Section 250(b)(3)(A)(i)(VII), effective for sales occurring after June 16, 2025, provides that DEI does not include any income and gain from the sale or other disposition3 of (a) intangible property (within the meaning of section 367(d)(4)) and (b) any other property of a type that is subject to depreciation, amortization, or depletion by the seller (such income, “Excluded Property Sales Income” and such exclusion, the “Property Sales Income Exclusion”).
The Proposed Regulations largely follow the roadmap set out in Notice 2025-78 (issued on December 4, 2025), announcing forthcoming proposed regulations and providing preliminary guidance on the new exclusion.4 However, the Proposed Regulations expand upon the guidance in Notice 2025-78 in several important respects—most notably, by adding detailed rules on the scope of “other excluded property,” a related party anti-abuse rule, and extensive clarifications regarding software transactions.
Background
The FDDEI deduction and DEI
As amended by the OBBBA, section 250(a)(1) allows a domestic corporation a deduction equal to 33.34% of its “foreign-derived deduction eligible income” (“FDDEI”) for taxable years beginning after December 31, 2025.5 FDDEI is the portion of DEI that is derived from property sold to non-U.S. persons for foreign use, or services provided to persons outside the United States.6 DEI, in turn, is a domestic corporation’s gross income minus certain excluded categories of income enumerated in section 250(b)(3)(A)(i)(I) through (VII), minus expenses and deductions (other than interest expense and research expenditures), including taxes, allocated and apportioned to such non-excluded items of gross income.
Prior to the OBBBA, section 250(b)(3)(A)(i) excluded six categories of income from DEI.7 The OBBBA retained these categories and added the Property Sales Income Exclusion as a seventh excluded category. The definition of a “sale” for purposes of the Property Sales Income Exclusion is narrower than the definition that is used for purposes of section 250 (which, as a general matter, covers licenses, leases, exchanges, or other dispositions).8
Treasury and the IRS stated that this additional exclusion was intended to strengthen the policy objectives of the FDDEI regime, directed principally toward curbing erosion of the U.S. tax base through the offshoring of property that would otherwise generate foreign-market intangible income.9
Proposed Regulations under Section 250(b)
1. Definition of “sale”
As discussed above, section 250(b)(2)(E) ordinarily defines “sale” capaciously to include any lease, license, exchange, or other disposition. However, section 250(b)(2)(E) specifically provides that this statutory definition does not apply for purposes of the Property Sales Income Exclusion. Instead, whether a transaction constitutes a “sale or other disposition” for purposes of the Property Sales Income Exclusion is determined under general U.S. federal income tax principles, which would generally include deemed sales, deemed dispositions, and transactions subject to section 367(d) (outbound transfers of intangibles treated as sales), but would generally exclude leases and licenses. In light of the fact that leases and licenses, on the one hand, and sales, on the other hand, can be economically similar transactions in many cases, the distinction between leases and licenses, on the one hand, and sales, on the other hand, presents opportunities for taxpayers that are attempting to structure transactions outside the scope of the Property Sales Income Exclusion, but also presents a potential trap for taxpayers who do not closely scrutinize whether their purported license or lease in fact qualifies as a license or lease, instead of a sale, under general U.S. tax principles.
2. Excluded Property Sales Income; Intangible Property; Other Excluded Property
The Proposed Regulations define Excluded Property Sales Income as gross income and gain from the sale or other disposition of two categories of property: (a) intangible property (within the meaning of section 367(d)(4))10 (“Intangible Property”) and (b) Other Excluded Property (as defined below).
Excluded Property Sales Income includes all recognized gain from the sale of Intangible Property or Other Excluded Property (as defined below), and not just the portion of the income or gain that is treated as ordinary income under section 1245 or section 1250.
The Proposed Regulations define “Other Excluded Property” as property (other than Intangible Property) that, in the hands of a seller who is a domestic corporation or a domestic or foreign partnership (an “Excluded Seller”):
- is, or has been, property of a character subject to the allowance for depreciation under section 16711
- is, or has been, subject to an allowance for amortization or
- is, or has been, subject to the allowance for depletion under section 611.
The Proposed Regulations clarify that property that has been fully depreciated retains its character as Other Excluded Property. This may be the case even if the property was not depreciated by the taxpayer but was depreciated by a prior transferor in a carryover basis transaction.
Furthermore, the Proposed Regulations expressly rejected comments requesting an exception from the definition of Other Excluded Property for property that was previously depreciated but subsequently repurposed or remanufactured into inventory. Such property therefore retains its character as Other Excluded Property.
However, Other Excluded Property does not include property that has at all times been held by the seller as inventory.
3. Intangible Property: Copyrighted Articles Distinguished
The Proposed Regulations clarify that Intangible Property does not include “copyrighted articles” as defined in Treas. Reg. §1.861-18(c)(3).12 This distinction has significant consequences for software transactions.
In particular, a sale of copies of software to customers, whether through electronic downloads or physical media, constitutes a transfer of a copyrighted article—the copies themselves are not Intangible Property. However, the copies may still be treated as Other Excluded Property if they were depreciable in the seller’s hands. Therefore, provided that the seller has never used those particular copies in a trade or business (i.e., they were never depreciable property in the seller’s hands), the income from the sale of such copies is not Excluded Property Sales Income because such copies would be excluded from the definition of Intangible Property and Other Excluded Property.
By contrast, a transfer of the underlying copyright itself constitutes a sale of Intangible Property and, accordingly, gives rise to Excluded Property Sales Income. Finally, a lease or license of a copyrighted article (e.g., a limited-duration, nonexclusive, revocable arrangement) does not constitute a “sale or other disposition” under general U.S. tax principles (as discussed above) and, accordingly, does not give rise to Excluded Property Sales Income, regardless of the character of the underlying asset.
4. Related party anti-abuse rule
The Proposed Regulations introduce an anti-abuse rule targeting related party transfers.13 Under this rule, property that is Other Excluded Property in the hands of another person retains that character in the hands of the transferee when:
- the property is transferred within the Excluded Seller’s “modified affiliated group” (“MAG”)
- in a transaction (or series of transactions) in which the basis of the property is determined, in whole or in part, by reference to the basis in the hands of the member of the Excluded Seller’s MAG in whose hands the property was Other Excluded Property and
- the transfer has a principal purpose of avoiding the application of section 250(b)(3)(A)(i)(VII)(bb) (defining Other Excluded Property).
This rule seeks to prevent taxpayers from converting depreciable property into property that is not Other Excluded Property through transfers between related parties. For example, the Proposed Regulations provide that a taxpayer cannot avoid the Property Sales Income Exclusion merely by transferring depreciable, amortizable, or depletable property to a related party that holds the property as inventory before later selling it to a foreign customer.
In addition to the related party anti-abuse rule, the examples in the Proposed Regulations provide that Treas. Reg. §1.1502-13(c)14 will apply in such a manner that if a transferor-member sells property that is Other Excluded Property in its hands to another member of the consolidated group in a taxable transaction, such transferee-member’s corresponding item from the sale of the asset will be treated as Excluded Property Sales Income, even if the transferee-member holds the property as inventory. See Example 5, below.
5. Examples
Example 1: sale of a copyright vs. license
Facts: DC, a domestic corporation, developed Software X. DC transfers an exclusive, irrevocable license for the remaining useful life of the copyright to a foreign person, constituting a transfer of all substantial rights in the copyright under general U.S. tax principles.
Result: The copyright is Intangible Property under section 367(d)(4). The transfer of all substantial rights constitutes a “sale or other disposition” under general U.S. tax principles. The income from such sale is therefore Excluded Property Sales Income and is excluded from DEI under the Property Sales Income Exclusion.
Alternative: If DC instead grants a nonexclusive, revocable, limited-duration license, the transaction is a license—not a “sale or other disposition” under general U.S. tax principles. The income from the license would not be Excluded Property Sales Income.
Example 2: software copies (copyrighted articles)
Facts: DC sells copies of Software X to customers (whether electronically or on physical media). The copies are “copyrighted articles” under Treas. Reg. §1.861-18(c)(3). DC never used those copies in its own trade or business.
Result: The copies are copyrighted articles, not Intangible Property. Furthermore, because DC never used the copies in its business, they are not Other Excluded Property. The income is therefore not Excluded Property Sales Income.
Alternative: If DC provides 2-year limited-duration access to the software, the transaction is a lease of a copyrighted article—not a “sale or other disposition.” The income is not Excluded Property Sales Income regardless of the character of the underlying asset.
Example 3: fully depreciated machine
Facts: DC purchased a machine and fully depreciated it over its recovery period. DC subsequently sells the machine to a foreign buyer.
Result: The machine is Other Excluded Property as a result of being property “of a character subject to the allowance for depreciation,” even though it has been fully depreciated. The gain is Excluded Property Sales Income.
Alternative: DC2 acquires the machine from DC in a tax-deferred exchange described in section 351 (a nonrecognition transaction in which DC2 takes a carryover basis under section 362(a)). DC2 never claims any depreciation deductions. DC2 subsequently sells the machine. The machine is still Other Excluded Property in DC2’s hands because it “has been” property of a character subject to depreciation.
Example 4: inventory vs. Depreciable property
Facts: DC manufactures and sells airplanes. DC holds five airplanes for use in its own business operations (depreciable property) and 95 airplanes as inventory for sale to customers. DC sells to a foreign buyer two airplanes that DC uses in its trade or business and 35 airplanes DC holds in inventory.
Result: Sales of the two depreciable airplanes produce Excluded Property Sales Income (they are Other Excluded Property). Sales of the 35 inventory airplanes do not produce Excluded Property Sales Income because inventory that has always been held as such is not Other Excluded Property.
Example 5: intercompany sales within a consolidated group
Facts: DC1 and DC2 are members of the same consolidated group. DC1 holds airplanes as Other Excluded Property and sells them to DC2 in a taxable transaction. DC2 holds those airplanes as inventory and sells them to third-party customers.
Result: Under Treas. Reg. §1.1502-13(c)(1), in order to put the consolidated group in the same position that it would have been in had DC1 and DC2 been divisions of a single corporation, both DC1’s intercompany item and DC2’s corresponding item are treated as Excluded Property Sales Income due to DC1’s prior use of the airplanes as Other Excluded Property.
Example 6: related party anti-abuse rule
Facts: DC1 holds cars as Other Excluded Property. DC1 transfers the cars to a partnership in which it is an 80% partner in a tax-deferred exchange described in section 721 pursuant to which the partnership’s tax basis in the cars is determined by reference to DC1’s tax basis in the cars under section 723. The partnership then transfers the cars to DC2, its wholly owned subsidiary, in a tax-deferred exchange described in section 351 pursuant to which DC2’s tax basis in the cars is determined by reference to the partnership’s tax basis in such cars under section 362(a). The transfers are made with a principal purpose of avoiding section 250(b)(3)(A)(i)(VII)(bb). DC2 holds the cars as inventory following the transfers. DC2 later sells the cars to third-party customers.
Result: Under the anti-abuse rule, because (a) the transfers are made between members of DC2’s MAG, (b) DC2’s tax basis in the cars is determined by reference to DC1’s tax basis in the cars and (c) the transfers are made with a principal purpose of avoiding section 250(b)(3)(A)(i)(VII)(bb), the cars retain their Other Excluded Property character in DC2’s hands. Accordingly, DC2’s income from subsequent sales of the cars is Excluded Property Sales Income, notwithstanding DC2’s treatment of the cars as inventory.
Applicability dates
The Proposed Regulations generally apply to sales or other dispositions occurring after June 16, 2025.
The clarification that FDDEI is a subset of DEI applies to taxable years beginning after December 31, 2025.
Taxpayers may rely on the rules set forth in the Proposed Regulations before they are published as final regulations, provided the taxpayers and their related parties follow them in their entirety and in a consistent manner for the relevant taxable years.
Treasury and the IRS expect to finalize the Proposed Regulations by January 4, 2027. Comments on the Proposed Regulations, and requests for a public hearing, are due 45 days after publication in the Federal Register (i.e., October 4, 2026).
Footnotes
1 Unless otherwise indicated, all “section” references contained herein are to sections of the Code.
2 Pub. L. 119-21.
3 For this purpose, a sale or disposition includes a deemed sale or other disposition subject to section 367(d).
4 Notice 2025-78 announced forthcoming proposed regulations under new section 250(b)(3)(A)(i)(VII) and provided preliminary guidance. Taxpayers were permitted to rely on the notice for sales or other dispositions occurring after June 16, 2025, and before the date the proposed regulations were published in the Federal Register.
5 For taxable years beginning after December 31, 2025, the OBBBA permanently reduced the FDDEI deduction percentage from 37.5% to 33.34%. If the OBBBA had not been passed, the FDDEI deduction percentage would have been reduced from 37.5% to 21.875% for taxable years beginning after December 31, 2025. The OBBBA also abrogated the prior FDII framework (which included both DII and DTIR as components of the FDII calculation) with a simplified “FDDEI” deduction. The Proposed Regulations note that notwithstanding the removal of DII and DTIR from the new FDDEI calculation, FDDEI will continue to be limited by the amount of a taxpayer’s DEI.
6 The property sold to the foreign buyer does not need to be produced or manufactured by the domestic seller.
7 Section 250(b)(3)(A)(i) excludes certain categories of income from the computation of DEI. Prior to the OBBBA, the six excluded categories were: (i) subpart F income, (ii) GILTI (now NCTI), (iii) financial services income, (iv) CFC dividends, (v) domestic oil and gas extraction income, and (vi) foreign branch income.
8 Section 250(b)(2)(E).
9 Application of Section 250(b)(3)(A)(i)(VII) to Sales or Other Dispositions of Property, 91 Fed. Reg. 53792, 53796 (proposed Aug. 20, 2026).
10 Under section 367(d)(4), the following items are treated as intangible property: patents, inventions, formulae, processes, designs, patterns, know-how, copyrights, literary/musical/artistic compositions, trademarks, trade names, brand names, franchises, licenses, contracts, methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, technical data, goodwill, going concern value, and workforce in place.
11 Practically speaking, the exclusion from FDDEI of depreciable assets is particularly relevant for taxpayers who might sell major business assets rather than inventory to foreign buyers. How the buyer would use the depreciated asset does not factor into the analysis given that the policy behind the FDDEI regime seeks to incentivize U.S. corporate sellers to export inventory manufactured domestically. Selling a depreciable asset is more akin to offshoring an asset that could otherwise produce inventory property in the U.S. that could later be sold directly to foreign buyers.
12 A “copyrighted article” as defined in Treas. Reg. §1.861-18(c)(3) is a copy of a work of authorship (such as a book or software) that a customer may use but that does not transfer any of the underlying copyright rights (reproduction, preparation of derivatives, distribution, performance, or display).
13 The term “modified affiliated group” means an affiliated group as defined in section 1504(a) (generally, one or more chains of corporations connected through stock ownership with a common parent corporation that meets various tests, including an ownership threshold), but using an 80% ownership threshold (by vote and value) rather than the 50% threshold ordinarily used for section 250 purposes.
14 Treas. Reg. §1.1502-13(c)(1) provides the separate entity attributes of the selling member’s intercompany item and the buying member’s corresponding item must be redetermined to the extent necessary to produce the same effect on consolidated taxable income (and consolidated tax liability) as if the selling member and buying member were divisions of a single corporation, and the intercompany transaction were a transaction between such divisions.
