In furtherance of its efforts to provide guidance related to the implementation of tax law changes that are part of the One Big Beautiful Bill Act of 2025 (OBBBA), on December 4, 2025, the IRS issued Notice 2025-78 (Notice). The Notice previews proposed regulations that will provide guidance on which income and gain must be excluded from the determination of deduction-eligible income (DEI) under section 250(b)(3).1
At a high level, the Department of the Treasury (Treasury) and IRS intend to issue proposed regulations under section 250 that (i) clarify the types of “sales or other dispositions” subject to the amended rules, (ii) clarify the scope of the excluded property, and (iii) introduce a related-party anti-abuse rule, all as discussed further below.
Background
Section 250(a)(1) allows a domestic corporation a deduction equal to a percentage of its foreign-derived deduction eligible income (FDDEI). Generally, FDDEI includes the domestic corporation’s DEI derived in connection with either property sold for a foreign use to a non-US person or services provided outside of the United States.
Prior to the OBBBA, section 250(b)(3)(A) defined DEI as the excess of a domestic corporation’s gross income over allocable deductions, determined without regard to six specific categories of gross income. The OBBBA added a seventh category of income that is excluded from the determination of DEI: any income and gain resulting from the sale or other disposition (including any deemed sales or dispositions, or a transaction subject to section 367(d)) of (i) intangible property (as defined in section 367(d)(4)) (Intangible Property), and (ii) any other property subject to depreciation, amortization, or depletion by the seller (Other Excluded Property).
The OBBBA exempted licenses and leases from the new exclusion for sales of Intangible Property or Other Excluded Property by carving such exclusion out of the scope of the general rule that licenses and leases are treated as “sales” for purposes of section 250. Thus, royalties received in exchange for a license to a foreign person for use outside the United States, or income related to leasing equipment to a foreign person for use outside the United States, should continue to be treated as FDDEI under section 250.
These revisions are effective for sales or other dispositions occurring after June 16, 2025. Thus, these changes potentially reduce the section 250 deduction available to domestic corporations in 2025 and subsequent years.
Scope of Intangible Property and Other Excluded Property
The Notice explains that the forthcoming proposed regulations will provide that the determination of whether a transaction is a “sale or other disposition” is made by applying general tax principles. Under the statute, sales include deemed sales and other deemed dispositions for US federal income tax purposes, as well as transactions subject to section 367(d). And, consistent with the statute, a lease or license is not treated as a sale or other disposition of Intangible Property or Other Excluded Property for purposes of applying the exclusions from DEI. Correspondingly, the regulations are expected to provide that whether a transaction is a lease or license is determined under general tax principles.
The Notice helpfully clarifies that a sale of Intangible Property does not include the sale of a “copyrighted article” as defined in Treas. Reg. § 1.861-18(c)(3).2 Thus, the exclusion does not apply to the sale of copies of digital content (e.g., movies, computer software, music, and books) when transferred with rights akin to a sale of a copy or via download/disk.
For purposes of defining Other Excluded Property, the Notice clarifies that it includes only property that, in the hands of the seller, is or has been treated as property subject to the allowance for depreciation under section 167, amortization (not under section 167), or depletion under section 611.3 Thus, property held as inventory is not Other Excluded Property, because it is not subject to the allowance for depreciation under section 167.4
In the context of a consolidated group, property is treated as Other Excluded Property if it was subject to the allowance for depreciation under section 167, amortization (not under section 167), or depletion under section 611 in the hands of any member of the consolidated group. Thus, property depreciated by a member of a consolidated group retains its character as Other Excluded Property even if sold to another member of the consolidated group.
Anti-abuse Rule
The proposed regulations will also include an anti-abuse rule for certain related-party transactions. The rule will provide that Other Excluded Property transferred in a carryover basis transaction within a modified affiliated group5 will continue be treated as Other Excluded Property if a principal purpose for the transaction was to avoid the exclusion from DEI.6
Effective Dates
The Notice anticipates that the proposed regulations, when finalized, will apply to
sales or other dispositions occurring after June 16, 2025. Taxpayers have the option to rely on the rules outlined in the Notice immediately for sales or other dispositions occurring before the proposed regulations are published in the Federal Register, provided they apply the rules in their entirety and in a consistent manner for all applicable taxable years.
1 Unless otherwise stated, all section references are to the Internal Revenue Code of 1986, as amended (Code), and all “Treas. Reg. §” references are to the regulations promulgated thereunder by the Department of the Treasury (Treasury Regulations or Regulations) as in effect as of the applicable taxable year or as of the date of this legal alert, as relevant.
2 Notice, Example 1 (describing the sale of a copyright instead of a copyrighted article, and concluding that the sale of the copyright is subject to the exclusion from DEI).
3 Such property falls within the section 250(b)(3)(A)(i)(VII)(bb) exclusion even if the property is fully depreciated and has a zero adjusted basis at the time of the sale. See Notice, Example 2.
4 See Notice, Example 3 (distinguishing between the sale of airplanes that are used in the trade or business, and which were subject to the allowance for depreciation under section 167, and airplanes held in inventory for sale to customers).
5 For purposes of the related-party anti-abuse rule, the term “modified affiliated group” has the meaning provided in Treas. Reg. § 1.250(b)-1(c)(17) but without the substitution of “more than 50 percent” for “at least 80 percent” each place it appears, and by substituting “at least 80 percent” for “more than 50 percent” for purposes of determining control within the meaning of section 954(d)(3).
6 See Notice, Example 5.
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