Proposed FDDEI regulations relating to sales of IP and other excluded property

Background 

On August 20, 2026, the United States Internal Revenue Service (IRS) published proposed regulations under section 250 that describe the income and gain excluded from deduction-eligible income (DEI) and, therefore, from foreign-derived deduction-eligible income (FDDEI) under section 250(b)(3)(A)(i)(VII). The proposed regulations exclude income and gain from the sale or other disposition of (i) intangible property, as defined in section 367(d)(4), and (ii) other property of a type subject to depreciation, amortization, or depletion by the seller. Section 70322(a)(1) of the One Big Beautiful Bill Act (OBBBA) added section 250(b)(3)(A)(i)(VII), and the proposed regulations build on the preliminary guidance in Notice 2025-78. For additional commentary on Notice 2025-78, please see our prior alert.

For context, section 250(a)(1) allows a domestic corporation to deduct 33.34 percent of its FDDEI for taxable years beginning after December 31, 2025. The OBBBA reduced the deduction rate from 37.5 percent to 33.34 percent. FDDEI generally includes income from exports of services and certain property that a US corporation provides or sells to foreign persons for foreign use.

Section 250(b)(3)(A)(i)(VII) excludes from DEI – and therefore excludes from FDDEI – any income and gain from the sale or other disposition (including a deemed disposition) of intangible property and any other property of a type subject to depreciation, amortization, or depletion by the seller.

The OBBBA also narrowed the general section 250 definition of “sale,” which ordinarily includes any lease, license, exchange, or other disposition. Taxpayers do not apply that broad definition to sales described in section 250(b)(3)(A)(i)(VII); instead, they apply general US federal income tax principles to determine whether a transaction constitutes a sale or other disposition.

On December 4, 2025, the IRS released Notice 2025-78, describing anticipated rules addressing the scope of excluded property sales income. That notice permitted taxpayers to rely on the rules described therein for sales or other dispositions occurring after June 16, 2025, and before the proposed regulations are published in the Federal Register. 

Excluded property sales income: In general 

Under the proposed regulations, taxpayers determine gross DEI without regard to a new category of gross income, “excluded property sales income.” The proposed regulations define “excluded property sales income” as income and gain that a taxpayer realizes from selling or otherwise disposing of (i) intangible property and (ii) “other excluded property.” 

Sales or other dispositions

A taxpayer generates excluded property sales income only when it sells or otherwise disposes of the relevant intangible property or other excluded property (each described below). Notice 2025-78 and the proposed regulations explain that the general section 250 definition of “sale” does not govern section 250(b)(3)(A)(i)(VII). Instead, consistent with Notice 2025-78, the proposed regulations would determine “sale or other disposition” under general federal income tax principles and include deemed sales, transactions subject to section 367(d), and other deemed dispositions. 

If taxpayers characterize a transaction under general US federal income tax principles as a lease or license, then the sale or other disposition criterion is not met, regardless of whether there is a sale or disposition for any other purpose. Accordingly, income from a lease or license remains in DEI and may qualify for the FDDEI deduction. 

Intangible property

For purposes of the exclusion, the proposed regulations define “intangible property” by reference to section 367(d)(4), but they expressly exclude copyrighted articles as defined in Treasury Regulation Section 1.861-18(c)(3). The proposed regulations provide two examples to help taxpayers determine whether they have sold or leased a copyrighted article for purposes of the exclusion. As a result, a software company generally can continue to include income from selling copies of software to foreign customers in DEI, while a sale or transfer of the underlying copyright or other section 367(d)(4) intangible property falls within the exclusion.

Other excluded property 

The proposed regulations define “other excluded property” as property that, in the hands of the seller, the seller may depreciate under section 167, amortize, or deplete under section 611, or that previously met any of those conditions.

Because the definition focuses on the property’s character in the seller’s hands, property that the seller has always held exclusively as inventory does not qualify as “other excluded property.” The proposed regulations distinguish ordinary course inventory sales from dispositions of the seller’s own depreciable, amortizable, or depletable business assets, treating the latter, not the former, as excluded property. The proposed regulations also explain that property remains excluded if the seller previously depreciated it – even once – in a trade or business and later repurposes, remanufactures, or refurbishes it into inventory. The definition therefore excludes remanufactured property, and the regulations do not adopt a remanufacturing exception.

Related-party anti-abuse rule 

Under the proposed regulations, other excluded property retains its character in the hands of a related party when the related party acquires the property in a carryover-basis transaction and the transaction has the principal purpose of avoiding the exclusion. A taxpayer therefore cannot avoid the exclusion by transferring depreciable, amortizable, or depletable property to a related party that holds the property as inventory before selling it to a foreign customer.

The related-party anti-abuse rule uses a “modified affiliated group” concept. When applying that concept, taxpayers use the ordinary 80-percent affiliation threshold without substituting the lower 50-percent threshold used elsewhere in the section 250 regulations. For determining control under section 954(d)(3), however, the proposed regulations substitute an 80-percent threshold for the usual more-than-50-percent threshold.

Implications and key observations

• Companies with intellectual property (IP). A company that sells or otherwise disposes of patents, trade secrets, know-how, and other intangible property to foreign persons is no longer able to claim the section 250 FDDEI deduction on the resulting income or gain as a result of the OBBBA. Prior to the OBBBA, it was possible to claim the FDDEI deduction on outbound IP transfers to foreign affiliates. The OBBBA turns off such deduction for income related to outbound IP transfers that occur after June 16, 2025. The proposed regulations implement this change, providing additional clarity to taxpayers.


• Depreciable, amortizable, or depletable assets. A domestic corporation that sells used machinery, equipment, or other business assets to a foreign buyer loses the FDDEI deduction on the resulting income or gain, even when the corporation has fully depreciated the property.


• Lease and license structuring. Because the exclusion reaches only sales and other dispositions – not leases or licenses – a company that licenses IP or leases equipment to foreign persons may continue to include the related income in DEI and may qualify for the FDDEI deduction. Taxpayers are encouraged to evaluate whether restructuring an outbound IP arrangement as a license rather than a sale could preserve FDDEI benefits, while confirming that the arrangement qualifies as a lease or license under general US federal income tax principles.


• Inventory sales. The proposed regulations clarify that property held exclusively as inventory by the seller does not constitute “other excluded property.” Manufacturers and distributors therefore may continue to claim the FDDEI deduction on inventory sales to foreign customers. The related-party anti-abuse rule, however, prevents taxpayers from converting excluded property into inventory through related-party transfers to circumvent the exclusion.


• Remanufactured property. The proposed regulations decline to adopt a remanufacturing exception. If a taxpayer previously depreciated property in its trade or business and later repurposes, remanufactures, or refurbishes the property into inventory, the property retains its character as excluded property. Companies that routinely refurbish and resell used equipment will need to account for this rule.


• Software transactions. The exclusion of copyrighted articles from “intangible property” generally benefits software companies that sell copies of software and copyrighted articles to foreign customers because those sales generally remain in DEI. A sale or transfer of the underlying copyright or other intangible property described in section 367(d)(4), however, falls within the exclusion.


• Reliance. Before the Treasury Department and the IRS publish final regulations, taxpayers may rely on the proposed regulations for sales or other dispositions if they apply the rules in their entirety and consistently.

Applicability and date reliance 

The Treasury Department and the IRS expect to finalize these proposed regulations by January 4, 2027. The proposed regulations generally apply to sales or other dispositions occurring after June 16, 2025, while the clarification that FDDEI constitutes a subset of DEI applies to taxable years beginning after December 31, 2025. Before the Treasury Department and the IRS publish final regulations, taxpayers may rely on the proposed regulations for sales or other dispositions if they apply the rules in their entirety and consistently.

For more information, please contact the authors.