

• A narrative description of the features of the proposed AVA affecting viticulture, such as climate, geology, soils, physical features, and elevation, that makes the proposed AVA distinctive and distinguishes it from adjacent areas outside the proposed AVA boundary;

• The appropriate United States Geological Survey (USGS) map(s) showing the location of the proposed AVA, with the boundary of the proposed AVA clearly drawn thereon;

• A detailed narrative description of the proposed AVA boundary based on USGS map markings; and

• If the proposed AVA is to be established within, or overlapping, an existing AVA, an explanation that both identifies the attributes of the proposed AVA that are consistent with the existing AVA and explains how the proposed AVA is sufficiently distinct from the existing AVA, and therefore appropriate for separate recognition.

TTB received a petition from Justin Scheiner, Sydney Maulsby, Dorado Delgado, and Jack Whatley of the Department of Horticultural Sciences at Texas A&M University—College Station, proposing to establish the “Llano Uplift” AVA. The proposed AVA is located primarily in Llano and Mason Counties, in Texas, but also includes small portions of Blanco, Burnet, Gillespie, McCulloch, and San Saba Counties. The proposed AVA is located entirely within the established Texas Hill Country AVA (27 CFR 9.136) and also contains the entire established Bell Mountain AVA (27 CFR 9.55) within it. There are 12 commercial vineyards covering a total of 294 acres within the proposed AVA, as well as 14 wineries. The distinguishing features of the proposed Llano Uplift AVA are its geology, soils, climate, and groundwater.

The proposed AVA takes its name from the large geologic dome of Precambrian granite and metamorphic rock known as the Llano Uplift. According to the petition, the first observed use of the name “Llano Uplift” to describe the region of the proposed AVA appeared in a 1947 Bulletin of the Geological Society of America. 1 The name also appears on a 1962 USGS. map titled “Aeromagnetic map of the Llano Uplift, Mason-Burnet area, Central Texas.”  2

The petition also includes multiple current examples of the use of the name “Llano Uplift” to describe the region of the proposed AVA. For example, the website for the city of Llano, which is located within the proposed AVA, has a section on the mineral deposits of the region which notes, “The Llano Uplift is a rock hound's wonderland.”  3 The Texas Parks and Wildlife Department's website includes a section on the “Llano Uplift Acidic Forest, Woodland, and Glade” on its web page related to the ecological mapping systems of Texas. 4 A curriculum guide for elementary and middle school students also notes that the “Llano Uplift” is one of the 11 unique ecoregions of the State. 5 An organization dedicated to archaeology of the region of the proposed AVA is called the Llano Uplift Archeological Society. 6 The Texas Department of Transportation's website publishes a list of wildflower seeds they specifically sow in the “Llano Uplift Region.”  7 A web page on a site for vacation cabin rentals within the proposed AVA features the heading “Llano Uplift: A Geological Wonder in the Texas Hill Country.”  8 A website dedicated to Texas history states that the Llano County Historical Museum has photos of “the Llano Uplift's largest quarried granite rock,”  9 which was later used to build the base of the Texas Rangers monument at the State Capitol. Finally, a magazine article about a family-run rock and mineral shop in the city of Llano states, “Enchanted Rocks & Minerals on Llano's historic courthouse square feels as timeless as the Precambrian rocks of the surrounding Llano Uplift.”  10

The proposed Llano Uplift AVA encompasses the geologic feature in central Texas known as the Llano Uplift. The proposed AVA boundary closely follows the boundaries of the formation as reported by the USGS. According to the petition, the proposed northern boundary approximates the division between the ecoregion known as the Llano Uplift and the ecoregion known as the North Central Rolling Plains, which has lower elevations. The proposed western, southern, and eastern boundaries represent the division between the Llano Uplift ecoregion and the Edwards Plateau. The portion of the Edwards Plateau immediately to the west of the proposed AVA, has a flatter topography and more arid climate than the proposed AVA. The remaining portion of the Edwards Plateau is comprised primarily of soft limestone, rather than the hard granite of the proposed AVA, and its topography has been more influenced by weathering and erosion than the proposed AVA.

According to the petition, the distinguishing features of the proposed Llano Uplift AVA are its geology, soils, climate, and groundwater.

The proposed Llano Uplift is located on an uplifted dome of granite and metamorphic rock. According to the petition, granite has lower porosity and permeability than limestone, which affects water runoff and the root depth of grapevines in the proposed AVA. The petition also states that the granite and metamorphic rocks are harder than the limestone materials found throughout much of the surrounding Texas Hill Country AVA. As a result, the proposed Llano Uplift AVA has been less subject to erosion from water than the limestone-rich regions to the north, south, and east. To the west of the proposed AVA, limestone is also present in large amounts. However, the limestone to the west is less eroded than the limestone within the proposed AVA due to the arid climate and lack of major streams or rivers.

According to the petition, the weathering of the exposed granite and metamorphic rocks within the proposed Llano Uplift AVA resulted in many loamy-to-coarse soils that are ideal for grape production. Soils derived from weathered granite and gneiss include Castell, Click, Keese, Lou, and Voca, which are all sandy loam soils with excellent drainage. Other major soil groups in the proposed AVA include Campair, Katemcy, Ligon, Loneoak, Nebgen, and Yates, which are all sandy-to-loamy, well-drained soils derived from weathered sandstone, schist, and limestone. The petition states that good soil drainage allows grape growers to provide greater control of water availability that directly impacts fruit yields and quality.

The petition also states that the soils of the proposed Llano Uplift AVA are slightly acidic and contain high concentrations of potassium. The petition claims that moderately acidic soils are desirable for vineyards because they provide high nutrient availability to the vines. By contrast, the limestone-derived soils found in the surrounding regions are mostly alkaline and have high levels of calcium due to the presence of limestone and caliche. The petition states that plants are less able to absorb zinc, iron, boron, and phosphorous from alkaline soils. Furthermore, soils with high calcium levels impact a plant's ability to absorb magnesium. As a result, vineyards planted in alkaline soils or soils with high calcium levels often need different fertilizer programs than vineyards with acidic soils and may also require the use of different rootstock.

The petition includes information on the climate of the proposed Llano Uplift AVA. The 30-year mean annual temperature in the proposed AVA ranges from 67 to 69 degrees Fahrenheit (F), which is slightly cooler than the range of 67 to 71 degrees F for the surrounding Texas Hill Country AVA. However, the petition states that the average July and August 30-year average minimum temperatures in the proposed AVA are approximately 1 degree F warmer than in the portions of the established Texas Hill Country AVA that are to the south and west of the proposed AVA. During the same period, average maximum July and August temperatures within the proposed AVA are 1 to 2 degrees F warmer than within the majority of the surrounding Texas Hill Country AVA. The petition states that grape composition and quality can be greatly influenced by temperatures during the ripening period. For example, warmer maximum and minimum temperatures for July and August within the proposed Llano Uplift AVA may accelerate fruit ripening and lead to earlier harvest times. The petition also states that warmer temperatures during the ripening period can reduce acidity in grapes, particularly malic acid, and influence the development of polyphenolic compounds.

The petition also describes rainfall and humidity levels during the summer months within the proposed AVA. The 30-year average rainfall amounts for May through August within the proposed Llano Uplift AVA are approximately 2 inches less than rainfall amounts within the surrounding Texas Hill Country AVA. The petition states that the proposed AVA's location within the northern portion of the established Texas Hill Country AVA renders the proposed AVA less prone to summer moisture that is pulled inland from the Texas coast by southerly winds. According to the petition, the reduced moisture is advantageous to grape growers, as it reduces the risk of potential fungal diseases and other negative impacts from excessive rainfall, including greater water content in the fruit.

The drier air also increases the intensity of solar radiation within the proposed AVA, leading to solar radiation levels that are greater than within approximately two-thirds of the surrounding Texas Hill Country AVA, namely the regions to the south and east of the proposed AVA. According to the petition, greater solar radiation amounts impact the photosynthetic activity of grapevines.

The petition states that vineyard owners within the proposed Llano Uplift AVA and the larger surrounding Texas Hill Country AVA irrigate their crops during the summer months. As a result, the petition states that the quality and availability of irrigation water is an important factor for vineyard owners. Most vineyards within the proposed Llano Uplift AVA draw water from wells drawing water from the Ellenberger-San Saba, Hickory, and Llano Uplift aquifers. These three aquifers provide water that usually has less than 1,000 milligrams per liter of total dissolved solids. The petition states that low levels of dissolved solids are desirable, as high levels can harm the physical characteristics of soil and can result in osmotic stress and cause phytotoxicity in grapevines.

By contrast, the regions to the north, east, and south of the proposed Llano Uplift AVA generally derive their water from the Trinity Aquifer. The petition states that the Trinity Aquifer can yield very hard, moderately saline water. The petition notes that high salt concentrations in water can cause deflocculation (reduction or breaking up) of soil particles in soils with a heavier texture, resulting in reduced water infiltration and poor soil structure. Higher salt levels can also make it more difficult for roots to extract water from the soil, increasing drought stress on grapevines. In areas where salinity is a limiting factor for vineyards, salt tolerant rootstock is often used to mitigate these potential problems.

The Bell Mountain AVA was established by T.D. ATF-238, which was published in the Federal Register on October 10, 1986 (51 FR 36398). The Bell Mountain AVA is located entirely within the southeastern portion of the proposed Llano Uplift AVA. According to T.D. ATF-238, the southern and southwestern slopes of Bell Mountain on which the AVA is located have gentler slope angles than the northern and northeastern slopes of the mountain. Soils in the Bell Mountain AVA are primarily from the Pedernales-Pontotoc association and are slightly acidic, whereas most of the soils in the surrounding region are calcareous and alkaline. The Bell Mountain AVA is generally drier and cooler than the regions to the north and south due to its higher elevations.

Like the Bell Mountain AVA, the proposed Llano Uplift AVA also has a relatively dry climate and soils that are slightly acidic. However, the petition states that the climate of the Bell Mountain AVA is generally cooler than that of the majority of the proposed Llano Uplift AVA. Additionally, although portions of the proposed Llano Uplift AVA have elevations and slope angles similar to those of the Bell Mountain AVA, the proposed AVA also has regions with lower elevations and regions with gentler slope angles.

The Texas Hill Country AVA was established by T.D. ATF-318, which was published in the Federal Register on November 29, 1991 (56 FR 60920). The proposed Llano Uplift AVA is located in the northern portion of the Texas Hill Country AVA. T.D. ATF-318 describes the Texas Hill Country AVA as a region of low mountains, hills, canyons, and valleys surrounded by flatter terrain. Soils in the AVA are derived from limestone, sandstone, and granite and are generally calcareous.

The proposed Llano Uplift AVA shares some of the characteristics of the larger Texas Hill Country AVA. For instance, the proposed AVA also has rolling hills, canyons, and valleys, as well as elevations that are within the range of elevations found in the established AVA. The Texas Hill Country AVA also has a drier, cooler climate than the region to the east, which is closer to the Texas coast. However, the proposed Llano Uplift AVA is distinguishable from the Texas Hill Country AVA due to its soils, which are derived primarily from granite, rather than limestone.

TTB received a petition from Dan McLaughlin, owner of Robert Clay Vineyards, William R. Parr, Jr., owner of Parr Vineyards and Parr Cellars, and Drew Tallent, owner of Tallent Vineyards, proposing to establish the “Hickory Sands District” AVA. The proposed AVA is located in portions of Llano, Mason, McCulloch, and San Saba Counties in Texas, and it is entirely within the established Texas Hill Country AVA. If established, the proposed AVA would also be located entirely within the northwest corner of the proposed Llano Uplift AVA. There are 9 commercial vineyards covering a total of approximately 190 acres within the proposed Hickory Sands District AVA, as well as nine wineries. The distinguishing features of the proposed Hickory Sands District AVA are its soils, groundwater, climate, and elevation.

The proposed Hickory Sands District AVA is located in central Texas atop a geologic formation known as the Hickory Sandstone formation or Hickory Sandstone Member. The weathering of the geologic formation produced sandy, loamy, iron-rich soils regionally called “hickory” sands due to their red and brown hues. The presence of these soils led to the region being referred to as the “Hickory Sands” region of Texas.

The petition includes multiple examples of the use of “Hickory Sands” to describe the region of the proposed AVA. For example, an article about wine and grape growing in the region is titled “The Hickory Sands is more than just a sandy outcrop in Texas.”  11 The article goes on to describe vineyards located “smack dab in the middle of Hickory Sand country.” In an article about prospecting for topaz within the region of the proposed AVA, the author also describes visiting the Mason town square to try wines grown “in the nearby hickory sands [sic]”. 12 A newspaper article about transferring water from the region of the proposed AVA to a nearby city notes that the water is “transited from Hickory Sands to San Angelo's Groundwater Treatment Plant . . . .”  13 Hickory Sand Ranch is located within the proposed AVA, and the petition includes an advertisement for “Hickory Sand Ranch's Annual Bull Sale.”  14 On its website, the Texas Section of the American Institute of Professional Geologists notes a recent trip to the region of the proposed AVA and a visit to the “Hickory Sands Mine” owned by Premier Silica. 15 The websites for the city of Fredericksburg  16 and the city of San Angelo  17 both note that the cities receive their drinking water from the “Hickory Sands Aquifer.” A real estate listing for a property within the proposed AVA notes that it has “a good Hickory Sands water well . . . .”  18 Finally, an advertisement for the Mason Arts & Wine Festival encourages people to come taste the “wines of the Hickory Sands.”  19

Although the region is commonly called “Hickory Sands,” the petitioners proposed the name “Hickory Sands District.” Doing so would allow wines that are not eligible to use the AVA name as an appellation of origin to include truthful statements about the presence of “hickory” sands soil in the vineyards on the labels.

The proposed Hickory Sands District AVA follows a series of creeks, roads, and straight lines drawn between marked elevation points to encompass the portions of the Hickory Sandstone Member geologic formation that are at 1,500 feet or higher. According to the petition, the soils, groundwater conditions, and diurnal temperature shifts found at 1,500 feet or higher are significantly different from those found at lower elevations and provide a unique set of conditions for growing grapes.

According to the petition, the distinguishing features of the proposed Hickory Sands District AVA are its soils, groundwater, climate (specifically diurnal temperature swings), and elevation.

According to the petition, the soils of the proposed Hickory Sands District AVA formed from eroded igneous and metamorphic Precambrian bedrock and Cambrian sedimentary rocks. The soils are mainly coarse, sometimes gravelly, textured sands and are primarily from the Keese and Ligon soil series. Keese soils are shallow and found on slopes, while Ligon soils are deeper and found on broad ridges. The soils are mineral-rich but low in fertility and have low salinity levels. The petition states that the coarse texture of the sand allows for favorable movement of water and air through the soils, providing adequate drainage and soil oxygen for vine roots. The petition also notes that the silicate in the sandy soil makes it inhospitable for phylloxera, a soil-borne aphid that can devastate vineyards.

To the north, west, and immediate south of the proposed Hickory Sands District AVA, the soils belong to the Tarrant-Oplin soil group. To the east and farther south, the soils are from the Brackett-Eckrant-Real series. The petition states that both soil types are frequently clayey and often lack the rooting depth of the soils of the proposed AVA. Furthermore, soils of the Oplin group have a root-restrictive layer of cemented caliche.

The petition states that, due to low precipitation and minimal surface water, vineyards throughout the Texas Hill Country rely heavily on regional aquifers for irrigation. Within the proposed Hickory Sands District AVA, the Hickory Aquifer is the primary source of water. The petition states that water in the Hickory Aquifer is easily accessible, with the average thickness of freshwater saturation being 350 feet. As a result, wells can be cost-effectively tapped for irrigation purposes. The petition includes information from the Texas Water Development Board which shows 66 irrigation wells within the proposed Hickory Sands District AVA that draw water from the Hickory Aquifer at a rate of 200 gallons per minute or higher, suitable for providing the 25 to 35 inches of water per year that grapevines need to avoid stress. The mineral content of the water averages 450 milligrams per liter (mpl) of dissolved solids, and the pH is relatively neutral at 7.3 on average. The petition states that mineral uptake in vineyards is optimal when water pH levels are between 6.5 and 7.5.

The region to the west and south of the proposed AVA is served by the Edwards—Trinity Aquifer. The average saturated thickness is 433 feet, but the petition states that in the grape-growing portions of these regions, the depth can be up to 800 feet. Total dissolved solids can range up to 3,000 mpl, and salinity levels are higher, especially as one moves west. To the east and southeast, the Trinity is the principal aquifer for many vineyards. The average saturated thickness for this aquifer is roughly 1,900 feet. Total dissolved solids range from 1,000 to 5,000 mpl, and salinity is moderate. Farther east and south the Edwards Aquifer is the primary source of irrigation, which has an average saturated thickness of 560 feet. However, the petition notes that the quantity of water that can be withdrawn from this aquifer is limited by law to protect endangered species that are dependent on the aquifer's springs' flow. The petition states that there are no commercial vineyards to the north of the proposed Hickory Sands District AVA, but the agricultural activities in that region are supported by the Hickory Aquifer, as well as the San Saba or Ellenburger Aquifers.

The petition states that, while the climate of the proposed Hickory Sands District AVA is generally the same as that of the surrounding regions during the growing season, diurnal temperature shifts are an important distinction. The proposed AVA has daily maximum temperatures similar to the surrounding regions but experiences significantly greater cooling after sunset due to its higher elevations and greater distance from the coastal regions of Texas. The following tables show the average monthly growing season diurnal temperature swings  20 for the proposed AVA and the surrounding regions from 2018 to 2022.

The data show that the proposed Hickory Sands District AVA has greater growing season diurnal temperature swings than the surrounding regions. Temperature swings within the proposed AVA are regularly at least 14 degrees greater than the regions to the south, east, and southeast, which have a large concentration of commercial viticulture. The differences between the proposed AVA and the regions to the north and west are less pronounced, but the petition notes that commercial viticulture does not occur in these regions. According to the petition, the nightly cooldown helps counteract the punishing daily heat during the grape ripening. In particular, cooler nighttime temperatures allow the grapes to maintain acidity while ripening and ensure favorable pH levels from harvested fruit.

Elevations within the proposed AVA range from 1,500 feet to 1,980 feet. According to the petition, the average vineyard elevation within the proposed Hickory Sands District AVA is 1,717 feet. To the east and southeast, within the proposed Llano Uplift AVA, elevations average 983 feet. The petition states that the high elevations within the proposed AVA hasten and enhance the cooling of temperatures after the sun sets. As discussed previously, the lower nighttime temperatures relieve stress on the vines and allow the grapes to ripen while maintaining favorable acidity levels.

The Texas Hill Country AVA was established by T.D. ATF-318, which published in the Federal Register on November 29, 1991 (56 FR 60920). T.D. ATF-318 states that the AVA is a region of low mountains, hills, canyons, and valleys surrounded by flatter terrain. Soils are derived from limestone, sandstone, and granite and are generally calcareous.

The proposed Hickory Sands District AVA shares some of the major features of the established Texas Hill Country AVA. For example, the proposed AVA is considered part of the region known as the Texas Hill Country, as shown in a map produced by the Texas Parks and Wildlife and included in the petition as Exhibit 13. The petition also notes that the proposed AVA is similarly dominated by karst topography, where the land was shaped by the dissolution of water-soluble limestone and granite bedrock. As a result, the proposed AVA also has soils derived from sandstone and granite.

However, the proposed Hickory Sands District AVA also has distinctive features that set it apart from the larger Texas Hill Country AVA. For example, the exposed Precambrian rock formations in the proposed AVA are the oldest in Texas, whereas the rock formations in the surrounding established AVA are from the Cretaceous period and are several hundred million years more recent. Additionally, while the primary soils of the proposed AVA are from the Keese and Ligon soil series, the major soils of the established Texas Hill Country AVA are from the Tarrant—Oplin group and the Brackett—Eckrant—Real series. The proposed AVA also draws its water from the Hickory Aquifer, whereas most of the Texas Hill Country AVA gets its water from the Edwards—Trinity, Edwards, and Trinity Aquifers. Finally, the proposed AVA has average elevations that are 1,717 feet, compared to the average Texas Hill Country AVA, which has an average elevation of 1,000 feet.

The proposed Hickory Sands District AVA is located entirely within the northwestern portion of the proposed Llano Uplift AVA. Both proposed AVAs share several features, including karst topography with exposed Precambrian and Cambrian rock formations; neutral to slightly acidic sandy loam soils over bedrock of granite, limestone, gneiss, and schist; and hot growing season temperatures. However, within the proposed Hickory Sands District AVA, irrigation wells draw groundwater from only the Hickory Aquifer, whereas irrigation wells in the proposed Llano Uplift AVA also draw from the Ellenburger-San Saba Aquifer. Additionally, the petition states that irrigation wells in the proposed Hickory Sands District AVA are generally more productive than in the proposed Llano Uplift AVA. The petitioner provided a chart showing irrigation wells with yield rates at or exceeding 200 gallons per minute. 21 There are 66 such wells within the proposed Hickory Sands District AVA, compared to four within the region of the proposed Llano Uplift AVA that is outside the proposed Hickory Sands District AVA.

Diurnal temperature swings also differentiate the proposed Hickory Sands District AVA from the proposed Llano Uplift AVA. Within the proposed Hickory Sands District AVA, the shifts are greater, even though the petition states that average growing season high temperatures in the two proposed AVAs are less than one degree different. The petition attributes the difference in diurnal temperature swings to elevation differences, as the average elevation of commercial vineyards in the proposed Hickory Sands District AVA is over 700 feet higher than the average elevation of vineyards within the proposed Llano Uplift AVA.

Finally, although both proposed AVAs contain Keese and Ligon “hickory sands” soils, these soils are more scattered and not as prevalent within the proposed Llano Uplift AVA as compared within the proposed Hickory Sands District AVA. According to the petition, the proposed Llano Uplift AVA also has extensive areas where granite outcroppings intrude upon the surface, leading to shallower soils than are found in the proposed Hickory Sands District AVA.

TTB concludes that the petitions to establish the 2,096-square mile “Llano Uplift” AVA and the 193-square mile “Hickory Sands District” AVA merit consideration and public comment, as invited in this document.

See the narrative boundary descriptions of the petitioned-for AVAs in the proposed regulatory text published at the end of this document.

The petitioners provided the required maps, and they are listed below in the proposed regulatory text. You may also view the proposed Llano Uplift AVA and Hickory Sands District AVA boundaries on the AVA Map Explorer on the TTB website, at https://www.ttb.gov/regulated-commodities/beverage-alcohol/wine/ava-map-explorer.

Part 4 of the TTB regulations prohibits any label reference on a wine that indicates or implies an origin other than the wine's true place of origin. For a wine to be labeled with an AVA name or with a brand name that includes an AVA name, at least 85 percent of the wine must be derived from grapes grown within the area represented by that name, and the wine must meet the other conditions listed in 27 CFR 4.25(e)(3). If the wine is not eligible for labeling with an AVA name and that name appears in the brand name, then the label is not in compliance and the bottler must change the brand name and obtain approval of a new label. Similarly, if the AVA name appears in another reference on the label in a misleading manner, the bottler would have to obtain approval of a new label. Different rules apply if a wine has a brand name containing an AVA name that was used as a brand name on a label approved before July 7, 1986. See 27 CFR 4.39(i)(2) for details.

If TTB establishes the proposed Llano Uplift AVA, its name, “Llano Uplift,” will be recognized as a name of viticultural significance under § 4.39(i)(3) of the TTB regulations (27 CFR 4.39(i)(3)). The text of the proposed regulation clarifies this point. Consequently, wine bottlers using “Llano Uplift” in a brand name, including a trademark, or in another label reference as to the origin of the wine, would have to ensure that the product is eligible to use the viticultural area's name “Llano Uplift.” The approval of the proposed Llano Uplift AVA would not affect any existing AVA, and any bottlers using “Texas Hill Country” as an appellation of origin or in a brand name for wines made from grapes grown within the Llano Uplift AVA would not be affected by the establishment of this new AVA. If approved, the establishment of the proposed Llano Uplift AVA would allow vintners to use “Llano Uplift,” “Texas Hill Country,” or both AVA names as appellations of origin for wines made from grapes grown within the proposed AVA, if the wines meet the eligibility requirements for the appellation.

If TTB establishes the proposed Hickory Sands District AVA, its name, “Hickory Sands District,” will be recognized as a name of viticultural significance under § 4.39(i)(3) of the TTB regulations (27 CFR 4.39(i)(3)). The text of the proposed regulation clarifies this point. Consequently, wine bottlers using “Hickory Sands District” in a brand name, including a trademark, or in another label reference as to the origin of the wine, would have to ensure that the product is eligible to use the viticultural area's name “Hickory Sands District.” The approval of the proposed Hickory Sands District AVA would not affect any existing AVA, and any bottlers using “Texas Hill Country” as an appellation of origin or in a brand name for wines made from grapes grown within the Hickory Sands District AVA would not be affected by the establishment of this new AVA. If approved, the establishment of the proposed Hickory Sands District AVA would allow vintners to use “Hickory Sands District,” “Texas Hill Country,” “Llano Uplift,” or two or three of these AVA names as appellations of origin for wines made from grapes grown within the proposed AVA, if the wines meet the eligibility requirements for the appellation. TTB is not proposing to make “Hickory Sands,” standing alone, a term of viticultural significance in order to allow for the use of truthful statements regarding the presence of “hickory sand” soils in vineyards on wine labels.

TTB invites comments from interested members of the public on whether TTB should establish the proposed Llano Uplift and Hickory Sands District AVAs. TTB is interested in receiving comments on the sufficiency and accuracy of the name, boundary, and other required information submitted in support of the AVA petitions. With regards to the proposed Llano Uplift AVA, TTB is interested in comments on whether the evidence submitted in the petition regarding the distinguishing features of the proposed AVA sufficiently differentiates it from the existing Texas Hill Country AVA, in which the proposed AVA is located. TTB is also interested in comments on whether the geographic features of the proposed AVA are so distinguishable from the Texas Hill Country AVA that the proposed Llano Uplift AVA should not be part of the established AVA. Please provide any available specific information in support of your comments.

With regards to the proposed Hickory Sands District AVA, TTB is interested in comments on whether the evidence submitted in the petition regarding the distinguishing features of the proposed AVA sufficiently distinguishes it from the existing Texas Hill Country AVA and the proposed Llano Uplift AVA, both of which entirely encompass the proposed Hickory Sands District AVA. TTB is also interested in comments on whether the geographic features of the proposed Hickory Sands District AVA are so distinguishable from either the Texas Hill Country AVA or the proposed Llano Uplift AVA that the proposed Hickory Sands District AVA should not be part of either the established AVA or the proposed Llano Uplift AVA. Please provide any available specific information in support of your comments.

Because of the potential impact of the establishment of the proposed Llano Uplift and Hickory Sands District AVAs on wine labels that include the terms “Llano Uplift” or “Hickory Sands District” as discussed above under Impact on Current Wine Labels, TTB is particularly interested in comments regarding whether there will be a conflict between the proposed area names and currently used brand names. If a commenter believes that a conflict will arise, the comment should describe the nature of that conflict, including any anticipated negative economic impact that approval of the proposed AVAs will have on an existing viticultural enterprise. TTB is also interested in receiving suggestions for ways to avoid conflicts, for example, by adopting a modified or different name for the proposed AVAs.

You may submit comments on this proposal as an individual or on behalf of a business or other organization via the Regulations.gov website or via postal mail, as described in the ADDRESSES section of this document. Your comment must reference Notice No. 243 and must be submitted or postmarked by the closing date shown in the DATES section of this document. You may upload or include attachments with your comment. You also may request a public hearing on this proposal. The TTB Administrator reserves the right to determine whether to hold a public hearing.

All submitted comments and attachments are part of the rulemaking record and are subject to public disclosure. Do not enclose any material in your comments that you consider confidential or that is inappropriate for disclosure. TTB will post, and you may view, copies of this document, the related petition and selected supporting materials, and any comments TTB receives about this proposal within the related Regulations.gov docket. In general, TTB will post comments as submitted, and it will not redact any identifying or contact information from the body of a comment or attachment. Please contact TTB's Regulations and Rulings Division by email using the web form available at https://www.ttb.gov/contact-rrd , or by telephone at 202-453-2265, if you have any questions about commenting on this proposal or to request copies of this document, the related petition and its supporting materials, or any comments received.

TTB certifies that this proposed regulation, if adopted, would not have a significant economic impact on a substantial number of small entities. The proposed regulation imposes no new reporting, recordkeeping, or other administrative requirement. Any benefit derived from the use of a viticultural area name would be the result of a proprietor's efforts and consumer acceptance of wines from that area. Therefore, no regulatory flexibility analysis is required.

It has been determined that this proposed rule is not a significant regulatory action as defined by Executive Order 12866, as amended. Therefore, it requires no regulatory assessment.

For the reasons discussed in the preamble, we propose to amend title 27, chapter I, part 9, Code of Federal Regulations, as follows:

In accordance with 5 U.S.C. 553(b)(4), a summary of this rule may be found at https://www.regulations.gov/docket/TTB-2026-0003.

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act provides that these regulations should, among other things, prohibit consumer deception and the use of misleading statements on labels and ensure that labels provide the consumer with adequate information as to the identity and quality of the product. The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers the FAA Act pursuant to section 1111(d) of the Homeland Security Act of 2002, codified at 6 U.S.C. 531(d). In addition, the Secretary of the Treasury has delegated certain administrative and enforcement authorities to TTB through Treasury Order 120-01.

Part 4 of the TTB regulations (27 CFR part 4) authorizes TTB to establish definitive viticultural areas and regulate the use of their names as appellations of origin on wine labels and in wine advertisements. Part 9 of the TTB regulations (27 CFR part 9) sets forth standards for the preparation and submission of petitions for the establishment or modification of American viticultural areas (AVAs) and lists the approved AVAs.

Section 4.25(e)(1)(i) of the TTB regulations (27 CFR 4.25(e)(1)(i)) defines a viticultural area for American wine as a delimited grape-growing region having distinguishing features as described in part 9 of the regulations and, once approved, a name and a delineated boundary codified in part 9 of the regulations. These designations allow vintners and consumers to attribute a given quality, reputation, or other characteristic of a wine made from grapes grown in an area to the wine's geographic origin. The establishment of AVAs allows vintners to describe more accurately the origin of their wines to consumers and helps consumers to identify wines they may purchase. Establishment of an AVA is neither an approval nor an endorsement by TTB of the wine produced in that area.

Section 4.25(e)(2) of the TTB regulations (27 CFR 4.25(e)(2)) outlines the procedure for proposing an AVA and allows any interested party to petition TTB to establish a grape-growing region as an AVA. Section 9.12 of the TTB regulations (27 CFR 9.12) prescribes standards for petitions to establish or modify AVAs. Petitions to establish an AVA must include the following:

• Evidence that the area within the proposed AVA boundary is nationally or locally known by the AVA name specified in the petition;

• An explanation of the basis for defining the boundary of the proposed AVA;

• A narrative description of the features of the proposed AVA affecting viticulture, such as climate, geology, soils, physical features, and elevation, that make the proposed AVA distinctive and distinguish it from adjacent areas outside the proposed AVA;

• The appropriate United States Geological Survey (USGS) map(s) showing the location of the proposed AVA, with the boundary of the proposed AVA clearly drawn thereon; and

• A detailed narrative description of the proposed AVA boundary based on USGS map markings.

TTB received a petition to establish the “Kaw Valley” AVA in Kansas, submitted on behalf of local winery and vineyard owners and with support from the Kansas State Department of Agriculture. The proposed AVA is located in northeastern Kansas and contains approximately 3,515,482 acres (5,493 square miles). The proposed AVA covers all or parts of the following Kansas counties: Atchison, Brown, Douglas, Jackson, Jefferson, Johnson, Leavenworth, Marshall, Nemaha, Pottawatomi, Riley, Shawnee, Wabaunsee, Washington, and Wyandotte. There are currently 33 vineyards with approximately 500 acres of viticulture within the proposed AVA. According to the petition, the primary distinguishing feature of the proposed Kaw Valley AVA is the presence of soils developed from materials deposited by glaciers. Unless otherwise noted, all information and data pertaining to the proposed AVA is from the petition and its supporting exhibits.

According to the petition, “Kaw” is an alternate name for both the Kansas River and the Kansas tribe of Native Americans (the namesake of the State). The proposed AVA encompasses the Kansas portion of the watershed of the Kansas River, or “Kaw River.” Although the watershed extends north into Nebraska, the petition states that the term “Kaw Valley” is not used in that State, so the Nebraska portion of the watershed is excluded from the proposed AVA.

The petition included multiple examples of the term “Kaw Valley” being used to describe the region of the proposed AVA. For example, the Kaw Valley Unified School District and Kaw Valley Bank both serve communities in the proposed AVA. The annual Kaw Valley Farm Tour is a self-guided tour of farms within the proposed AVA. A women's soccer team within the region is known as Kaw Valley FC. The Kaw Valley Rodeo Association hosts the annual Kaw Valley Rodeo in Manhattan, Kansas, which is within the proposed AVA. An excavation and demolition company in Kansas City, Kansas, is named Kaw Valley Companies, Inc. Finally, the Kansas Viticulture and Farm Winery Association established the Kaw Valley Wine Trail, and the annual Kaw Valley Wine Rally features wines produced within the proposed AVA.

The proposed Kaw Valley AVA encompasses the portion of the Kansas River watershed that is in Kansas and has been directly affected by Pleistocene glaciation. A portion of the northern boundary of the proposed Kaw Valley AVA follows the Kansas-Nebraska State line to exclude the portion of the Kansas River watershed that is in Nebraska and that is not known as the “Kaw Valley.” The remainder of the northern boundary and the northeastern boundary both approximate the extent of the Kansas River watershed. The proposed eastern boundary follows the Kansas-Missouri State line to mark the eastern extent of the Kansas River watershed and exclude the region outside Kansas that is not known as “Kaw Valley.” The proposed southern and western boundaries approximate the division between the glaciated and unglaciated portions of the Kansas River watershed as well as the extent of soils developed from glacially-derived sediments.

TTB notes that the boundary set forth in the proposed regulations differs from the boundary described in the petition. With regard to the northeast boundary line, the petition states at item eight in the boundary description, that the boundary should “[p]roceed east-southeast for 67.5 miles to the point where the Kansas-Missouri State line leaves the Missouri River and becomes a north-south line, near the confluence of the Kansas River and the Missouri River.” The actual distance between these two points appears to be approximately 6.7 miles. TTB believes there is a typographical error and is therefore using 6.7 miles in the proposed boundary description; TTB invites interested parties to comment on this aspect of the boundary description.

According to the petition, the primary distinguishing feature of the proposed Kaw Valley AVA is the presence of soils derived from glacially deposited material, in particular glacial till. The petition defines glacial till as unconsolidated rock debris deposited directly by melting glaciers. The glaciers transported materials, including granite, quartzite, and other metamorphic and igneous rocks, from a variety of distant locations. In most of the proposed AVA, a thick layer of this glacial till covers the Kansas bedrock, which is comprised mostly of sandstone, shale, and limestone. In a few places within the proposed AVA, the bedrock has been exposed and weathered to form soils, but the majority of bedrock is deep beneath the till. According to the petition, the igneous and metamorphic rocks give till-derived soils a chemical composition that is different from soils derived from other sources, such as the sedimentary rocks of the local bedrock. These chemical differences can affect grapevine physiology and the chemistry of the wines produced from those grapes.

The principal soils of the proposed AVA are from the Pawnee and Shelby soil series and are derived from glacial till. A small percentage of the proposed AVA contains soils from the Grundy series, which are relatively thin soils derived from wind-deposited silt known as loess. The petition describes the Pawnee and Shelby soils as high in sand and rock fragments and well drained. The petition states that well drained soils in vineyards promote vine water stress, resulting in fewer berries, thicker skins, and open grape clusters.

To the north of the proposed Kaw Valley AVA, the soils are also derived from glacial till. However, this region was omitted from the proposed AVA because it is not considered part of the Kaw Valley. East of the proposed AVA, the soils abruptly shift to very thick loess-derived soils from the Grundy, Marshall, and Sharpsburg soil series. As mentioned, loess-based soils have less sand and rock fragment content than the glacial till soils of the proposed AVA. To the south and west of the proposed AVA, the soils formed from the weathering of the underlying sedimentary rocks. Examples of these soils include the Florence and Labette series. According to the petition, these soils have less sand and higher clay content than the soils of the proposed AVA, making them more poorly drained. Soils that retain water can lead to overly vigorous vines with dense leaf canopies that inhibit ripening of the grapes.

TTB concludes that the petition to establish the proposed Kaw Valley AVA merits consideration and public comment, as invited in this notice of proposed rulemaking.

See the narrative description of the boundary of the petitioned-for AVA in the proposed regulatory text published at the end of this proposed rule.

The petitioner provided the required maps, and TTB lists them below in the proposed regulatory text. You may also view the proposed Kaw Valley AVA boundary on the AVA Map Explorer on the TTB website, at https://www.ttb.gov/regulated-commodities/beverage-alcohol/wine/ava-map-explorer.

Part 4 of the TTB regulations prohibits any label reference on a wine that indicates or implies an origin other than the wine's true place of origin. For a wine to be labeled with an AVA name, at least 85 percent of the wine must be derived from grapes grown within the area represented by that name, and the wine must meet the other conditions listed in § 4.25(e)(3) of the TTB regulations (27 CFR 4.25(e)(3)). If the wine is not eligible for labeling with an AVA name and that name appears in the brand name, then the label is not in compliance and the bottler must change the brand name and obtain approval of a new label. Similarly, if the AVA name appears in another reference on the label in a misleading manner, the bottler would have to obtain approval of a new label. Different rules apply if a wine has a brand name containing an AVA name that was used as a brand name on a label approved before July 7, 1986. See § 4.39(i)(2) of the TTB regulations (27 CFR 4.39(i)(2)) for details.

If TTB establishes this proposed AVA, its name, “Kaw Valley,” will be recognized as a name of viticultural significance under § 4.39(i)(3) of the TTB regulations (27 CFR 4.39(i)(3)). The text of the proposed regulation clarifies this point. Consequently, wine bottlers using the name “Kaw Valley” in a brand name, including a trademark, or in another label reference as to the origin of the wine, would have to ensure that the product is eligible to use the AVA name as an appellation of origin if TTB adopts this proposed rule as a final rule.

TTB invites comments from interested members of the public on whether it should establish the proposed Kaw Valley AVA. TTB is also interested in receiving comments on the sufficiency and accuracy of required information submitted in support of the petition. Please provide specific information in support of your comments.

Because of the potential impact of the establishment of the proposed Kaw Valley AVA on wine labels that include the term “Kaw Valley” as discussed above under Impact on Current Wine Labels, TTB is particularly interested in comments regarding whether there will be a conflict between the proposed AVA name and currently used brand names. If a commenter believes that a conflict will arise, the comment should describe the nature of that conflict, including any anticipated negative economic impact that approval of the proposed AVA will have on an existing viticultural enterprise. TTB is also interested in receiving suggestions for ways to avoid conflicts, for example, by adopting a modified or different name for the proposed AVA.

You may submit comments on this proposal by using one of the following methods:

• Federal e-Rulemaking Portal: You may send comments via the online comment form posted with this document within Docket No. TTB-2026-0003 on “ Regulations.gov ,” the Federal e-rulemaking portal, at https://www.regulations.gov. A direct link to that docket is available under Notice No. 241 on the TTB website at https://www.ttb.gov/regulated-commodities/beverage-alcohol/wine/notices-of-proposed-rulemaking. Supplemental files may be attached to comments submitted via Regulations.gov. For complete instructions on how to use Regulations.gov, visit the site and click on the “FAQ” link at the bottom of the page.

• U.S. Mail: You may send comments via postal mail to the Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW, Box 12, Washington, DC 20005.

Please submit your comments by the closing date shown above in this document. Your comments must reference Notice No. 241 and include your name and mailing address. Your comments also must be made in English, be legible, and be written in language acceptable for public disclosure. We do not acknowledge receipt of comments, and we consider all comments as originals.

Your comment must clearly state if you are commenting on your own behalf or on behalf of an organization, business, or other entity. If you are commenting on behalf of an organization, business, or other entity, your comment must include the entity's name as well as your name and position title. If you comment via Regulations.gov , please enter the entity's name in the “Organization” blank of the online comment form. If you comment via postal mail, please submit your entity's comment on letterhead.

You may also write to the Administrator before the comment closing date to ask for a public hearing. The Administrator reserves the right to determine whether to hold a public hearing.

All submitted comments and attachments are part of the public record and subject to disclosure. Do not enclose any material in your comments that you consider to be confidential or inappropriate for public disclosure.

TTB will post, and you may view, copies of this document, selected supporting materials, and any online or mailed comments received about this proposal within Docket No. TTB-2026-0003 on the Federal e-rulemaking portal, Regulations.gov, at https://www.regulations.gov . A direct link to that docket is available on the TTB website at https://www.ttb.gov/wine/notices-of-proposed-rulemaking under Notice No. 241. You may also reach the relevant docket through the Regulations.gov search page at https://www.regulations.gov. For instructions on how to use Regulations.gov, visit the site and click on the “FAQ” link at the bottom of the page.

All posted comments will display the commenter's name, organization (if any), city, and State, and, in the case of mailed comments, all address information, including email addresses. TTB may omit voluminous attachments or material that it considers unsuitable for posting.

You may also obtain copies of this proposed rule, all related petitions, maps, and other supporting materials, and any electronic or mailed comments that TTB receives about this proposal at 20 cents per 8.5- x 11-inch page. Please note that TTB is unable to provide copies of USGS maps or any similarly-sized documents that may be included as part of the AVA petition. Contact TTB's Regulations and Rulings Division by email using the web form at https://www.ttb.gov/contact-rrd, or by telephone at 202-453-1039, ext. 175, to request copies of comments or other materials.

TTB certifies that this proposed regulation, if adopted, would not have a significant economic impact on a substantial number of small entities. The proposed regulation imposes no new reporting, recordkeeping, or other administrative requirement. Any benefit derived from the use of a viticultural area name would be the result of a proprietor's efforts and consumer acceptance of wines from that area. Therefore, no regulatory flexibility analysis is required.

It has been determined that this proposed rule is not a significant regulatory action as defined by Executive Order 12866 of September 30, 1993. Therefore, no regulatory assessment is required.

For the reasons discussed in the preamble, TTB proposes to amend title 27, chapter I, part 9, Code of Federal Regulations, as follows:

In accordance with 5 U.S.C. 553(b)(4), a summary of this rule may be found at https://www.regulations.gov/docket/TTB-2026-0004.

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act provides that these regulations should, among other things, prohibit consumer deception and the use of misleading statements on labels and ensure that labels provide the consumer with adequate information as to the identity and quality of the product. The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers the FAA Act provisions pursuant to section 1111(d) of the Homeland Security Act of 2002, as codified at 6 U.S.C. 531(d). In addition, the Secretary has delegated certain administrative and enforcement authorities to TTB through Treasury Order 120-01.

Part 4 of the TTB regulations (27 CFR part 4) authorizes TTB to establish definitive viticultural areas and regulate the use of their names as appellations of origin on wine labels and in wine advertisements. Part 9 of the TTB regulations (27 CFR part 9) sets forth standards for the preparation and submission of petitions for the establishment or modification of American viticultural areas (AVAs) and lists the approved AVAs.

Section 4.25(e)(1)(i) of the TTB regulations (27 CFR 4.25(e)(1)(i)) defines a viticultural area for American wine as a delimited grape-growing region having distinguishing features as described in part 9 of the regulations and, once approved, a name and a delineated boundary codified in part 9 of the regulations. These designations allow vintners and consumers to attribute a given quality, reputation, or other characteristic of a wine made from grapes grown in an area to the wine's geographic origin. The establishment of AVAs allows vintners to describe more accurately the origin of their wines to consumers and helps consumers to identify wines they may purchase. Establishment of an AVA is neither an approval nor an endorsement by TTB of the wine produced in that area.

Section 4.25(e)(2) of the TTB regulations (27 CFR 4.25(e)(2)) outlines the procedure for proposing an AVA and allows any interested party to petition TTB to establish a grape-growing region as an AVA. Section 9.12 of the TTB regulations (27 CFR 9.12) prescribes standards for petitions to establish or modify AVAs. Petitions to establish an AVA must include the following:

• Evidence that the area within the proposed AVA boundary is nationally or locally known by the AVA name specified in the petition;

• An explanation of the basis for defining the boundary of the proposed AVA;

• A narrative description of the features of the proposed AVA that affect viticulture, such as climate, geology, soils, physical features, and elevation, that make the proposed AVA distinctive and distinguish it from adjacent areas outside the proposed AVA boundary;

• The appropriate United States Geological Survey (USGS) map(s) showing the location of the proposed AVA, with the boundary of the proposed AVA clearly drawn thereon; and

• A detailed narrative description of the proposed AVA boundary based on USGS map markings.

• If the proposed AVA is to be established within, or overlapping, an existing AVA, an explanation that both identifies the attributes of the proposed AVA that are consistent with the existing AVA and explains how the proposed AVA is sufficiently distinct from the existing AVA, and therefore appropriate for separate recognition.

TTB received a petition submitted on behalf of local vineyard owners and winemakers that proposed establishing the “Mill Creek—Walla Walla Valley” AVA.

The proposed Mill Creek—Walla Walla Valley AVA is located in Walla Walla County, Oregon, and lies entirely within the boundaries of the established Columbia Valley AVA (27 CFR 9.74) and the established Walla Walla Valley AVA (27 CFR 9.91). The proposed Mill Creek—Walla Walla Valley AVA contains approximately 4,898 acres, with twelve commercially-producing vineyards covering a total of 282 acres distributed throughout the proposed AVA. There are currently five wineries within the proposed AVA.

According to the petition, the distinguishing features of the proposed Mill Creek—Walla Walla Valley AVA include its geography, geology, soils, and climate. Unless otherwise noted, all information and data pertaining to the proposed AVA contained in this document are from the petition for the proposed Mill Creek—Walla Walla Valley AVA and its supporting exhibits.

According to the petition, most of the land within the boundaries of the proposed Mill Creek—Walla Walla Valley AVA is located either within the current watershed of Mill Creek or is situated on an old alluvial fan of Mill Creek. Mill Creek Road forms most of the southern boundary of the proposed AVA. The wineries and vineyards in this section of the Walla Walla Valley AVA are commonly referred to as being located in the “Mill Creek area” or “Mill Creek region,” and the oldest vineyard in the proposed AVA is known as the “Mill Creek Upland” vineyard. Appendix A to the petition includes several references that cite wineries, vineyards, and properties located in the “Mill Creek area” of the Walla Walla Valley. A 2020 newspaper article noted that Echolands Winery of Walla Walla purchased “340 acres of Mill Creek property.”  1 A 2023 press release discussed Echolands Winery's plans for building a new facility “located in the Mill Creek area of the Walla Walla Valley AVA in the foothills of the Blue Mountains, some of the highest elevations in Washington State.”  2 A local hotel's website noted that when the owners of Menozzi Estate Vineyards were searching across the Walla Walla Valley for a location, they eventually focused on “the upland Mill Creek area in the foothills of the Blue Mountains.”  3 In 2020, a local newspaper published an article about a family rebuilding after the flood that occurred on their “Mill Creek property.”  4

The petition mentions that Mill Creek is a major tributary of the Walla Walla River, and its lower reaches are considered part of the greater Walla Walla Valley. According to the petition, “Walla Walla Valley” is included in the name of the proposed AVA to emphasize its location within the Walla Walla Valley and to distinguish the area from other regions in the U.S. that have streams named Mill Creek.

According to the petition, the boundaries of the proposed Mill Creek-Walla Walla Valley AVA encompass the mostly south-facing slopes with elevations between 1,200 and 2,000 feet of the interfluve separating the Mill Creek floodplain, located south of the proposed AVA, from the Spring Creek and Dry Creek floodplains, located north of the proposed AVA. The northern boundary of the proposed AVA lies near the ridge line or crest of the interfluve. The proposed eastern boundary coincides with the boundaries of the established Columbia Valley and Walla Walla Valley AVAs. The proposed southern boundary approaches the northern boundary of the Mill Creek and Blue Creek floodplains. The western boundary of the proposed AVA coincides with the former Northern Pacific rail lines and has elevations above 1,200 feet.

According to the petition the distinguishing features of the proposed Mill Creek—Walla Walla Valley AVA are its geography, geology, soils, and climate.

According to the petition, the proposed Mill Creek—Walla Walla Valley AVA lies at the place where the relatively flat floor of the Walla Walla Valley meets the foothills of the Blue Mountains. In the vast majority of the proposed AVA, slope angles range between 2-10 degrees with an average slope of 5 degrees. East of the proposed AVA slopes can exceed 25 degrees. Slope angle ranges in the areas west and north of the proposed AVA are mostly similar to those within the proposed AVA. The area immediately to the south is also similar to the proposed AVA, although the region slightly farther south has a few slopes that are significantly steeper with angles above 25 degrees. The gentle to moderate slopes within the proposed AVA are ideal for viticulture, as they are steep enough to promote cold air drainage but shallow enough to farm with conventional tractors.

The proposed AVA is generally composed of the south-facing slopes of the interfluve between the floodplains of Mill Creek and Spring Creek, which drain westward from the Blue Mountains. According to the petition, south-facing slopes are generally preferred for viticulture in the northern hemisphere since they receive the greatest solar insolation, resulting in higher soil temperatures that encourage the onset of the stages of vine growth and speed ripening. To the north and south of the proposed AVA are the southern sides of the Spring Creek and Mill Creek valleys, both of which are dominated by north-facing slopes. The petition did not include information about the direction of the slopes to the east and west of the proposed AVA.

The petition notes that within the proposed AVA elevations range from 2,041 to 1,260 feet with an average elevation of approximately 1,550 feet. To the east and southeast of the proposed AVA, elevations in the Blue Mountains are higher, rising to elevations over 5,000 feet. West of the proposed AVA, elevations start at 1,400 feet and descend to 1,200 feet or lower. The region immediately to the south of the proposed AVA has elevations generally between 1,500 and 1,300 feet. According to the petition, cool air drains off the higher elevations to the east and moves through the proposed AVA on the way to the lower elevations to the west. The petition states that this cold air drainage, aided by the elevation differences, affects the climate of the proposed AVA.

According to the petition, the area of the proposed Mill Creek—Walla Walla Valley AVA lies within a geologic province which is characterized by the underlying basalt bedrock formed from extremely thick accumulations of lava flows. In the areas south and east of the proposed AVA, tectonic compression uplifted the bedrock to form the Blue Mountains. The erosion of the Blue Mountains supplied the basalt-derived gravel, sand, and clay underlying much of the Walla Walla Valley. The petition notes that geologists classified the gravel from the initial erosion and uplift of the Blue Mountains as “old gravel” to distinguish it from the gravel deposits of the floodplains and modern streams. Geologists classified the ancient lake sediments as the “old clay.” Along the southern and eastern borders of the proposed AVA, the old gravel is exposed in road cuts while the old clay is not exposed anywhere in the Walla Walla Valley.

According to the petition, during the ice age approximately one million years ago, there were several catastrophic floods in the Columbia Basin. Repeated failures of a glacial ice dam between 18 and 12 thousand years ago flooded the Columbia Basin and deposited layers of sand and silt, known as the Touchet beds, in all areas of the Walla Walla Valley below 1,200 feet elevation and in 75 percent of the Walla Walla Valley AVA. The petition notes that the uppermost soil-forming layer of sediment in most parts of the Walla Walla Valley consists of wind-deposited silt known as loess, which was primarily sourced from wind erosion of the deposits of the ice-age floods in areas upwind of the valley. This loess consists primarily of minerals such as granite-derived quartz and mica that indicate they were derived from the erosion of sources other than basalt outside of the Columbia Plateau. The thickness of the loess is 2 to 4 feet in areas below 1,200 feet. In contrast, most areas of the proposed AVA have elevations above 1,200 feet that were never subjected to erosion by the glacial outburst floods and as a result, the loess thickness can reach more than 50 feet.

The petition notes that the distinguishing characteristic of the proposed AVA related to geology is primarily derived from its elevation being above the level of the ice-age era floods. As a result, the proposed AVA contains no sediments that were directly deposited by the floods. Additionally, the thickness of the loess in most areas of the proposed AVA prohibits the roots of grapevines from encountering the underlying basaltic materials that contain higher concentrations of iron, magnesium, and titanium relative to the overlying loess soils. This feature distinguishes the soil chemistry of the proposed AVA from areas in the Walla Walla Valley AVA where vines are planted in basaltic cobblestones or in shallow loess over basaltic bedrocks.

The petition notes that the soils within the proposed AVA are almost evenly split between the Walla Walla series and the Athena series, both of which were developed in the thick loess. Both soil series are deep, well-drained silt loam soils with relatively high water-holding capacity but were developed under different precipitation amounts. Walla Walla series soils are lower elevation soils that receive less precipitation, resulting in more calcium carbonate, a higher pH, and a lower clay content than the Athena series. Walla Walla series soils have 10-18 percent clay content, while the higher elevation Athena series soils have 18-27 percent clay content. According to the petition, the higher clay content of the loessal uplands soils increases water retention and helps facilitate viticulture in the proposed AVA without supplemental irrigation, which is a process known as dry-farming.

In the areas east of the proposed AVA, the dominant Palouse series soils contain 20-25 percent clay and have been leached of lime due to higher precipitation in those areas. Soils west of the proposed AVA that are generally classified as either “soils of bottom lands and low terraces” or “soils of loessal and lake-laid terraces,” including Ritzville and Ellisforde series soils, which both have a lower level of clay than the proposed AVA's soils. The petition notes that in the areas west and north of the proposed AVA, dry-farmed viticulture is not practiced due to decreased precipitation and lower clay content in the soil. South of the proposed AVA is the Mill Creek floodplain, with alluvial soils such as the Yakima series developed in basalt cobblestone gravel, sand, and fluvial silt. The coarse-textured basaltic soils in the floodplain are in contrast to the quartz-rich loess within the proposed AVA. Most of the floodplain has a shallow water table and is not suited for viticulture due to subirrigation of the vines.

According to the petition, the proposed Mill Creek—Walla Walla Valley AVA receives an average of more than 20 inches of annual precipitation due to its location near the Blue Mountains. The higher precipitation, combined with loess-based soil and 18 percent average clay content, allows vines to be grown without supplemental irrigation. By contrast, annual precipitation amounts to the west are lower, making the use of supplemental irrigation necessary.

According to the petition, the most significant distinction of the proposed AVA is its exposure to a robust mountain-valley wind system during the middle of the growing season in July and August. The daytime sun bakes the mostly flat ground of the Walla Walla Valley, heating the air above to become less dense and move up the mountain as a valley breeze. In the evening as the sun sets between 7 and 9 p.m., a cooler, denser air moves down out of the Blue Mountains as a mountain breeze. In the area of the proposed AVA, the mountain breeze is most often a dramatic temperature change. The dramatic cooldown in the proposed AVA helps with the ripening process by slowing and balancing vine growth and preserving grape acidity and the brisk winds discourage fungi growth. Within the proposed AVA, winds are generally westerly during the late morning and afternoon, and easterly from late evening through early morning. By contrast, the region west of the proposed AVA has winds from the west and southwest throughout the day.

The petition also includes data collected from 2020 through 2022 on the average temperature, average maximum and minimum temperatures, and average frost-free days for three locations southwest of the proposed AVA and one location within the proposed AVA. The petition did not provide data for temperature and frost-free days for areas north and east of the proposed AVA during this time. Additionally, the petition includes growing degree data from three locations outside the proposed AVA. The petition notes that such data were unavailable from within the proposed AVA and instead provided data from the Walla Walla Airport, which is at a similar elevation to the proposed AVA, as a proxy. However, because the data were not from within the actual proposed AVA, TTB is unable to determine whether growing degree days are a distinguishing feature of the proposed AVA.

According to the petition, the climate of the proposed Mill Creek-Walla Walla Valley AVA is suitable for growing a wide range of warm climate grape cultivars, while the cooler climate of the lower elevations to the west and southwest is very near the cool limit for the same varietals. The petition also notes that the longer growing season length of the proposed AVA is sufficient to ripen most grape varietals, while the shorter growing season length of the regions to the west and southwest would prevent many varietals from achieving ripeness.

In summary, the geography, geology, soils, and climate of the proposed Mill Creek-Walla Walla Valley AVA distinguish it from the surrounding regions. The following table, derived from information in the petition, compares the features of the proposed AVA to the features of the surrounding areas.

T.D. ATF-190, which published in the Federal Register on November 13, 1984 (49 FR 44895) established the Columbia Valley AVA. The Columbia Valley AVA is described in T.D. ATF-190 as a large treeless basin surrounding the Yakima, Snake, and Columbia Rivers in Washington and Oregon. The elevations within the existing AVA are below 2,000 feet. The growing season typically exceeds 150 days, which is similar to the growing season of the proposed AVA.

The proposed Mill Creek—Walla Walla Valley AVA has generally low elevations similar to the Columbia Valley AVA, with the maximum elevation just over 2,000 feet. However, the proposed AVA differs in the amount of rainfall it receives annually. Within the proposed AVA, average annual rainfall amount exceeds 20 inches, whereas the average rainfall in the existing Columbia Valley AVA does not exceed 15 inches.

T.D. ATF-165, which published in the Federal Register on February 6, 1984 (49 FR 4374) established the Walla Walla Valley AVA. T.D. ATF-441, which published in the Federal Register on February 26, 2001 (66 FR 11540), extended the northern boundary of the existing Walla Walla Valley AVA located in Walla Walla County in Washington State and Umatilla County in Oregon. The Walla Walla Valley AVA is described in T.D. ATF-441 as an area at the foot of the mountain slopes on the Oregon/Washington border with elevations from 820 to 1,968 feet. The growing season ranges from 190 to 220 days and the annual precipitation averages 12.5 inches.

The proposed Mill Creek—Walla Walla Valley AVA is located entirely within the eastern region of the existing Walla Walla Valley AVA and shares some broad characteristics with the existing AVA. For example, the soils of the Walla Walla Valley AVA are mostly loess-derived, similar to the soils of the proposed AVA. The proposed AVA also has similar growing season lengths to the established AVA, with an average growing season ranging from 182 to 206 days based on data in the region for the years 2020-2022.

The proposed AVA also has characteristics that differ from the existing AVA. For instance, the petition notes that annual rainfall in the Walla Walla Valley AVA ranges from 10 to 20 inches, while annual rainfall in most of the proposed AVA exceeds 20 inches. As a result, vineyards within the proposed AVA have been dry-farmed for many years, whereas dry-farming is not feasible in 80 percent of the existing AVA due to insufficient precipitation. Additionally, according to the petition, about half of the area within the proposed AVA lies above 1,500 feet, and the highest elevation exceeds 2,000 feet. By contrast, most elevations in the existing Walla Walla Valley AVA descend from about 1,500 feet at the foot of the mountain slopes to about 500 feet where the Walla Walla River cuts through the valley.

TTB concludes that the petition to establish the approximately 4,898-acre Mill Creek—Walla Walla Valley AVA merits consideration and public comment, as invited in this notice of proposed rulemaking.

See the narrative description of the boundary of the petitioned-for AVA in the proposed regulatory text published at the end of this proposed rule.

The petitioner provided the required maps, and they are listed below in the proposed regulatory text. You may also view the proposed Mill Creek—Walla Walla Valley AVA boundary on the AVA Map Explorer on the TTB website, at https://www.ttb.gov/regulated-commodities/beverage-alcohol/wine/ava-map-explorer.

Part 4 of the TTB regulations prohibits any label reference on a wine that indicates or implies an origin other than the wine's true place of origin. For a wine to be labeled with an AVA name or with a brand name that includes an AVA name, at least 85 percent of the wine must be derived from grapes grown within the area represented by that name, and the wine must meet the other conditions listed in 27 CFR 4.25(e)(3). If the wine is not eligible for labeling with an AVA name and that name appears in the brand name, then the label is not in compliance and the bottler must change the brand name and obtain approval of a new label. Similarly, if the AVA name appears in another reference on the label in a misleading manner, the bottler would have to obtain approval of a new label. Different rules apply if a wine has a brand name containing an AVA name that was used as a brand name on a label approved before July 7, 1986. See 27 CFR 4.39(i)(2) for details.

If TTB establishes this proposed AVA, its name, “Mill Creek—Walla Walla Valley,” will be recognized as a name of viticultural significance under § 4.39(i)(3) of the TTB regulations (27 CFR 4.39(i)(3)). The text of the proposed regulation clarifies this point. Consequently, wine bottlers using “Mill Creek-Walla Walla Valley” in a brand name, including a trademark, or in another label reference as to the origin of the wine, would have to ensure that the product is eligible to use the viticultural area's name “Mill Creek—Walla Walla Valley.” The approval of the proposed Mill Creek—Walla Walla Valley AVA would not affect any existing AVA, and any bottlers using “Walla Walla Valley” or “Columbia Valley” as an appellation of origin or in a brand name for wines made from grapes grown within the Mill Creek—Walla Walla Valley AVA would not be affected by the establishment of this new AVA. If approved, the establishment of the proposed Mill Creek—Walla Walla Valley AVA would allow vintners to use “Mill Creek—Walla Walla Valley”, “Walla Walla Valley,” “Columbia Valley,” or any combination of the three AVA names as appellations of origin for wines made from grapes grown within the proposed AVA, if the wines meet the eligibility requirements for the appellation.

TTB invites comments from interested members of the public on whether TTB should establish the proposed Mill Creek—Walla Walla Valley AVA. TTB is interested in receiving comments on the sufficiency and accuracy of the name, boundary, and other required information submitted in support of the AVA petition. In addition, because the proposed Mill Creek—Walla Walla Valley AVA would be within the existing Walla Walla Valley and Columbia Valley AVAs, TTB is interested in comments on whether the evidence submitted in the petition regarding the distinguishing features of the proposed AVA sufficiently differentiates it from the existing AVAs. TTB is also interested in comments on whether the geographic features of the proposed AVA are so distinguishable from the Walla Walla Valley and Columbia Valley AVAs that the proposed Mill Creek—Walla Walla Valley AVA should not be part of these established AVAs. Please provide any available specific information in support of your comments.

Because of the potential impact of the establishment of the proposed Mill Creek—Walla Walla Valley AVA on wine labels that include the term “Mill Creek—Walla Walla Valley” as discussed above under Impact on Current Wine Labels, TTB is particularly interested in comments regarding whether there will be a conflict between the proposed area names and currently used brand names. If a commenter believes that a conflict will arise, the comment should describe the nature of that conflict, including any anticipated negative economic impact that approval of the proposed AVA will have on an existing viticultural enterprise. TTB is also interested in receiving suggestions for ways to avoid conflicts, for example, by adopting a modified or different name for the proposed AVA.

You may submit comments on this proposal by using one of the following methods:

• Federal e-Rulemaking Portal: You may send comments via the online comment form posted with this document within Docket No. TTB-2026-0004 on “ Regulations.gov ,” the Federal e-rulemaking portal, at https://www.regulations.gov. A direct link to that docket is available under Notice No. 242 on the TTB website at https://www.ttb.gov/regulated-commodities/beverage-alcohol/wine/notices-of-proposed-rulemaking. Supplemental files may be attached to comments submitted via Regulations.gov . For complete instructions on how to use Regulations.gov , visit the site and click on the “FAQ” link at the bottom of the page.

• U.S. Mail: You may send comments via postal mail to the Director, Regulations and Rulings Division, Alcohol and Tobacco Tax and Trade Bureau, 1310 G Street NW, Box 12, Washington, DC 20005.

Please submit your comments by the closing date shown above in this document. Your comments must reference Notice No. 242 and include your name and mailing address. Your comments also must be made in English, be legible, and be written in language acceptable for public disclosure. We do not acknowledge receipt of comments, and we consider all comments as originals.

Your comment must clearly state if you are commenting on your own behalf or on behalf of an organization, business, or other entity. If you are commenting on behalf of an organization, business, or other entity, your comment must include the entity's name as well as your name and position title. If you comment via Regulations.gov , please enter the entity's name in the “Organization” blank of the online comment form. If you comment via postal mail, please submit your entity's comment on letterhead.

You may also write to the Administrator before the comment closing date to ask for a public hearing. The Administrator reserves the right to determine whether to hold a public hearing.

All submitted comments and attachments are part of the rulemaking record and are subject to public disclosure. Do not enclose any material in your comments that you consider to be confidential or inappropriate for public disclosure.

TTB will post, and you may view, copies of this document, selected supporting materials, and any online or mailed comments received about this proposal within Docket No. TTB-2026-0004 on the Federal e-rulemaking portal, Regulations.gov , at https://www.regulations.gov. A direct link to that docket is available on the TTB website at https://www.ttb.gov/regulated-commodities/beverage-alcohol/wine/notices-of-proposed-rulemaking under Notice No. 242. You may also reach the relevant docket through the Regulations.gov search page at https://www.regulations.gov. For instructions on how to use Regulations.gov , visit the site and click on the “FAQ” link at the bottom of the page.

All submitted comments and attachments are part of the rulemaking record and are subject to public disclosure. Do not enclose any material in your comments that you consider confidential or that is inappropriate for disclosure. TTB will post comments as submitted, and it will not redact any identifying or contact information from the body of a comment or attachment.

All posted comments will display the commenter's name, organization (if any), city, and State, and, in the case of mailed comments, all address information, including email addresses. TTB may omit voluminous attachments or material that it considers unsuitable for posting.

You may also obtain copies of this proposed rule, all related petitions, maps and other supporting materials, and any electronic or mailed comments that TTB receives about this proposal at 20 cents per 8.5- x 11-inch page. Please note that TTB is unable to provide copies of USGS maps or any similarly-sized documents that may be included as part of the AVA petition. Contact TTB's Regulations and Rulings Division by email using the web contact form at https://www.ttb.gov/contact-rrd, or by telephone at 202-453-1039, ext. 175, to request copies of comments or other materials.

TTB certifies that this proposed regulation, if adopted, would not have a significant economic impact on a substantial number of small entities. The proposed regulation imposes no new reporting, recordkeeping, or other administrative requirement. Any benefit derived from the use of a viticultural area name would be the result of a proprietor's efforts and consumer acceptance of wines from that area. Therefore, no regulatory flexibility analysis is required.

It has been determined that this proposed rule is not a significant regulatory action as defined by Executive Order 12866, as amended. Therefore, it requires no regulatory assessment.

Vonzella C. Johnson of the Regulations and Rulings Division drafted this notice of proposed rulemaking.

For the reasons discussed in the preamble, TTB proposes to amend title 27, chapter I, part 9, Code of Federal Regulations, as follows:

In accordance with 5 U.S.C. 553(b)(4), a summary of this rule may be found at https://www.regulations.gov/docket/TTB-2026-0006.

Section 105(e) of the Federal Alcohol Administration Act (FAA Act), 27 U.S.C. 205(e), authorizes the Secretary of the Treasury to prescribe regulations for the labeling of wine, distilled spirits, and malt beverages. The FAA Act provides that these regulations should, among other things, prohibit consumer deception and the use of misleading statements on labels and ensure that labels provide the consumer with adequate information as to the identity and quality of the product. The Alcohol and Tobacco Tax and Trade Bureau (TTB) administers the FAA Act provisions pursuant to section 1111(d) of the Homeland Security Act of 2002, as codified at 6 U.S.C. 531(d). In addition, the Secretary has delegated certain administrative and enforcement authorities to TTB through Treasury Order 120-01.

Part 4 of the TTB regulations (27 CFR part 4) authorizes TTB to establish definitive viticultural areas and regulate the use of their names as appellations of origin on wine labels and in wine advertisements. Part 9 of the TTB regulations (27 CFR part 9) sets forth standards for the preparation and submission of petitions for the establishment or modification of American viticultural areas (AVAs) and lists the approved AVAs.

Section 4.25(e)(1)(i) of the TTB regulations (27 CFR 4.25(e)(1)(i)) defines a viticultural area for American wine as a delimited grape-growing region having distinguishing features as described in part 9 of the regulations and, once approved, a name and a delineated boundary codified in part 9 of the regulations. These designations allow vintners and consumers to attribute a given quality, reputation, or other characteristic of a wine made from grapes grown in an area to the wine's geographic origin. The establishment of AVAs allows vintners to describe more accurately the origin of their wines to consumers and helps consumers to identify wines they may purchase. Establishment of an AVA is neither an approval nor an endorsement by TTB of the wine produced in that area.

Section 4.25(e)(2) of the TTB regulations (27 CFR 4.25(e)(2)) outlines the procedure for proposing an AVA and allows any interested party to petition TTB to establish a grape-growing region as an AVA. Section 9.12 of the TTB regulations (27 CFR 9.12) prescribes standards for petitions to establish or modify AVAs. Petitions to establish an AVA must include the following:

• Evidence that the area within the proposed AVA boundary is nationally or locally known by the AVA name specified in the petition;

• An explanation of the basis for defining the boundary of the proposed AVA;

• A narrative description of the features of the proposed AVA that affect viticulture, such as climate, geology, soils, physical features, and elevation, that make the proposed AVA distinctive and distinguish it from adjacent areas outside the proposed AVA boundary;

• The appropriate United States Geological Survey (USGS) map(s) showing the location of the proposed AVA, with the boundary of the proposed AVA clearly drawn thereon;

• If the proposed AVA is to be established within, or overlapping, an existing AVA, an explanation that both identifies the attributes of the proposed AVA that are consistent with the existing AVA and explains how the proposed AVA is sufficiently distinct from the existing AVA and therefore appropriate for separate recognition; and

• A detailed narrative description of the proposed AVA boundary based on USGS map markings.

TTB received a petition on behalf of the Rancho Santa Fe Vinters & Growers Association, proposing to establish the 15,827-acre “Rancho Santa Fe” AVA. The proposed AVA is located in San Diego County, California, and is entirely within the existing South Coast AVA (27 CFR 9.104). Within the proposed AVA, there are approximately 30 commercial vineyards. The distinguishing features of the proposed Rancho Santa Fe AVA are its climate and soils. The petition also notes that eucalyptus groves and zoning laws affect viticulture in the proposed AVA and help distinguish it from surrounding regions.

The proposed Rancho Santa Fe AVA takes its name from the community of Rancho Santa Fe, which is located within the proposed AVA. According to the petition, the community received its name in 1906, when the Santa Fe Railway purchased all the lands within the former San Dieguito Land Grant to grow timber for railway ties. Although the timber production plan ultimately failed, the railway turned the land into a subdivision called Rancho Santa Fe and encouraged growing fruits, vegetables, and flowers that could be shipped to East Coast markets via the railroad. After the Santa Fe Railway gave up its control of the land, the Santa Fe Covenant was formed to ensure the orderly development of the community and the “retention of the ranch's character.” Today, the Santa Fe Covenant still controls development within the community.

The petition included other examples of the use of the “Rancho Santa Fe” name to describe the proposed AVA. For example, the Rancho Santa Fe Branch of the San Diego County Library, the Rancho Santa Fe Fire Protection District, the Rancho Santa Fe Elementary School, and the Rancho Santa Fe Middle School all serve people within the proposed AVA. Two charitable organizations within the proposed AVA are the Rancho Santa Fe Foundation and the Rancho Santa Fe Women's Fund. Businesses within the proposed AVA include the Rancho Santa Fe Golf Club and the Inn at Rancho Santa Fe.

The proposed Rancho Santa Fe AVA is located in coastal San Diego County, California, approximately 25 miles north of downtown San Diego. According to the petition, the Pacific Ocean essentially forms the western boundary. The petitioners, however, chose to use Interstate 5 as the western boundary instead, because the small strip of land between the highway and the ocean is highly urbanized with little or no room for commercial viticulture. The proposed northern boundary primarily follows Escondido Creek to separate the proposed AVA from the city of Encinitas, which is highly urbanized and unsuitable for commercial viticulture. The proposed eastern boundary follows the San Dieguito River and a series of roads to separate the proposed AVA from regions with higher elevations and rising temperatures. The eastern boundary also approximates the eastern extent of the 92067 postal code, which is the postal code for the town of Rancho Santa Fe. The proposed southern boundary also follows the San Dieguito River Valley and separates the proposed AVA from the highly urbanized city of San Diego.

According to the petition, the distinguishing features of the proposed Rancho Santa Fe AVA are its climate and soils. Additional aspects related to the effects of local by-laws and the presence of eucalyptus trees on viticulture are also discussed.

The petition states that the proposed Rancho Santa Fe AVA has a mild, consistent climate, with mild year-round temperatures and a balance of sunshine and coastal cloud coverage. The petition includes information on the annual average maximum and minimum temperatures, average annual growing degree day  1 (GDD) accumulations, average annual precipitation amounts, cloud cover and fog, and wind speeds for the proposed AVA and surrounding regions. 2 The information is set forth in the following tables and was gathered from data collected by the Western Weather Group, Inc., from 2018 to 2020. Because the region to the west of the proposed AVA consists largely of highly urbanized land and the Pacific Ocean, climate data were not provided for that region.