Federal Register / Vol. 90, No. 8 / Tuesday, January 14, 2025 / Rules and Regulations 2977 

distribution of Property X to Partner A, 

and the increase to the basis of Property 

X by $10 million in Partner A’s hands, 

ABC Partnership is required to reduce 

the adjusted basis of its remaining 

properties under section 734(b)(2)(B) by 

$10 million. Partner B’s and Partner C’s 

share of ABC Partnership’s basis 

decrease to its remaining properties is 

$5 million each. Neither Partner A nor 

ABC Partnership engages in any other 

transaction described in paragraph (c) of 

this section for taxable year 2025. 

(ii) Analysis. For purposes of 

paragraphs (c)(1)(ii) and (c)(3)(i) of this 

section, under paragraph (c)(3)(iv) of 

this section, only $5 million of the $10 

million basis increase to Property X 

counts toward the applicable threshold 

because $5 million of the basis increase 

corresponds to unrelated Partner C’s 

share of the decrease to the basis of ABC 

Partnership’s remaining properties 

under section 734(b)(2)(B) and thus, is 

excluded from the calculation of the 

applicable threshold. Thus, the 

distribution of Property X to Partner A 

is not a transaction described in 

paragraph (c)(1)(ii) of this section with 

respect to either Partner A or ABC 

Partnership because the applicable 

threshold is not met for taxable year 

2025. 

(h) Extension of time—(1) Taxpayer 

disclosures. Taxpayers will be treated as 

having met their requirements to 

disclose timely under § 1.6011–4(e)(2)(i) 

if they file their disclosure with the 

OTSA by July 14, 2025. 

(2) Material advisor disclosures. 

Material advisors who have made a tax 

statement before January 14, 2025 will 

be treated as having met their 

requirements to disclose timely under 

§ 301.6111–3(e) of this chapter if they 

file their disclosure with the OTSA by 

the date that is an additional 90 days 

beyond the last day for filing specified 

in § 301.6111–3(e) of this chapter. 

(i) Applicability date—(1) In general. 

This section’s identification of 

transactions that are the same as or 

substantially similar (within the 

meaning of § 1.6011–4(c)(4)) to the 

transactions described in paragraph (c) 

of this section as transactions of interest 

for purposes of § 1.6011–4(b)(6) and 

sections 6111 and 6112 of the Code is 

effective January 14, 2025. 

(2) Material advisors. 

Notwithstanding § 301.6111–3(b)(4)(i) 

and (iii) of this chapter, material 

advisors are required to disclose only if 

they have made a tax statement on or 

after January 14, 2019. 

Douglas W. O’Donnell, 

Deputy Commissioner. 

Approved: January 3, 2025. 

Aviva R. Aron-Dine, 

Deputy Assistant Secretary of the Treasury 

(Tax Policy). 

[FR Doc. 2025–00324 Filed 1–10–25; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 10022] 

RIN 1545–BM41 

Classification of Digital Content 

Transactions and Cloud Transactions 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations modifying the rules for 

classifying transactions involving 

computer programs, including by 

applying the rules to transfers of digital 

content. These final regulations also 

provide rules for the classification of 

cloud transactions. These rules apply 

for purposes of the international 

provisions of the Internal Revenue Code 

and generally affect taxpayers engaging 

in transactions involving digital content 

or cloud transactions. 

DATES: 

Effective date: These regulations are 

effective on January 14, 2025. 

Applicability date: For dates of 

applicability, see §§ 1.861–18(i) and 

1.861–19(e). 

FOR FURTHER INFORMATION CONTACT: 

Christopher E. Fulle, (202) 317–5367, or 

Michelle L. Ng, (202) 317–6989 (not tollfree numbers). 

SUPPLEMENTARY INFORMATION: 

Authority 

These final regulations are issued 

under the express delegation of 

authority under section 7805 of the 

Internal Revenue Code (Code). Section 

7805(a) directs the Secretary of the 

Treasury or her delegate to prescribe all 

needful rules and regulations for the 

enforcement of that section and others 

in the Code, including all rules and 

regulations as may be necessary by 

reason of any alteration of law in 

relation to internal revenue. 

Background 

On August 14, 2019, the Department 

of the Treasury (Treasury Department) 

and the Internal Revenue Service (IRS) 

published proposed regulations (REG– 

130700–14) under section 861 of the 

Code in the Federal Register (84 FR 

40317) (the proposed regulations). The 

Treasury Department and the IRS 

received written comments on the 

proposed regulations, and a public 

hearing was held on February 11, 2020. 

All written comments received in 

response to the proposed regulations are 

available at www.regulations.gov or 

upon request. Terms used but not 

defined in this preamble have the 

meaning provided in these final 

regulations. 

These regulations (the final 

regulations) extend the classification 

rules in existing § 1.861–18 to transfers 

of digital content other than computer 

programs and clarify the source of 

income for certain transfers of digital 

content. The final regulations also 

clarify the classification of transactions 

involving on-demand network access to 

computing and other similar resources. 

The final regulations retain the overall 

approach of the proposed regulations, 

with certain revisions discussed in the 

preamble. The preamble also discusses 

comments received in response to the 

solicitation of comments in the notice of 

proposed rulemaking. 

Summary of Comments and 

Explanation of Revisions 

I. General Classification Issues 

A. Replacement of De Minimis Rule 

With a Predominant Character Rule 

Section 1.861–18(b)(1), as in effect 

before this Treasury decision, described 

four transactions involving computer 

programs: the transfer of a copyright 

right, the transfer of a copyrighted 

article, the provision of services for the 

development or modification of a 

computer program, and the provision of 

know-how relating to the development 

of a computer program. Section 1.861– 

18(b)(2) required any transaction that 

consisted of more than one of the 

transactions described in § 1.861– 

18(b)(1) to be treated as separate 

transactions, unless a transaction was de 

minimis, in which case it would be 

treated as part of another transaction. 

The proposed regulations generally 

retained the four types of transactions 

(with the expansions described in Part 

II.A of this Summary of Comments and 

Explanation of Revisions) and preserved 

the de minimis rule, but for clarification 

purposes, § 1.861–18(b)(2) was proposed 

to be modified by introducing the term 


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‘‘arrangement’’ and providing that 

multiple transactions in an arrangement 

generally must be characterized 

separately. 

Proposed § 1.861–19(b) defined a 

cloud transaction as a transaction 

through which a person obtains ondemand network access to computer 

hardware, digital content (as defined in 

proposed § 1.861–18(a)(3)), or other 

similar resources, other than on-demand 

network access that is de minimis taking 

into account the overall arrangement 

and the surrounding facts and 

circumstances. Similar to proposed 

§ 1.861–18(b)(2), proposed § 1.861– 

19(c)(3) required separate classification 

of each transaction comprising an 

arrangement, except that any transaction 

that was de minimis would be treated as 

part of another transaction rather than 

being classified separately. 

Comments recommended replacing 

these rules in proposed §§ 1.861– 

18(b)(1) and (b)(2), and 1.861–19(c)(3), 

with a predominant character rule, such 

that a transaction consisting of more 

than one category of transactions 

described in proposed § 1.861–18(b)(1), 

or a transaction consisting of one or 

more categories of transactions 

described in both proposed §§ 1.861– 

18(b)(1) and 1.861–19(b), would be 

characterized as only one of those 

categories of digital content transactions 

or as a cloud transaction in accordance 

with the predominant character of that 

transaction. As an example of a mixed 

transaction that would be difficult to 

characterize under the proposed 

regulations, comments pointed to video 

game business models where the 

customer purchases a copy of the game 

but primarily plays the video game 

online with other players. As another 

example, comments pointed to software 

antivirus programs that include code 

that executes on the user’s equipment as 

well as code that is deployed in the 

cloud to detect and capture viruses 

before they reach the user’s equipment. 

The comments argued that the 

predominant character rule would avoid 

the difficult and burdensome task of 

determining whether an element is de 

minimis in the context of the overall 

transaction and allocating income from 

the transaction among the non-de 

minimis categories as if they were 

separate transactions. The comments 

also argued that a de minimis standard 

is imprecise, and a predominant 

character rule that compares 

components of a transaction to 

determine which component is 

predominant would be much more 

administrable. Furthermore, one 

comment suggested that a predominant 

character standard would better align 

with existing Treasury regulations and 

other authorities, for instance, § 1.954– 

1(e)(3), which provides for a 

predominant character approach in the 

subpart F context. Finally, the 

comments noted confusion arising from 

the use of the term ‘‘transaction’’ to 

mean two different things in the same 

provision under proposed § 1.861– 

18(b)(2), and also recommended 

removing the term ‘‘arrangement’’ on 

the grounds that the term was unclear, 

particularly because it was not defined 

and rarely appears in other tax rules. 

The comments recommended that the 

predominant character of a transaction 

be determined based on the facts and 

circumstances. Comments suggested 

that the relevant facts may include the 

overall commercial purpose, the 

taxpayer’s treatment for non-tax 

purposes, the relative cost of each 

component (including the cost of 

maintaining online and offline 

components), and a comparison of unit 

prices for components sold separately. 

Comments suggested that the facts and 

circumstances should provide at least a 

reasonable basis for determining the 

predominant character of the 

transaction. 

Further, the comments suggested 

defining a transaction based on the facts 

and circumstances or as an agreement 

entered into in the ordinary course. 

Several comments suggested that 

relevant factors for determining the 

scope of a transaction could include the 

availability of separate pricing, the use 

of separate stock keeping units 

(‘‘SKUs’’), and the taxpayer’s definition 

for non-tax purposes. 

The final regulations adopt these 

comments, in part. The final regulations 

replace the de minimis rule and the 

concept of an arrangement with a 

predominant character rule, which 

applies to both digital content 

transactions and cloud transactions. The 

Treasury Department and the IRS agree 

that, for purposes of the final 

regulations, a transaction with multiple 

elements (including de minimis 

elements) should be characterized based 

on the predominant character of the 

transaction. Predominant character rules 

also exist in other regulations for 

international provisions of the Code, 

such as foreign-derived intangible 

income and subpart F, and thus are 

familiar to taxpayers. See §§ 1.250(b)– 

3(d) and 1.954–1(e)(3). Further, in many 

business models that include both 

online and offline functionality it may 

be difficult to bifurcate a single 

transaction into a digital content 

transaction and a cloud transaction. The 

Treasury Department and the IRS expect 

that bifurcation will remain difficult 

and may increase in difficulty as 

business models and technology evolve. 

Therefore, § 1.861–18(b)(2) of the final 

regulations provides that, taking into 

account the overall transaction and the 

surrounding facts and circumstances, a 

transaction that has multiple elements, 

one or more of which would be a digital 

content transaction if considered 

separately, is classified in its entirety as 

a digital content transaction under one 

of the categories described in § 1.861– 

18(b)(1) if the predominant character of 

the transaction is described in one of the 

categories in that paragraph. Section 

1.861–19(c)(2) of the final regulations 

provides a corresponding rule for 

transactions that have multiple 

elements, one or more of which is a 

cloud transaction. Further, the 

references to ‘‘de minimis’’ and 

‘‘arrangement’’ are also removed in 

§ 1.861–19(a) of the final regulations so 

that the final regulations define a cloud 

transaction as a transaction through 

which a person obtains on-demand 

network access to computer hardware, 

digital content (as defined in § 1.861– 

18(a)(2)), or other similar resources. 

The final regulations define a digital 

content transaction as a transaction that 

constitutes a transfer of digital content 

or the provision of modification or 

development services or of know-how 

with respect to digital content. See 

§ 1.861–18(b)(1). The final regulations 

do not, however, define the term 

transaction. The Treasury Department 

and the IRS have concluded that it is 

not necessary to introduce a specialized 

definition in these regulations because 

the concept is already well-established 

under general tax principles, case law, 

and existing administrative guidance. 

Section 1.861–18(b)(3) of the final 

regulations (cross-referenced in § 1.861– 

19(c)(2)) provides a general rule and a 

special rule for determining the 

predominant character of a transaction 

that contains multiple elements, one or 

more of which would be a digital 

content transaction or a cloud 

transaction if considered separately. 

Under the general rule, the predominant 

character is determined by the primary 

benefit or value received by the 

customer. If that information is not 

reasonably ascertainable, the special 

rule provides that the predominant 

character is determined by the primary 

benefit or value received by a typical 

customer in a substantially similar 

transaction, which is determined by 

data on how a typical customer uses or 

accesses the digital content. If data on 

how a typical customer uses or accesses 

the digital content is not available, then 

all factors indicative of the primary 

benefit or value received by a typical 


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customer must be examined, including 

how the transaction is marketed, the 

relative development costs of each 

element of the transaction, and the 

relative price paid in an uncontrolled 

transaction for one or more elements 

compared to the total contract price of 

the transaction in question. 

B. Distinction Between Temporary 

Downloads and Streaming 

One comment requested guidance on 

‘‘streaming’’ and ‘‘temporary 

downloading’’ transactions. The 

comment expressed the view that 

whether a customer can download 

digital content should not determine 

whether a transaction is characterized as 

a service or a lease. The comment noted 

that when a customer’s rights are 

limited to downloading and viewing a 

discrete item of digital content, such as 

a movie, for a limited time, the 

transaction would be treated as a lease 

of digital content. However, if the 

customer can access and download as 

many movies as desired from a catalog 

of thousands of movies for a monthly 

fee, and once the subscription ends 

access to the downloaded movies ends, 

the transaction would be treated as a 

cloud transaction and classified as a 

service according to the comment. The 

comment suggested that the 

characterization of these two 

transactions should not depend on 

whether the content is actually 

downloaded by any particular customer. 

Another comment asserted that ondemand access to digital content should 

not be treated differently than 

temporary downloads of digital content 

because the two transactions are 

functionally equivalent in that both 

provide temporary access to digital 

content. The comment observed that the 

decision to provide on-demand access 

or temporary downloads of digital 

content is typically driven by the nature 

of the technology involved (for example, 

the memory capacity of a user’s 

computer or the download speeds 

available), and generally has no bearing 

on the economic substance of the 

transaction. 

Where the provider chooses whether 

to offer either temporary downloads or 

streaming the Treasury Department and 

the IRS disagree that these two types of 

transactions should be treated the same. 

A fundamental requirement of a digital 

content transaction, unlike a cloud 

transaction involving digital content, is 

that there must be a transfer of digital 

content to the customer. This 

distinction between property and 

services transactions has been in place 

since the original issuance of § 1.861–18 

in 1998 and applying it consistently 

provides a degree of certainty for an 

otherwise factual case-by-case 

determination. 

When a customer downloads digital 

content, there is a transfer of a copy of 

that digital content to the customer and 

the customer must use its own device to 

host the copy of content for viewing or 

listening, for example. In contrast, when 

a customer streams digital content, there 

is no transfer of digital content. Instead, 

the customer receives access to the 

digital content through the provider’s 

servers. Especially for large file-size 

content, performing the hosting function 

in order to allow the customer 

continuous access places a higher 

burden on the provider. Similarly, for a 

temporary download, the customer must 

have sufficient storage on its device for 

the temporary download that is not 

necessary in a streaming transaction. 

There are also differences in how the 

customer may experience the digital 

content. For example, once a customer 

downloads digital content, the customer 

is able to access the content regardless 

of whether the customer is connected to 

the internet and could thus watch a 

downloaded movie or read a 

downloaded book when the customer is 

unable to connect to the internet. In 

these ways, there are fundamental 

differences in character between a 

temporary download and streaming that 

warrant different characterization and 

sourcing rules for each type of 

transaction. Where the customer may 

choose whether to temporarily 

download or stream content, the 

predominant character rule in the final 

regulations would apply to characterize 

the transaction. See § 1.861–19(d)(7) 

(Example 7) and (d)(9) (Example 9) of 

the final regulations. 

II. Transactions Involving Digital 

Content 

A. Definition of Digital Content 

Section 1.861–18, as in effect before 

this Treasury decision, applied only to 

computer programs. The proposed 

regulations expanded the scope of 

§ 1.861–18 to apply to transactions 

involving ‘‘digital content,’’ defined as 

‘‘a computer program or any other 

content in digital format that is either 

protected by copyright law or no longer 

protected by copyright law solely due to 

the passage of time.’’ 

Several comments recommended 

broadening the definition of digital 

content to encompass content not 

protected by copyright law that is 

transferred electronically and is similar 

to copyrightable content, such as 

consumer or user data, text files of 

recipes, government-produced 

documents, and sets of font and 

typefaces. One comment suggested 

expansion to any property in digital 

format in which a person has a right or 

interest, including any property bought 

and sold in real marketplaces, in virtual 

marketplaces and in in-game economies. 

These comments generally suggested 

that transfers of this non-copyrightable 

digital property are economically and 

functionally equivalent to the transfer of 

digital content and that characterization 

of the transfers should be treated the 

same. One comment asserted that such 

content may be subject to other forms of 

intellectual property protection such as 

contractual restrictions and nondisclosure agreements, such that 

transfers of that content are functionally 

similar to transfers of digital content. 

The final regulations do not broaden 

the definition of digital content beyond 

content protectable by copyright law. 

Section 1.861–18, as in effect before this 

Treasury decision, generally followed 

copyright law, and the Treasury 

Department and the IRS are of the view 

that it is appropriate to continue to 

apply this longstanding copyright law 

framework. This framework is not 

workable for non-copyrightable content 

given that the legal rights associated 

with such content generally are not the 

same as those associated with content 

protectable by copyright law. For 

example, in a digital transfer of property 

that is not protected by copyright law, 

the transferee may (unless otherwise 

restricted, such as by contract) have the 

unfettered ability to make and distribute 

copies to the public, to prepare 

derivative works, or to publicly display 

or publicly perform the property. As a 

result, if the framework of § 1.861–18 

were applied to the transaction, such a 

transfer would generally be 

characterized as a license or sale of a 

copyright right, regardless of whether 

the transferee intends to exploit those 

abilities or whether those powers have 

any value or relevance in the context of 

the transaction. Therefore, the existing 

framework could result in a 

classification at odds with the 

economics and reality of the transaction. 

Further, where non-copyrightable 

digital property is transferred subject to 

contractual or other restrictions, those 

restrictions may not fit cleanly within 

the existing framework and may require 

a different analysis to determine the 

correct characterization. Accordingly, 

including non-copyrightable content 

would require a different set of rules 

that are beyond the scope of § 1.861–18. 

One comment noted that under the 

proposed regulations, an online 

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copyrightable content such as recipes or 

court opinions is a cloud transaction. 

See § 1.861–19(d)(8) (Example 8). This 

is because the definition of a cloud 

transaction in proposed § 1.861–19(b) 

refers to on-demand network access to 

computer hardware, digital content, or 

‘‘other similar resources.’’ The comment 

suggested that the inclusion of ‘‘other 

similar resources’’ in the definition of 

cloud transaction may provide a road 

map for expanding the definition of 

digital content in proposed § 1.861–18. 

The Treasury Department and the IRS 

disagree. The cloud transaction 

definition includes access to noncopyrightable content because curation 

of such content is a common business 

model that, unlike the framework of 

§ 1.861–18, does not depend on whether 

the content is copyrightable because 

there is no transfer to the customer. 

The final regulations therefore do not 

adopt these comments and continue to 

characterize digital content transactions 

based on the distinction between a 

transfer of a copyrighted article and a 

transfer of copyright rights, which 

depends on whether the customer 

receives copyright rights as part of the 

transfer. The Treasury Department and 

the IRS may, however, consider these 

comments for possible future guidance 

specific to types of digital property that 

are not protectable by copyright law. 

The final regulations do provide, 

however, that digital content includes 

content that is not protected by 

copyright law solely because the creator 

dedicated the content to the public 

domain. The regulations include this 

refinement because monetization of 

such content generally also involves 

digital content that is protected by 

copyright law and therefore fits within 

the framework of § 1.861–18. See 

§ 1.861–18(a)(2). 

B. Provision of Know-How Relating To 

Development of Digital Content 

Section 1.861–18(b)(1)(iv), as in effect 

before this Treasury decision, provided 

that one of the categories of transactions 

relating to computer programs was 

‘‘[t]he provision of know-how relating to 

computer programming techniques.’’ 

Section 1.861–18(e) provided that the 

provision of information with respect to 

computer programs will be treated as 

the provision of know-how for purposes 

of § 1.861–18 only if the information (1) 

relates to computer programming 

techniques; (2) is furnished under 

conditions preventing unauthorized 

disclosure, specifically contracted for 

between the parties; and (3) is 

considered property subject to trade 

secret protection. The proposed 

regulations would modify § 1.861– 

18(b)(1)(iv) and (e)(1) by replacing 

‘‘computer programming techniques’’ 

with ‘‘development of digital content,’’ 

but would not otherwise change 

§ 1.861–18(b)(1)(iv) and (e)(1). 

One comment asked for confirmation 

that the changes to § 1.861–18(b)(1)(iv) 

and (e)(1) would not change the scope 

of § 1.861–18(b)(1)(iv), and that § 1.861– 

18(b)(1)(iv) in the final regulations 

describes only know-how transferred 

under terms that constitute a license for 

United States Federal tax purposes. The 

Treasury Department and the IRS 

confirm that § 1.861–18(b)(1)(iv) in the 

proposed and final regulations is 

intended to describe the same type of 

know-how covered by § 1.861– 

18(b)(1)(iv) as in effect before this 

Treasury decision, except that knowhow may relate to any development of 

digital content and not merely computer 

programming techniques. The Treasury 

Department and the IRS have 

determined that § 1.861–18(b)(1)(iv) and 

(e)(1) are sufficiently clear in this regard 

and that additional guidance on the 

treatment of such know-how is 

unnecessary. 

C. Rights To Prepare Derivative Digital 

Content 

Section 1.861–18(c)(2)(ii), as in effect 

before this Treasury decision, provided 

that one of the copyright rights referred 

to in that paragraph was the right to 

prepare derivative computer programs 

based upon a copyrighted computer 

program. The proposed regulations 

would replace the references to 

computer programs with references to 

digital content but would not otherwise 

change § 1.861–18(c)(2)(ii). One 

comment recommended that the right to 

prepare derivative digital content based 

upon digital content should be treated 

as a copyright right only if it is coupled 

with the right to distribute the 

derivative digital content to the public. 

The comment expressed the belief that 

this change would be consistent with 

one of the underlying policies of these 

regulations, which is to treat as a license 

a transaction in which the transferee 

exercises a copyright right to exploit the 

rights in the market, and to treat as a 

sale or lease a transaction in which the 

transferee consumes the digital content. 

The comment also suggested that this 

change would address the ambiguity in 

copyright law as to what modifications 

of a copyrighted work are necessary to 

create a derivative work, and whether, 

for example, rights to modify software 

during installation or customization 

would constitute rights to create a 

derivative work. 

The final regulations do not adopt this 

comment. The preamble to Treasury 

Decision 8785 (which promulgated 

§ 1.861–18 in 1998) stated in response to 

similar comments to the proposed 

regulations (REG–251520–96) that were 

finalized in Treasury Decision 8785 that 

the right to make copies (which must be 

coupled with the right to distribute the 

copies to the public to constitute a 

copyright right under the regulations, 

despite such a requirement not being 

present under copyright law) is treated 

differently from the other copyright 

rights in the context of the regulations 

because of the unique characteristics of 

computer programs, including the ease 

with which computer programs can be 

copied. However, as explained in that 

preamble, it is generally consistent with 

copyright law to treat as a copyright 

right a non-de minimis right to make a 

derivative work, regardless of whether it 

is coupled with the right to distribute to 

the public, and there is no sufficiently 

unique aspect of digital content that 

would compel a different result for 

purposes of § 1.861–18. The Treasury 

Department and the IRS continue to be 

of the view that that the right to make 

a derivative work without further rights 

to distribute to the public should be 

treated as a copyright right and that the 

unique characteristics of digital content 

do not compel a different result. 

However, the predominant character 

rule in § 1.861–18(b)(2) and (3) of the 

final regulations (discussed in Part I.A 

of this Summary of Comments and 

Explanation of Revisions) should 

alleviate concerns about minor 

customization rights causing what 

would otherwise be a transfer of digital 

content to be treated as a license of a 

copyright right. See § 1.861–18(h)(18) 

(Example 18) of the final regulations. 

D. Right To Make a Public Performance 

or Public Display for Purposes of 

Advertising 

Section 1.861–18(c)(2), as in effect 

before this Treasury decision, 

designated as copyright rights the right 

to make a public performance of a 

computer program and the right to 

display a computer program to the 

public. The proposed regulations would 

replace the references to computer 

programs with references to digital 

content, and also provide exceptions for 

the right to publicly perform or publicly 

display digital content for the purpose 

of advertising the sale of the digital 

content performed or displayed. 

Proposed § 1.861–18(c)(2)(iii) and (iv). 

The preamble to the proposed 

regulations used an example of rights 

provided to a video game retailer that 

allow the retailer to display screenshots 

of a video game on television 

commercials promoting the game, and 


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noted that these rights, on their own, 

would not be significant. Two 

comments agreed with the addition of 

the regulatory language and one of the 

comments suggested that the preamble 

example be included in the regulatory 

text. 

The final regulations retain the 

exceptions for the public performance 

or public display of digital content for 

the purpose of advertising the sale of the 

digital content performed or displayed. 

See § 1.861–18(c)(2)(iii) and (iv). The 

Treasury Department and the IRS have 

determined, however, that the language 

of the regulation is sufficiently clear 

without an example and therefore the 

final regulations do not include the 

example in the regulatory text. 

E. Copyright Rights Related to Digital 

Content Used for Cloud Transactions 

One comment questioned whether the 

transfer of the right to use software or 

other digital content for a cloud 

transaction should be treated as the 

transfer of a copyright right. The 

comment included an example wherein 

A, a domestic corporation, transfers 

computer software to B, a foreign 

affiliate. B also gets the right to use the 

software to provide software-as-aservice transactions, but does not get the 

right to sell copies of the software or 

make derivative works. The comment 

stated that it appears that a copyright 

right has been transferred in this 

scenario, but that it is not clear which 

of the enumerated copyright rights is 

transferred. The comment recommend 

that the final regulations allow 

taxpayers to elect to characterize this 

type of transaction as a transfer of a 

copyright right. 

The Treasury Department and the IRS 

agree that a transfer of digital content 

accompanied by the right to use the 

digital content to provide a cloud 

transaction will generally result in the 

transfer of the right to either publicly 

display or publicly perform the digital 

content, depending on the type of 

digital content and specific rights 

transferred. To display a work means to 

show a copy of it, either directly or by 

means of a film, slide, television image, 

or any other device or process or, in the 

case of a motion picture or other 

audiovisual work, to show individual 

images nonsequentially. 17 U.S.C. 101. 

To perform a work means to recite, 

render, play, dance, or act it, either 

directly or by means of any device or 

process or, in the case of a motion 

picture or other audiovisual work, to 

show its images in any sequence or to 

make the sounds accompanying it more 

audible. Id. Further, 17 U.S.C. 101 

includes a ‘‘transmit clause’’ that 

provides that to publicly display or 

perform a work means, in relevant part, 

to transmit or otherwise communicate a 

performance or display of the work to 

the public, by means of any device or 

process, whether the members of the 

public capable of receiving the 

performance or display receive it in the 

same place or in separate places and at 

the same time or at different times. 

Reading these provisions of 17 U.S.C. 

101, the Treasury Department and the 

IRS have concluded that the use of 

digital content to provide a cloud 

transaction should be treated as the 

exercise of a copyright right under both 

copyright law and the final regulations. 

See American Broadcasting Companies, 

Inc. v. Aereo, Inc., 573 U.S. 431 (2014) 

(holding that capture of broadcast 

copyrighted content and retransmission 

to subscribers who stream the content to 

their personal devices was a public 

performance of a copyrighted work 

under the transmit clause of 17 U.S.C. 

101). However, whether the transferred 

right is a right to display or a right to 

perform will depend on the type of 

digital content, the type of copyright 

obtained, and the manner in which the 

digital content is used in the cloud 

transaction. Due to the factual nature of 

these issues and the important role of 

copyright law in those determinations, 

the final regulations do not specify 

which copyright right has been 

transferred when digital content is 

transferred for use in a cloud 

transaction. 

F. Examples Illustrating § 1.861–18 

Several comments requested new 

examples describing common business 

models or modifications to examples 

provided in the proposed regulations. In 

response to these comments, the final 

regulations contain several new 

examples and make certain 

modifications to the examples in the 

proposed regulations. In addition, preexisting examples that were in effect 

before the issuance of this Treasury 

decision have been modified to follow 

the same analytical structure as the 

examples added by the final regulations. 

One comment requested an example 

of a wholesaler of computer software 

buying and selling a limited number of 

product keys. A product key is a 

specific software-based key for a 

computer program that certifies the 

copy of the program is original. Instead 

of using physical media such as a CD or 

DVD to install software onto a computer 

or other electronic device, a user can 

enter a product key to download the 

software and then install it from their 

computer’s hard drive. A customer that 

purchases software through electronic 

channels often receives a link to 

download and a product key to activate 

the software. The comment asserted that 

an underlying principle of these 

regulations is to treat economically 

similar income equally, regardless of 

whether the income is earned through 

electronic means or through more 

conventional channels of commerce, 

and therefore the income earned by a 

wholesaler of product keys for software 

should be treated the same as a 

wholesaler of physical copies of 

software. The Treasury Department and 

the IRS agree that § 1.861–18 does not 

characterize otherwise similar 

transactions differently solely because 

one transaction was effected through 

electronic means and the other was not. 

See § 1.861–18(g)(2) of the final 

regulations. In response to the comment, 

a new example added in the final 

regulations, § 1.861–18(h)(24) (Example 

24), addresses a business model in 

which a video game copyright owner 

transfers product keys to retailers, and 

then the retailers transfer those keys to 

customers. Based on the facts in the 

example, the transfer of product keys to 

the retailers is characterized as a sale of 

copyrighted articles, and the transfer of 

product keys from the retailers to 

customers is also classified as the sale 

of copyrighted articles. 

Two comments asked for an example 

addressing a business model in which 

an operator of a platform offers for 

download digital content (for example, 

video games or electronic books) as an 

agent of the digital content developers. 

The platform operator receives the 

copyright right to make and sell digital 

copies of the digital content, but this 

right is granted only so that the platform 

operator can act in its capacity as an 

agent facilitating sales of the digital 

content between digital content 

developers and customers. As such, the 

comments asserted that the transaction 

between the platform operator and 

digital content developers should not be 

treated as the transfer of copyright 

rights. One of these comments also 

suggested several clarifying changes to 

proposed § 1.861–18(h)(19) (Example 

19) to distinguish the business model 

described in that example, which 

involves a licensed reseller that utilizes 

an online platform, from the agency 

platform operator described in the 

comment. 

The Treasury Department and the IRS 

recognize that an agency platform 

operator business model exists, and 

therefore the final regulations include a 

new example at § 1.861–18(h)(20) 

(Example 20) that describes a scenario 

in which a platform operator offers 

applications for sale as an agent of the 


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application developers. The facts in 

Example 20 assume that the platform 

operator acts as an agent of the 

application developers under general 

tax principles and concludes that the 

characterization of the transaction 

between the platform operator and 

application developers is not a digital 

content transaction nor a cloud 

transaction. Whether a taxpayer is 

acting as an agent on behalf of another 

taxpayer is determined under general 

tax principles and that determination is 

outside the scope of these final 

regulations. Additionally, § 1.861– 

18(h)(19) (Example 19) of the final 

regulations contains certain changes to 

the facts in the proposed regulations 

that are intended to distinguish the 

licensed reseller platform operator 

business model described in that 

example from the agency platform 

operator model described in Example 

20, namely that the primary benefit or 

value that the distributor (Corp A) 

receives in the transaction in Example 

19 is the right to reproduce and 

distribute an unlimited number of 

copies of the book. 

One comment recommended adding 

an example describing a business model 

in which a video game that can be 

played on a particular game console or 

a computer is sold in physical copies 

through retailers, or digitally through 

the game console’s store or through an 

internet store for a one-time fee. The 

game’s core functionality is accessed 

online and, if played on the game 

console, requires paying an annual or 

monthly subscription fee to the console 

maker which grants the customer access 

to the online functionality of the 

console, thereby allowing the customer 

to play the online component of the 

video game (and all other video games) 

on the console. This fee is charged by 

the console maker for purposes of using 

the console online, so if the game is 

played on a computer, there is no 

additional fee to access the online 

content. The example in the comment 

concluded that the purchase of the 

console version of the video game, 

whether from a retailer, the game 

console store, or the internet store, is a 

cloud transaction because most 

customers purchase the game primarily 

to enjoy the online functionality. This 

comment also recommended another 

similar example, except the core 

functionality of the video game is offline 

content, and therefore the purchase of 

the video game is the sale of a 

copyrighted article. 

The comment underscores the fact 

that there are many different business 

models and types of transactions in the 

video game industry. The determination 

of the character of each transaction will 

necessarily be fact-specific based on the 

rights obtained by the customer and, if 

relevant, the predominant character of 

the transaction. However, to address 

certain aspects of these scenarios, a new 

example at § 1.861–18(h)(24) (Example 

24) of the final regulations describes the 

purchase of a video game for a one-time 

fee that has online and offline 

functionality, and that does not require 

paying a periodic subscription fee that 

is specific to that game to access the 

online content. Additionally, a new 

example at § 1.861–19(d)(11) (Example 

11) of the final regulations describes the 

purchase of a video game for a one-time 

fee whose primary functionality is 

online and requires paying a monthly 

fee to the game developer to access the 

online content specific to the game. The 

examples conclude in both cases that, 

under the facts presented, a customer’s 

purchase of a game has the predominant 

character of a sale of a copyrighted 

article. Neither example introduces 

additional complexity by describing a 

separate subscription fee that the 

customer must pay to a console maker 

to enable the online functionality of the 

console for all games played on that 

console. The Treasury Department and 

the IRS have concluded that such a fee 

would not be relevant to determining 

the character of transactions specific to 

the game itself under the final 

regulations. Such a fee is more akin to 

the monthly amount that a customer 

may pay to an internet service provider 

for internet access to play games online 

in general, because the fee is not 

specific to the game and is instead 

required to enable online functionality 

on a device that has other functions. 

One comment recommended changes 

to the facts in § 1.861–18(h)(19) through 

(21) (Examples 19 through 21) of the 

proposed regulations, which contained 

a restriction on the transfer of the digital 

content by limiting the number of 

devices onto which the customer could 

download the content. Specifically, the 

comment recommended modernizing 

these examples by replacing the 

‘‘limited number of devices’’ restriction 

with more general background that 

explains that the user agreement and the 

conditions and features of the provider’s 

website and applications adequately 

restrict the end-user’s ability to lend or 

otherwise transfer the digital content. In 

§ 1.861–18(h)(19) and (21) (Examples 19 

and 21) of the final regulations, the 

restriction on the number of devices is 

removed, and facts were added to make 

clear that no copyright rights were 

granted. Proposed § 1.861–18(h)(20) 

(Example 20), which discussed a 

business that offered end-users 

membership to a catalog of copyrighted 

music and required the end-users to 

download the songs, was removed from 

the final regulations because the 

Treasury Department and the IRS 

determined the facts described in the 

example were unrealistic. 

III. Cloud Transactions 

A. Classification of Cloud Transactions 

Proposed § 1.861–19(c)(1) would 

provide that a cloud transaction is 

classified solely as either a lease of 

property or the provision of services, 

based on all relevant factors. Proposed 

§ 1.861–19(c)(2) would enumerate a 

non-exhaustive list of potentially 

relevant factors, most of which come 

from section 7701(e) of the Code. The 

preamble to the proposed regulations 

requested comments as to whether the 

classification as either a lease or a 

service was correct, or whether cloud 

transactions are more properly classified 

in another category of income. The 

preamble also requested comments on 

realistic examples of cloud transactions 

that would be treated as leases under 

proposed § 1.861–19. 

Several comments recommended that 

all cloud transactions be classified as 

services because the commentators 

could not identify any realistic cloud 

transaction that could be classified as a 

lease. One comment requested that the 

final regulations include an example of 

a cloud transaction that would be 

treated as a lease, but did not suggest a 

scenario in which a cloud transaction 

would be a lease. Alternatively, the 

comments recommended that the final 

regulations include a rebuttable 

presumption that all cloud transactions 

are classified as services. 

In the absence of a rule stating all 

cloud transactions are services, several 

comments expressed concerns with, and 

suggested modifications to, certain 

factors listed in proposed § 1.861– 

19(c)(2). For example, some comments 

suggested that certain factors were not 

relevant for cloud transactions, or 

would generally weigh towards a lease 

characterization, but that overall, a 

cloud transaction should still be 

classified as the provision of services. 

Comments also recommended clarifying 

the treatment as services of related party 

data hosting transactions that involve 

cost-plus payments from a company 

under common control with the hosting 

company. 

One comment suggested adding an 

example that commonly exists in 

practice that is similar to proposed 

§ 1.861–19(d)(2) (Example 2), involving 

the provision of designated servers to 


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the customer, but with a shifted focus to 

analyze the access that a remote user 

may have to data and software on those 

servers. 

Two comments expressed concerns 

that the proposed regulations may be 

used to characterize transactions of 

infrastructure providers, such as real 

estate investment trusts, who lease and 

otherwise make available real property 

and other infrastructure to cloud 

providers and similar tenants. These 

comments were concerned that the 

proposed regulations referenced the 

section 7701(e) factors to determine 

whether a cloud transaction was a 

service or a lease, and that these 

interpretations could affect the 

interpretation of the section 7701(e) 

factors in the context of non-cloud 

transactions. 

The final regulations treat all cloud 

transactions solely as the provision of 

services and remove the section 7701(e) 

and other factors listed in the proposed 

regulations. Like the comments, the 

Treasury Department and the IRS could 

not identify a transaction that satisfies 

the definition of a cloud transaction that 

would be properly classified as a lease. 

Further, the Treasury Department and 

the IRS would expect future business 

models that meet the definition of a 

cloud transaction to constitute services 

rather than leases or other types of 

transactions. The services classification 

is appropriate because in a typical 

business model that includes a cloud 

transaction, the cloud provider retains 

economic control and possession over 

the relevant property (such as servers, 

software, or digital content, depending 

on the transaction) and the cloud 

transaction meets other hallmarks of a 

service transaction such as the provider 

having the ability to determine the 

specific property used to provide the 

cloud transaction and to replace such 

property with similar property. Note, 

however, that business models may 

include transactions involving computer 

hardware, such as a server, that is 

located at the customer’s premises, and 

such a transaction may fall outside the 

definition of a cloud transaction (for 

example, because there is no on-demand 

network access provided in that 

transaction) and would therefore be 

classified under section 7701(e) and 

general tax principles. The Treasury 

Department and the IRS have also 

concluded that a more definite rule for 

characterization based on the definition 

of a cloud transaction will allow for 

better compliance and tax 

administration than the factors test in 

the proposed regulations. Because the 

final regulations classify all cloud 

transactions as the provision of services, 

examples applying the factors from the 

proposed regulations to determine 

whether a cloud transaction is a service 

or a lease have been removed (and no 

example concluding that the cloud 

transaction is a lease has been added). 

Finally, one comment recommended 

expanding the characterization of cloud 

transactions to include licenses for 

transactions in which non-de minimis 

copyright rights are transferred. The 

comment described an example where 

an owner of digital content (a movie) 

streams that digital content to a movie 

theater and grants the movie theater the 

right to show the streamed content to 

customers. The comment concluded 

that the transaction between the content 

owner and the movie theater is a 

license. The comment expressed the 

belief that the manner in which digital 

content and accompanying public 

display or performance rights are 

delivered should not alone change the 

character of a transaction from a license 

to a service or lease. 

The final regulations do not adopt this 

comment. In the scenario posited by the 

comment, the movie theater would be 

much more likely to download or 

otherwise obtain a copy of the movie 

than to stream the movie 

simultaneously with displaying the 

movie to customers, given the 

possibility of buffering or other 

technology issues that might occur 

while streaming and negatively impact 

the movie theater’s customers. However, 

a somewhat similar scenario could 

occur if a bar or similar establishment 

streams music, sporting events, or other 

content as entertainment for customers 

eating or drinking at the establishment. 

While the agreement with the streaming 

service may grant the bar the right to 

perform or to display the streamed 

content to its customers, if there is no 

transfer of digital content (that is, no 

option to download of digital content), 

the transaction falls outside the digital 

content rules in § 1.861–18 and may be 

properly characterized as a cloud 

transaction. Whether there is a transfer 

of a copyright right that is not described 

in § 1.861–18(c)(2) would depend on 

copyright law. As described in Part I.B 

of this Summary of Comments and 

Explanation of Revisions, a fundamental 

requirement for a digital content 

transaction such as a license of 

copyright rights, as opposed to a cloud 

transaction involving digital content, is 

that the former involves a transfer of the 

digital content to the customer. If, 

however, the theater or the bar has the 

choice to download or stream the 

content, then § 1.861–18, including the 

predominant character rule, would 

apply to the transaction. 

B. Inclusion of Common Cloud Business 

Models 

One comment suggested that the final 

regulations explicitly include as cloud 

transactions certain common cloudbased business models, namely: (1) 

advertising models where customers 

obtain ‘‘free’’ services and advertisers 

pay for access to those customers; (2) 

marketplace sites and apps that function 

as sales agents; (3) gig-economy sites 

and apps that put service providers and 

customers together; (4) job recruiting 

sites and apps that find candidates for 

employers; (5) travel sites and apps that 

act like sales agents for hotels, flights, 

etc.; and (6) game sites that allow users 

access to a range of games for a 

subscription price. 

The final regulations do not adopt this 

comment, though some similar 

examples are included in § 1.861–18(h). 

Although each of the comment’s 

suggested scenarios include services or 

goods accessed through the internet, 

whether each scenario is a cloud 

transaction (as defined by § 1.861–19(b)) 

is fact-specific and cannot be 

determined solely on the basis of the 

type of offering provided. Section 

1.861–19(b) defines a cloud transaction 

as a transaction through which a person 

obtains on-demand network access to 

computer hardware, digital content (as 

defined in § 1.861–18(a)(2)), or other 

similar resources. The first scenario, 

involving customers’ ‘‘free’’ access to 

content that is funded by advertising, is 

similar to § 1.861–18(h)(22) (Example 

22) of the final regulations. The example 

addresses the transfer of content to the 

platform by content creators (a digital 

content transaction) and the access to 

the content by customers (a cloud 

transaction). However, the example does 

not address the transaction between the 

advertisers and the platform because 

while the ads are viewable online, the 

advertising services are likely not cloud 

transactions because there is likely no 

on-demand network access to computer 

hardware, digital content, or similar 

resources provided by the platform to 

the advertisers (though specific fact 

patterns may differ). The second 

scenario, involving marketplace sites 

and apps that function as sales agents, 

may result in a transaction that has a 

digital content transaction element and 

a cloud transaction element if the 

marketplace site or app is used to 

transfer digital content to customers. 

See § 1.861–18(h)(20) (Example 20). 

Similarly, the sixth scenario, involving 

game sites allowing access to a range of 

games for a subscription price, may 

require a predominant character 

analysis to determine whether the 


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primary benefit to the customer (or a 

typical customer) is the download of 

games or access to play the games 

online. See § 1.861–18(h)(24) (Example 

24). In the remaining scenarios 

proposed by the comment, the website 

or app may provide a service, but it is 

likely that the service would not be a 

cloud transaction because the recipient 

of the service does not receive ondemand network access to computer 

hardware, digital content, or similar 

resources. The framework of the final 

regulations should be applied to the 

facts of each specific transaction rather 

than making generalizations about broad 

categories of content offerings. 

C. Examples Illustrating § 1.861–19 

Many comments requested 

modifications to the examples provided 

in proposed § 1.861–19, or new 

examples describing common business 

models. In response to these comments, 

the final regulations contain several new 

examples and make certain 

modifications to the pre-existing 

examples. The final regulations also 

remove examples illustrating the 

proposed regulations’ application of 

factors to distinguish between the 

characterization of a cloud transaction 

as a service or a lease because the final 

regulations characterize all cloud 

transactions as services. 

Proposed § 1.861–19(d)(11) (Example 

11) would describe a scenario in which 

a taxpayer operates an online database 

of industry-specific materials that 

utilizes a proprietary search engine. 

Certain materials in the database 

constitute digital content. The example 

concluded that the taxpayer’s provision 

of on-demand access to its computer 

hardware and software is a cloud 

transaction. One comment requested 

clarification that the characterization of 

this transaction would not be different 

if the online database contained no 

copyrightable materials. In the final 

regulations, the analysis of this example 

(which has been redesignated § 1.861– 

19(d)(8) (Example 8)) explains that the 

cloud transaction is access to the search 

engine and online database, rather than 

online access to the digital content, and 

therefore the conclusion that the 

transaction is a cloud transaction would 

not change if none of the content in the 

database was copyrightable. This 

conclusion is consistent with § 1.861– 

19(b)’s definition of a cloud transaction 

as a transaction through which a person 

obtains on-demand network access to 

computer hardware, digital content (as 

defined in § 1.861–18(a)(2)), or other 

similar resources. In this case, the 

content accessed would be an ‘‘other 

similar resource.’’ 

Two comments expressed concern 

that certain jurisdictions around the 

world treat income earned by a reseller 

of services, such as software-as-aservice, as royalties subject to 

withholding. These comments asked for 

an example in the final regulations 

addressing a reseller of services that 

concludes the reseller’s income is 

services income. In response to these 

comments, section 1.861–19(d)(10) 

(Example 10) of the final regulations 

addresses a reseller of software-as-aservice and concludes the transaction 

between the reseller and its customers is 

a cloud transaction classified as the 

provision of services. 

Proposed § 1.861–19(d)(9) (Example 

9) would describe a scenario in which 

a taxpayer maintains a catalogue of 

videos and music that it streams to 

customers in exchange for a monthly 

fee. To better reflect current and 

developing business practices, 

comments recommended adding a fact 

to this example that customers have the 

ability to download the digital content 

for offline viewing, and that such ability 

is de minimis in the context of the 

overall transaction. Proposed § 1.861– 

19(d)(9) (Example 9) is redesignated 

§ 1.861–19(d)(7) (Example 7) of the final 

regulations, and the ability to download 

the digital content has been added to the 

facts in the example. As discussed in 

Part I.A of this Summary of Comments 

and Explanation of Revisions, a 

predominant character rule in the final 

regulations replaced the de minimis rule 

in the proposed regulations. Under the 

facts described in Example 7 of the final 

regulations, the predominant character 

of the transaction is a cloud transaction. 

IV. Sourcing Rules 

A. Source Rule for Sales of Copyrighted 

Articles Transferred Through an 

Electronic Medium 

1. In General 

Section 1.861–18(f)(2), as in effect 

before this Treasury decision, provided 

that income from sales of copyrighted 

articles is sourced under sections 

861(a)(6), 862(a)(6), 863, 865(a), (b), (c), 

or (e), as appropriate. Proposed § 1.861– 

18(f)(2)(ii) would provide that when a 

copyrighted article is sold and 

transferred through an electronic 

medium, the sale is deemed to have 

occurred at the location of download or 

installation onto the end-user’s device 

used to access the digital content for 

purposes of § 1.861–7(c). If information 

about the location of download or 

installation was not available, proposed 

§ 1.861–18(f)(2)(ii) would provide that 

the sale is deemed to have occurred at 

the location of the customer, as 

determined based on the taxpayer’s 

recorded sales data for business or 

financial reporting purposes. 

Comments observed practical 

challenges with applying a rule based 

on the location of download or 

installation, including that: (i) data 

privacy laws may prevent taxpayers 

from collecting or retaining this 

information, (ii) internet Protocol (IP) 

addresses may be unreliable because 

virtual private networks may obscure an 

end-user’s IP address, (iii) it would be 

burdensome and expensive for 

taxpayers to collect new data on the 

location of download or installation, (iv) 

there may be difficulties in determining 

the location of download or installation 

onto an end-user’s device when 

software is sold through multi-level 

distribution channels, and (v) it may be 

difficult to identify the end-user. One 

comment suggested that the final 

regulations provide examples that 

illustrate the application of the 

download test in various circumstances. 

Instead of endorsing the proposed 

rule, most comments addressing this 

topic recommended a rule that uses the 

billing address of the first unrelated 

purchaser to determine the location of 

the sale. Some comments observed that 

the billing address of the purchaser is 

information sellers already collect and 

is a more reliable indicator of where the 

purchaser will use the digital content. 

Several comments suggested that 

taxpayers be permitted to elect to use 

the location of download or installation 

instead of the billing address of the 

purchaser if the taxpayer has access to 

that information. Some comments 

recommended permitting taxpayers to 

elect to use the location of actual use of 

the digital content, such as when an 

employer purchases digital content that 

is used by an employee not located in 

the same jurisdiction as the employer. 

Finally, another comment 

recommended that the rule in § 1.861– 

7(c) (which provides that the place of 

sale is the place where the rights, title, 

and interest of the seller in the property 

are transferred to the buyer (the title 

passage rule)) should be retained for 

purposes of sourcing sales of 

copyrighted articles transferred through 

an electronic medium. 

The final regulations adopt these 

comments in part. Consistent with the 

proposed regulations, § 1.861–18(f)(2)(ii) 

of the final regulations moves away 

from the ‘‘title passage’’ rule for sales of 

copyrighted articles transferred through 

an electronic medium. One reason for 

the change is that the title passage rule 

allowed taxpayers to artificially elect 

the source of income from sales of 

copyrighted articles through an 


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electronic medium using contractual 

terms that had no real-world impact due 

to the nature of digital content. A digital 

download is an almost instantaneous 

transfer that occurs with limited risk of 

loss; even when a file is corrupted in the 

download or installation process, a 

noncorrupted copy can be provided to 

the customer at virtually no cost to the 

seller, and the precise location of the 

corruption is typically not relevant. In 

contrast, a contractual agreement as to 

when and where title passes for 

physical property moved through 

physical distribution chains has realworld impact because the property may 

be lost or become damaged in transit 

and the location of title passage 

determines whether the seller or buyer 

bears the burden of that loss. Because 

the nature of the supply chain means 

that the seller retains risk of loss until 

a successful download, § 1.861– 

18(f)(2)(ii) treats the sale as having 

occurred at the customer’s location, 

using the customer’s billing address as 

a proxy. The Treasury Department and 

IRS generally agree that a billing address 

is more administrable than the location 

of download or installation as a suitable 

proxy for the place of sale of 

electronically transferred copyrighted 

articles (subject to the anti-abuse rule 

discussed below). 

The Treasury Department and IRS 

disagree, however, that the billing 

address of a subsequent unrelated 

purchaser of the same copyrighted 

article should be the general rule for 

sales between related parties, given the 

focus of the statutory sourcing 

provisions on place of sale. See sections 

861 through 865. It would also be 

complex and potentially inaccurate to 

attempt to determine whether every sale 

is intended for a related or unrelated 

purchaser. Therefore, § 1.861–18(f)(2)(ii) 

of the final regulations provides that 

when a copyrighted article is sold and 

transferred through an electronic 

medium, the sale is deemed to have 

occurred at the location of the billing 

address of the purchaser for purposes of 

§ 1.861–7(c), regardless of whether that 

purchaser is a related or unrelated party. 

This billing address rule also resolves 

the issue raised by comments regarding 

who the end-user is in certain 

transactions because the sourcing rule is 

based on the immediate purchaser in 

the transaction. See § 1.861–18(h)(25) 

(Example 25). 

The final regulations also do not 

provide for an election to treat the sale 

of a copyrighted article as occurring at 

the location of download or installation. 

As noted earlier in this part, one of the 

reasons for moving away from ‘‘title 

passage’’ for sales of copyrighted articles 

transferred through an electronic 

medium was that it allowed sellers the 

ability to artificially elect the source of 

the income. Consistent with this 

concern about electivity, the final 

regulations provide a single, 

administrable rule that applies to all 

sales (subject to the anti-abuse rule). 

The final regulations also add a new 

anti-abuse rule for any case in which the 

sales transaction is arranged in a 

particular manner for a principal 

purpose of tax avoidance. See § 1.861– 

18(f)(2)(ii) and (h)(26) (Example 26). In 

such cases, the foregoing billing address 

rule will not be applied, and instead all 

relevant facts and circumstances of the 

transaction will be considered to treat 

the sale as having occurred where the 

substance of the transaction occurred. 

This anti-abuse rule replaces the antiabuse rule in § 1.861–7(c) with respect 

to sales of copyrighted articles sold and 

transferred through an electronic 

medium. 

Finally, several comments asked for 

clarification that this source rule applies 

solely for purposes of the title passage 

rule of § 1.861–7(c). The Treasury 

Department and the IRS have concluded 

that these comments were already 

addressed in proposed § 1.861– 

18(f)(2)(ii) by the language that limited 

application of the rule ‘‘for purposes of 

§ 1.861–7(c),’’ and the final regulations 

retain this language. 

2. Coordination With Section 863(b) 

Some comments recommended 

allowing taxpayers to elect to apply a 

billing address source rule for sales of 

digital content where section 863(b) 

may otherwise apply. Section 863(b) 

provides, in part, that the gains, profits, 

and income from the sale or exchange 

of inventory property produced (in 

whole or in part) by the taxpayer within 

the United States and sold or exchanged 

without the United States, or produced 

(in whole or in part) by the taxpayer 

without the United States and sold or 

exchanged within the United States, 

shall be allocated and apportioned 

between sources within and without the 

United States solely on the basis of the 

production activities with respect to the 

property. 

The final regulations do not adopt the 

comment recommending allowing 

taxpayers to elect to apply a billing 

address source rule for sales of digital 

content where section 863(b) would 

apply. When section 863(b) applies, 

property produced and sold by a 

taxpayer must be sourced ‘‘solely on the 

basis of the production activities with 

respect to the property.’’ There is 

nothing to suggest that the billing 

address of the customer is relevant to 

this statutory rule based on place of 

production, and so the final regulations 

do not adopt this comment. 

3. Interaction With Rules for Sourcing 

Leases and Licenses of Digital Content 

One comment supported the location 

of download or installation rule for 

determining the place of sale for 

copyrighted articles, and recommended 

the final regulations explicitly adopt a 

uniform rule for sourcing income from 

sales, leases, and licenses of digital 

content based on the location of the 

end-user. The comment also 

recommended allowing taxpayers to 

rely on recorded sales data to determine 

the location of the end-user for purposes 

of determining place of use for leases 

and licenses of digital content. 

The final regulations do not adopt this 

comment. Section 1.861–18(f)(2)(ii) 

clarifies how the place of sale of digital 

content is determined for purposes of 

sections 861 through 865. Those 

sections contain different rules for 

determining the source of income from 

leases and licenses, for which the place 

of transfer is not the relevant statutory 

rule (generally, the determination is 

based on where the property subject to 

the lease or license is used, or where the 

possessor of the interest has the right to 

use the property). See sections 861(a)(4), 

862(a)(4). Section 1.861–18(f)(2)(ii) 

looks to the customer’s billing address 

for purposes of determining the place of 

sale for purposes of § 1.861–7(c). While 

that may sometimes also be the location 

in which the digital content is used, that 

is not necessarily the case. For example, 

where copyright rights are transferred in 

a transaction that is classified as a 

license, the copyright rights may be 

used in multiple locations, and not just 

the location of the customer’s billing 

address. Similarly, not all income from 

sales is sourced to the place where the 

sale occurred. In those cases, the statute 

provides the relevant determination, 

such as the place of production in 

section 863(b) or the residence of the 

seller in section 865(a). The location of 

download or installation is not 

necessarily indicative of any of those 

things, and the Treasury Department 

and the IRS only intend for the rule in 

§ 1.861–18(f)(2)(ii) to be used to 

determine the place where the sale 

occurred for purposes of statutory 

sourcing rules that rely on that 

determination. Therefore, § 1.861– 

18(f)(2)(ii) of the final regulations is not 

extended to provide a sourcing rule for 

all sales, licenses, and leases of digital 

content. 

Finally, a comment suggested that the 

regulations clarify that a license of 

copyright rights from a copyright owner 


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to a distributor is sourced under section 

861(a)(4) or 862(a)(4). Because § 1.861– 

18(f)(2), as in effect before this Treasury 

decision, already provides that income 

derived from licensing copyright rights 

is sourced under section 861(a)(4) or 

862(a)(4), no changes have been made in 

response to this comment. 

B. Source Rule for Gross Income From 

a Cloud Transaction 

Proposed § 1.861–19 would not 

provide a source rule for cloud 

transactions. As such, the proposed 

regulations indicated that existing law, 

regulations, and IRS guidance regarding 

sourcing services and leases would 

apply to sourcing cloud transactions. 

Numerous comments were received 

regarding whether a specific source rule 

for cloud transactions would be 

appropriate and several of these 

comments included suggestions for such 

a rule. 

The Treasury Department and the IRS 

are of the view that that there would be 

benefits for taxpayer compliance and 

administrability if gross income from 

cloud transactions were sourced using a 

uniform rule. Thus, the Treasury 

Department and the IRS are issuing 

proposed regulations (REG–107420–24) 

published elsewhere in this same issue 

of the Federal Register that provide 

rules for determining the source of gross 

income from a cloud transaction. 

C. Removal of Example 5 From § 1.937– 

3(e) 

The proposed regulations would have 

removed Examples 4 and 5 from 

§ 1.937–3(e). Section 937 provides 

residence and source rules involving 

territories. Examples 4 and 5 of § 1.937– 

3(e) relate to the sourcing of income 

from digital content transactions and 

cloud transactions, respectively. One 

comment suggested that the proposal to 

remove Example 5 was premature 

because the proposed regulations did 

not include a source rule for cloud 

transactions. The final regulations do 

not accept this comment. As discussed 

in Part IV.B of this Summary of 

Comments and Explanation of 

Revisions, the Treasury Department and 

the IRS are issuing a companion notice 

of proposed rulemaking addressing the 

source of income from cloud 

transactions concurrent with these final 

regulations. Therefore, to avoid 

potentially inconsistent inferences, the 

final regulations remove both Examples 

4 and 5 of § 1.937–3(e). 

V. Comments Outside the Scope of This 

Treasury Decision 

The preamble to Treasury Decision 

8785, which promulgated § 1.861–18 in 

1998, stated that the Treasury 

Department and the IRS were 

considering whether to issue guidance 

regarding whether transactions in 

copyrighted articles are transactions in 

tangible property, and whether 

transactions in copyright rights are 

transactions in intangible property, in 

each case for purposes of section 482. 

The proposed regulations did not 

contain further guidance on this topic. 

One comment to the proposed 

regulations recommended that the 

Treasury Department and the IRS 

reconsider this matter and issue 

guidance on this topic because the 

characterization of a transfer of digital 

content as tangible or intangible 

property is important for purposes of 

sections 250, 367(d), and 482. The 

Treasury Department and IRS have 

determined that guidance on whether 

the categories of transactions in § 1.861– 

18 are considered tangible or intangible 

property for purposes of such Code 

sections is outside the scope of these 

regulations. 

One comment suggested that section 

904 should be amended as it relates to 

certain sales income earned by U.S. 

residents to prevent ‘‘cross-crediting’’ of 

high-taxed income and zero- or lowtaxed income within the same foreign 

tax credit basket under section 

904(d)(1). The comment noted that such 

‘‘cross-crediting’’ results in the U.S. 

partially or fully bearing the cost of the 

high tax rates in some foreign 

jurisdictions because a credit related to 

the high-taxed income may offset U.S. 

tax on the income from low-tax 

jurisdictions. Amendments to section 

904 are outside the scope of this 

Treasury Decision. 

Two comments suggested changes to 

the regulations under section 250 

pertaining to foreign-derived intangible 

income (FDII). One comment requested 

that the Treasury Department and the 

IRS introduce a rule under § 1.250(b)–4 

stating that intangible property used in 

providing a service that is a cloud 

transaction within the meaning of 

§ 1.861–19 is, for purposes of section 

250, used at the location of the 

employees engaged in, and tangible 

property used in, providing the cloud 

transaction service. That comment also 

suggested adding a de minimis rule 

under § 1.250(b)–4 providing that any 

de minimis use of intangible property is 

disregarded in a cloud transaction. A 

second comment noted that the 

characterization of a cloud transaction 

would impact whether income is 

eligible for the FDII deduction because 

there are different rules for establishing 

‘‘foreign use’’ for services and lease 

transactions. That comment also 

suggested that the ‘‘foreign use’’ rule for 

intangible property should replicate the 

rule governing foreign use of general 

property. These comments are outside 

the scope of this Treasury Decision, but 

were considered in finalizing the 

section 250 regulations. See T.D. 9901 

(85 FR 43042, July 15, 2020). 

VI. Final Regulations Apply Only for 

Certain International Provisions of the 

Code 

Section 1.861–18, as in effect before 

this Treasury decision, applied only to 

certain listed international provisions of 

the Code. When § 1.861–18 was 

promulgated in 1998, the preamble 

stated that the Treasury Department and 

the IRS were considering whether the 

principles of § 1.861–18 should apply to 

other provisions of the Code. The 

proposed regulations retained the scope 

of § 1.861–18 by applying only to 

certain listed international provisions of 

the Code, although additional sections 

of the Code were added to the scope of 

the proposed regulations due to changes 

in law between 1998 and the date of the 

proposed regulations. Proposed § 1.861– 

19 would also apply only to the same 

listed international provisions of the 

Code. 

The Treasury Department and the IRS 

received comments recommending 

expanding the scope of the final 

regulations to apply for all purposes of 

the Code, particularly with respect to 

§ 1.861–18 for which all comments 

received on this topic recommended 

expansion to all purposes of the Code. 

Multiple comments expressed that the 

framework of the proposed regulations 

provides sensible rules and certainty 

with respect to transactions involving 

digital content. One comment also 

expressed concern that limiting the 

scope of the final regulations to only 

international provisions of the Code 

could lead to the same transaction being 

characterized differently depending on 

which Code section was applied. 

Another comment expressed the belief 

that both taxpayers and the IRS will 

utilize the guidance in the final 

regulations by analogy even if the final 

regulations apply only to international 

provisions of the Code, and that it 

would be better to make it clear that the 

final regulations apply to all provisions 

of the Code so that taxpayers and the 

IRS will not have to go through the 

rigors of trying to convince the other 

party that the final regulations are 

relevant in a particular case. 

Unlike § 1.861–18, some comments 

recommended that § 1.861–19 not be 

applied beyond the scope provided in 

the proposed regulations. These 

comments expressed concern that the 


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preamble to § 1.861–19 referenced 

section 7701(e) (pertaining to the 

treatment of certain contracts as leases 

rather than service contracts), and 

recommended against any guidance 

providing that section 7701(e) could 

apply throughout the Code, including 

Subchapter M. One comment explained 

that the extent to which the provision of 

services affects the definition of ‘‘rents 

from real property’’ for real estate 

investment trust purposes is addressed 

not only in Subchapter M and the 

regulations thereunder, but also in 

numerous items of IRS sub-regulatory 

guidance and private letter rulings 

specifically interpreting Subchapter M. 

The comments recommended adding an 

explicit disclaimer in the preamble and 

the text of the final regulations that any 

purported interpretation and 

application of section 7701(e) principles 

in the final regulations do not apply 

outside the intended scope of the final 

regulations, and therefore do not apply 

to lease-versus-service determinations 

under other provisions of chapter 1 of 

the Code. As discussed under Part III.A 

of this Summary of Comments and 

Explanation of Revisions, the final 

regulations treat all cloud transactions 

as the provision of services, and 

accordingly remove the section 7701(e) 

factors from the regulatory text. 

More broadly, the Treasury 

Department and the IRS continue to 

study issues related to applying the final 

regulations to all provisions of the Code. 

Concurrently with the issuance of the 

final regulations, the Treasury 

Department and the IRS are issuing a 

Notice (Notice 2025–6) requesting 

comments regarding issues to consider 

in deciding whether to apply the 

characterization rules in §§ 1.861–18 

and 1.861–19, as amended and added, 

respectively, by the final regulations to 

all provisions of the Code. 

VII. Change in Method of Accounting 

The proposed regulations would treat 

a change in method of accounting that 

a taxpayer made in order to comply 

with the proposed regulations as a 

change initiated by the taxpayer. 

Accordingly, the change in method of 

accounting would have to be 

implemented under the rules of § 1.446– 

1(e) and the applicable administrative 

procedures that govern voluntary 

changes in method of accounting under 

section 446(e). 

Two comments suggested that if a 

taxpayer must change its method of 

accounting in order to comply with the 

final regulations, then such change 

should be eligible for automatic consent. 

The final regulations do not adopt 

these comments. The Treasury 

Department and the IRS generally do 

not anticipate taxpayers needing to 

change methods of accounting as a 

result of the final regulations. 

Additionally, in light of the 

aforementioned Notice requesting 

comments on applying the 

characterization rules in §§ 1.861–18 

and 1.861–19, as amended and added, 

respectively, by the final regulations for 

all purposes of the Code, the Treasury 

Department and IRS have determined 

that it is important to ensure that any 

accounting method changes due to these 

regulations are consistent with the 

appropriate treatment of the 

transactions at issue under all 

appropriate Code or regulation sections. 

VIII. Applicability Date 

The proposed regulations were 

proposed to apply to transactions 

entered into pursuant to contracts 

entered into in taxable years beginning 

on or after the date of publication of 

final regulations. 

Comments recommended the final 

regulations apply to transactions 

entered into in taxable years beginning 

on or after the date that final regulations 

are published, regardless of the date of 

the contracts pursuant to which such 

transactions were entered into. One 

comment noted that it would be 

difficult to trace particular transactions 

to contracts that were entered into in 

taxable years that begin on or after the 

date of publication of final regulations. 

Other comments noted that the 

proposed applicability date may result 

in different rules applying to similar 

transactions of the same taxpayer long 

after these regulations are finalized. 

One comment suggested allowing 

taxpayers to elect application of the 

final regulations to taxable years ending 

after the date of publication of the 

proposed regulations. Another comment 

recommended that taxpayers be allowed 

to elect to apply the final regulations to 

transactions taking place before the 

effective date of the final regulations. 

In response to these comments, the 

final regulations generally apply to 

taxable years beginning on or after the 

date of publication of this Treasury 

decision in the Federal Register. 

However, taxpayers may elect to apply 

all of the rules of the final regulations 

to taxable years beginning on or after 

August 14, 2019 and all subsequent 

taxable years as long as all related 

persons (within the meaning of sections 

267(b) and 707(b)) also apply all of the 

rules of the final regulations to taxable 

years beginning on or after August 14, 

2019 and all subsequent taxable years, 

the period of limitations on assessment 

for each taxable year of the taxpayer and 

all related parties (within the meaning 

of sections 267(b) and 707(b)) is open 

under section 6501, and the taxpayer 

would not be required under this 

section to change its method of 

accounting as a result of such election. 

Special Analyses 

I. Regulatory Planning and Review— 

Economic Analysis 

Pursuant to the Memorandum of 

Agreement, Review of Treasury 

Regulations under Executive Order 

12866 (June 9, 2023), tax regulatory 

actions issued by the IRS are not subject 

to the requirements of section 6 of 

Executive Order 12866, as amended. 

Therefore, a regulatory impact 

assessment is not required. 

II. Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(44 U.S.C. 3501–3520) (PRA) generally 

requires that a Federal agency obtain the 

approval of the 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 Office of Management 

and Budget. 

The collections of information in 

these final regulations contain reporting 

and recordkeeping requirements that are 

necessary to ensure the correct 

classification of digital content 

transactions and cloud transactions. The 

collections will be used by the IRS for 

tax compliance purposes. 

The final regulation mentions a 

reporting requirement where a taxpayer 

may be required to change its method of 

accounting. For PRA purposes, Form 

3115, Application for Change in 

Accounting Method, is already 

approved by OMB under Control 

Numbers 1545–0047 for tax-exempt 

entities, 1545–0074 for individuals, 

1545–0123 for business filers and 1545– 

0092 for trust and estate filers. 

The recordkeeping requirements 

include that entities keep records of 

their transactions to substantiate the 

transaction classification. These 

recordkeeping requirements are 

considered general tax records under 

§ 1.6001–1(e). For PRA purposes, 

general tax records are already approved 

by OMB under 1545–0047 for taxexempt entities, 1545–0074 for 

individuals, 1545–0123 for business 

filers and 1545–0092 for trust and estate 

filers. 


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These final regulations are not 

creating new information collections or 

changing information collections 

already approved by OMB. 

III. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

requires consideration of the regulatory 

impact on small businesses. It is hereby 

certified that these final regulations 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 (5 U.S.C. 

chapter 6). 

Although data are not readily 

available to estimate the number of 

small entities that would be affected by 

the final regulations, the Treasury 

Department and the IRS project that any 

economic impact of the regulations 

would be minimal for businesses 

regardless of size. These final 

regulations generally provide 

clarification of definitions regarding 

how transactions are classified, and thus 

are not expected to have an impact on 

burden for large or small businesses. 

The Treasury Department and the IRS 

project that any economic impact would 

be small because current industry 

practice is generally consistent with the 

principles underlying the final 

regulations. 

IV. Section 7805(f) 

Pursuant to section 7805(f) of the 

Code, the proposed regulations (REG– 

130700–14) preceding these final 

regulations were submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on the impact on small businesses and 

no comments were received. 

V. Unfunded Mandates Reform Act 

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 final 

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. 

VI. Executive Order 13132: Federalism 

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 statutes, or preempts State 

law, unless the agency meets the 

consultation and funding requirements 

of section 6 of the Executive order. The 

final regulations do not have federalism 

implications, do not impose substantial 

direct compliance costs on State and 

local governments, and do not preempt 

State law within the meaning of the 

Executive order. 

Drafting Information 

The principal authors of these final 

regulations are Christopher E. Fulle and 

Michelle L. Ng of the Office of the 

Associate Chief Counsel (International). 

However, other personnel from the 

Treasury Department and the IRS 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Adoption of Amendments to the 

Regulations 

Accordingly, the Treasury Department 

and the IRS amend 26 CFR part 1 as 

follows: 

PART 1—INCOME TAXES 

■ Paragraph 1.The authority citation for 

part 1 continues to read in part as 

follows: 

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

■ Par. 2. Section 1.861–7 is amended by 

revising paragraph (c) to read as follows: 

§ 1.861–7 Sale of personal property. 

* * * * * 

(c) Country in which sold. For 

purposes of part I (section 861 and 

following), subchapter N, chapter 1 of 

the Code, and the regulations 

thereunder, a sale of personal property 

is consummated at the time when, and 

the place where, the rights, title, and 

interest of the seller in the property are 

transferred to the buyer. Where bare 

legal title is retained by the seller, the 

sale shall be deemed to have occurred 

at the time and place of passage to the 

buyer of beneficial ownership and the 

risk of loss. However, in any case in 

which the sales transaction is arranged 

in a particular manner for the primary 

purpose of tax avoidance, the foregoing 

rules will not be applied. In such cases, 

all factors of the transaction, such as 

negotiations, the execution of the 

agreement, the location of the property, 

and the place of payment, will be 

considered, and the sale will be treated 

as having been consummated at the 

place where the substance of the sale 

occurred. For determining the place of 

sale of copyrighted articles transferred 

through an electronic medium, see 

§ 1.861–18(f)(2)(ii). 

* * * * * 

■ Par. 3. Section 1.861–18 is amended 

by: 

■ a. Revising the section heading; 

■ b. Revising paragraphs (a), (b), (c)(1), 

(c)(2)(i) through (iv), (c)(3), (d), (e), (f)(1) 

through (3), (g)(2), (g)(3)(i) and (ii), and 

(h) through (j); and 

■ c. Removing paragraph (k). 

The revisions read as follows: 

§ 1.861–18 Classification of, and source of 

gross income from, digital content 

transactions. 

(a) General—(1) Scope. This section 

provides rules for classifying digital 

content transactions (as defined in 

paragraph (b)(1) of this section) for 

purposes of subchapter N of chapter 1 

of the Internal Revenue Code, sections 

59A, 245A, 250, 267A, 367, 404A, 482, 

679, 1059A, chapters 3 and 4, sections 

842 and 845 (to the extent involving a 

foreign person), and transfers to foreign 

trusts not covered by section 679. 

(2) Digital content—(i) Digital content 

defined. For purposes of this section, 

digital content means a computer 

program or any other content, such as 

books, movies, and music, in digital 

format that is— 

(A) Protected by copyright law; or 

(B) Not protected by copyright law 

solely— 

(1) Due to the passage of time; or 

(2) Because the creator dedicated the 

content to the public domain. 

(ii) Computer program defined. For 

purposes of this section, a computer 

program is a set of statements or 

instructions to be used directly or 

indirectly in a computer in order to 

bring about a certain result and includes 

any media, user manuals, 

documentation, data base, or similar 

item if the media, user manuals, 

documentation, data base, or other 

similar item is incidental to the 

operation of the computer program. 

(b) Categories of transactions—(1) 

General. A transaction that constitutes a 

transfer of digital content, or the 

provision of services or of know-how 

with respect to digital content (each a 

digital content transaction), is treated as 

being solely one of the following— 

(i) A transfer of a copyright right in 

the digital content; 

(ii) A transfer of a copy of the digital 

content (a copyrighted article); 

(iii) The provision of services for the 

development or modification of the 

digital content; or 

(iv) The provision of know-how 

relating to development of digital 

content. 

(2) Transaction with multiple 

elements. Taking into account the 


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overall transaction and the surrounding 

facts and circumstances, a transaction 

that has multiple elements, one or more 

of which would be a digital content 

transaction if considered separately, is 

classified in its entirety as a digital 

content transaction under one of the 

categories described in paragraph (b)(1) 

of this section if the predominant 

character of the transaction is described 

in one of the categories in that 

paragraph. 

(3) Determination of predominant 

character—(i) General rule. For 

purposes of paragraph (b)(2) of this 

section and § 1.861–19(c)(2), the 

predominant character of a transaction 

is determined by ascertaining the 

primary benefit or value received by the 

customer in the transaction. 

(ii) Special rule. If the primary benefit 

or value received by the customer in the 

transaction is not reasonably 

ascertainable, the predominant 

character of a transaction is instead 

determined by ascertaining the primary 

benefit or value received by a typical 

customer in a substantially similar 

transaction as determined under 

paragraphs (b)(3)(ii)(A) and (B) of this 

section. 

(A) The primary benefit or value 

received by a typical customer is 

determined by data on how a typical 

customer uses or accesses the digital 

content. See paragraph (h)(17) of this 

section (Example 17). 

(B) If data described in paragraph 

(b)(3)(ii)(A) of this section is not 

available, then the predominant 

character of a transaction subject to the 

special rule in paragraph (b)(3)(ii) of this 

section is determined by examining 

other factors that are indicative of the 

primary benefit or value received by a 

typical customer, including the 

following— 

(1) How the transferor or provider 

markets the transaction; 

(2) The relative development costs to 

the transferor or provider of each 

element of the transaction; and 

(3) The relative price paid in an 

uncontrolled transaction for one or more 

elements compared to the total contract 

price of the transaction in question. 

(iii) Identification and development of 

data. A transferor or provider must use 

reasonable efforts to identify the data 

specified in paragraphs (b)(3)(i) and 

(ii)(A) of this section, or if necessary, to 

apply the factors relevant to paragraph 

(b)(3)(ii)(B) of this section. However, a 

transferor or provider is not required to 

develop any of the data specified in 

those paragraphs that it does not 

develop in the course of business. 

(c) * * * 

(1) Transfers involving transfers of 

copyright rights. A digital content 

transaction involves a transfer of a 

copyright right if, as a result of the 

transaction, a person acquires one or 

more of the rights described in 

paragraphs (c)(2)(i) through (iv) of this 

section. 

(2) * * * 

(i) The right to make copies of the 

digital content for purposes of 

distribution to the public by sale or 

other transfer of ownership, or by rental, 

lease or lending; 

(ii) The right to prepare derivative 

digital content based upon the digital 

content; 

(iii) The right to make a public 

performance of digital content, other 

than a right to publicly perform digital 

content for the purpose of advertising 

the sale of the digital content performed; 

or 

(iv) The right to publicly display 

digital content, other than a right to 

publicly display digital content for the 

purpose of advertising the sale of the 

digital content displayed. 

(3) Copyrighted articles. A 

copyrighted article includes a copy of 

digital content from which the work can 

be perceived, reproduced, or otherwise 

communicated, either directly or with 

the aid of a machine or device. The copy 

of the digital content may be fixed in 

any medium. 

(d) Provision of services. The 

determination of whether a transaction 

involving newly developed or modified 

digital content involves the provision of 

services described in paragraph (b)(1) of 

this section is based on all the facts and 

circumstances of the transaction, 

including, as appropriate, the intent of 

the parties (as evidenced by their 

agreement and conduct) as to which 

party is to own the copyright rights in 

the digital content and how the risks of 

loss are allocated between the parties. 

See paragraph (h)(15) of this section 

(Example 15). 

(e) Provision of know-how. The 

provision of information with respect to 

digital content involves the provision of 

know-how for purposes of this section 

only if the information is— 

(1) Information relating to the 

development of digital content; 

(2) Furnished under conditions 

preventing unauthorized disclosure, 

specifically contracted for between the 

parties; and 

(3) Considered property subject to 

trade secret protection. 

(f) * * * 

(1) Transfers of copyright rights. The 

determination of whether a transfer of a 

copyright right is a sale or exchange of 

property is made on the basis of 

whether, taking into account all facts 

and circumstances, there has been a 

transfer of all substantial rights in the 

copyright. A transfer of a copyright right 

that does not constitute a sale or 

exchange because not all substantial 

rights have been transferred will be 

classified as a license. For this purpose, 

the principles of sections 1222 and 1235 

apply. Income derived from the sale or 

exchange of a copyright right will be 

sourced under section 865(a), (c), (d), 

(e), or (h), as appropriate. Income 

derived from the licensing of a 

copyright right will be sourced under 

section 861(a)(4) or 862(a)(4), as 

appropriate. 

(2) Transfers of copyrighted articles— 

(i) Classification. The determination of 

whether a transfer of a copyrighted 

article is a sale or exchange is made on 

the basis of whether, taking into account 

all facts and circumstances, the benefits 

and burdens of ownership have been 

transferred. A transfer of a copyrighted 

article that does not constitute a sale or 

exchange because insufficient benefits 

and burdens of ownership of the 

copyrighted article have been 

transferred, such that a person other 

than the transferee is properly treated as 

the owner of the copyrighted article, 

will be classified as a lease. 

(ii) Source. Income from transactions 

that are classified as sales or exchanges 

of copyrighted articles will be sourced 

under section 861(a)(6), 862(a)(6), 863, 

or 865(a), (b), (c), or (e), as appropriate. 

When a copyrighted article is sold and 

transferred through an electronic 

medium, the sale is deemed to have 

occurred at the location of the billing 

address of the purchaser for purposes of 

§ 1.861–7(c). However, in any case in 

which the sales transaction is arranged 

in a particular manner for a principal 

purpose of tax avoidance, the foregoing 

rules will not be applied. In such a case, 

all of the facts and circumstances 

relevant to the transaction, such as the 

place where the copyrighted article will 

be used, the place where negotiations 

and the execution of the agreement 

occurred, and the terms of the 

agreement, will be considered, and the 

sale will be treated as having occurred 

where the substance of the sale 

occurred. Income derived from leasing a 

copyrighted article will be sourced 

under section 861(a)(4) or 862(a)(4), as 

appropriate. 

(3) Special circumstances of digital 

content. In connection with 

determinations under this paragraph (f), 

consideration must be given as 

appropriate to the special characteristics 

of digital content in transactions that 

take advantage of these characteristics 

(such as the ability to make perfect 


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copies at minimal cost). For example, a 

transaction in which a person acquires 

a copy of digital content on a disk 

subject to a requirement that the disk be 

destroyed after a specified period is 

generally the equivalent of a transaction 

subject to a requirement that the disk be 

returned after such period. Similarly, a 

transaction in which the digital content 

deactivates itself after a specified period 

is generally the equivalent of a 

transaction subject to a requirement that 

the disk be returned after a specified 

period. 

(g) * * * 

(2) Means of transfer not to be taken 

into account. The rules of this section 

shall be applied irrespective of the 

physical or electronic or other medium 

used to effectuate a digital content 

transaction. 

(3) * * * 

(i) In general. For purposes of 

paragraph (c)(2)(i) of this section, a 

transferee of digital content shall not be 

considered to have the right to 

distribute copies of the digital content to 

the public if it is permitted to distribute 

copies of the digital content to only 

either a related person, or to identified 

persons who may be identified by either 

name or by legal relationship to the 

original transferee. For purposes of this 

subparagraph, a related person is a 

person who bears a relationship to the 

transferee specified in section 267(b)(3), 

(10), (11), or (12), or section 

707(b)(1)(B). In applying section 267(b), 

267(f), 707(b)(1)(B), or 1563(a), ‘‘10 

percent’’ shall be substituted for ‘‘50 

percent.’’ 

(ii) Use by individuals. The number of 

employees of a transferee of digital 

content who are permitted to use the 

digital content in connection with their 

employment is not relevant for purposes 

of this paragraph (g)(3). In addition, the 

number of individuals with a 

contractual agreement to provide 

services to the transferee of digital 

content who are permitted to use the 

digital content in connection with the 

performance of those services is not 

relevant for purposes of this paragraph 

(g)(3). 

(h) Examples. The examples in this 

paragraph (h) illustrate the provisions of 

this section. Unless otherwise specified, 

assume that Corp A is a domestic 

corporation, the digital content 

described in each example does not 

contain any online functionality, and all 

facts in each example occur as part of 

a single transaction. 

(1) Example 1: Sale of a computer 

program on a disk—(i) Facts. Corp A 

owns the copyright in a computer 

program, Program X. It copies Program 

X onto disks. The disks are placed in 

boxes covered with a wrapper on which 

is printed what is generally referred to 

as a shrink-wrap license. The license is 

stated to be perpetual. Under the license 

no reverse engineering, decompilation, 

or disassembly of the computer program 

is permitted. The transferee receives, 

first, the right to use the program on two 

of its own computers (for example, a 

laptop and a desktop) provided that 

only one copy is in use at any one time, 

and second, the right to make one copy 

of the program on each machine as an 

essential step in the utilization of the 

program. The transferee is permitted by 

the shrink-wrap license to sell the copy 

so long as it destroys any other copies 

it has made and imposes the same terms 

and conditions of the license on the 

purchaser of its copy. These disks are 

made available for sale to the general 

public in Country Z. In return for 

valuable consideration, P, a Country Z 

resident, receives one such disk. 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the transfer of a 

disk containing a copy of Program X 

from Corp A to P is a digital content 

transaction with one element, which is 

the transfer of a copy of Program X. 

Therefore, the transaction is treated 

solely as a transfer of a copyrighted 

article under paragraph (b)(1)(ii) of this 

section. Under paragraph (g)(1) of this 

section, the label license is not 

determinative. 

(B) Taking into account all of the facts 

and circumstances, P is properly treated 

as the owner of a copyrighted article. 

Therefore, under paragraph (f)(2) of this 

section, there has been a sale of a 

copyrighted article rather than the grant 

of a lease. 

(2) Example 2: Sale of a computer 

program via download from the 

internet—(i) Facts. The facts are the 

same as those in paragraph (h)(1) of this 

section (Example 1), except that instead 

of selling disks, Corp A decides to make 

Program X available, for a fee, on a 

World Wide Web home page on the 

internet. P, the Country Z resident, in 

return for payment made to Corp A, 

downloads Program X (via modem) onto 

the hard drive of his computer. As part 

of the electronic communication, P 

signifies his assent to a license 

agreement with terms identical to those 

in Example 1, except that in this case P 

may make a back-up copy of the 

program on to a disk. 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the digital transfer 

of a copy of Program X from Corp A to 

P is a digital content transaction with 

one element, which is the transfer of a 

copy of Program X. Therefore, the 

transaction is treated solely as a transfer 

of a copyrighted article under paragraph 

(b)(1)(ii) of this section. Although P did 

not buy a physical copy of the disk with 

the program on it, paragraph (g)(2) of 

this section provides that the means of 

transferring the program is irrelevant. 

(B) As in paragraph (h)(1) of this 

section (Example 1), P is properly 

treated as the owner of a copyrighted 

article. Therefore, under paragraph (f)(2) 

of this section, there has been a sale of 

a copyrighted article rather than the 

grant of a lease. 

(3) Example 3: Lease of a computer 

program with requirement to return 

disk—(i) Facts. The facts are the same as 

those in paragraph (h)(1) of this section 

(Example 1), except that Corp A only 

allows P, the Country Z resident, to use 

Program X for one week. At the end of 

that week, P must return the disk with 

Program X on it to Corp A. P must also 

destroy any copies made of Program X. 

If P wishes to use Program X for a 

further period he must enter into a new 

agreement to use the program for an 

additional charge. 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the transfer of a 

disk with a copy of Program X from 

Corp A to P is a digital content 

transaction with one element, which is 

the transfer of a copy of Program X. 

Therefore, the transaction is treated 

solely as a transfer of a copyrighted 

article under paragraph (b)(1)(ii) of this 

section. 

(B) Taking into account all of the facts 

and circumstances, P is not properly 

treated as the owner of a copyrighted 

article. Therefore, under paragraph (f)(2) 

of this section, there has been a lease of 

a copyrighted article rather than a sale. 

Taking into account the special 

characteristics of digital content as 

provided in paragraph (f)(3) of this 

section, the result would be the same if 

P were required to destroy the disk at 

the end of the one-week period instead 

of returning it since Corp A can make 

additional copies of the program at 

minimal cost. 

(4) Example 4: Lease of a computer 

program with electronic lock—(i) Facts. 

* * * 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the digital transfer 

of a copy of Program X from Corp A to 

P is a digital content transaction with 

one element, which is the transfer of a 

copy of Program X. Therefore, the 

transaction is treated solely as a transfer 

of a copyrighted article under paragraph 

(b)(1)(ii) of this section. 

(B) As in paragraph (h)(3) of this 

section (Example 3), P is not properly 

treated as the owner of a copyrighted 

article. Therefore, under paragraph (f)(2) 

of this section, there has been a lease of 

a copyrighted article rather than a sale. 


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While P does retain Program X on its 

computer at the end of the one-week 

period, as a legal matter P no longer has 

the right to use the program (without 

further payment) and, indeed, cannot 

use the program without the electronic 

key. Functionally, Program X is no 

longer on the hard drive of P’s 

computer. Instead, the hard drive 

contains only a series of numbers which 

no longer perform the function of 

Program X. Although in Example 3, P 

was required to physically return the 

disk, taking into account the special 

characteristics of digital content as 

provided in paragraph (f)(3) of this 

section, the result in this paragraph 

(h)(4) (Example 4) is the same as in 

Example 3. 

(5) Example 5: Sale of copyright rights 

to a computer program—(i) Facts. Corp 

A transfers a disk containing Program X 

to Corp B, a Country Z corporation, and 

grants Corp B an exclusive license for 

the remaining term of the copyright to 

copy and distribute an unlimited 

number of copies of Program X in the 

geographic area of Country Z, prepare 

derivative works based upon Program X, 

make public performances of Program 

X, and publicly display Program X. Corp 

B will pay Corp A a royalty of $y a year 

for three years, which is the expected 

period during which Program X will 

have commercially exploitable value (a 

period shorter than the copyright term). 

Corp A has ascertained that the primary 

benefit or value from the transaction to 

Corp B is derived from the four legal 

rights obtained in Program X from Corp 

A and not from the receipt of a copy of 

Program X. The transfer of a copy of 

Program X is merely the means by 

which Corp A provides Corp B access to 

Program X in order to exercise its 

copyright rights. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp B has 

multiple elements. One element is the 

transfer of a disk with a copy of Program 

X, which would be a digital content 

transaction described under paragraph 

(b)(1)(ii) of this section (transfer of a 

copyrighted article) if considered 

separately. Another element is the grant 

of the right to make an unlimited 

number of copies of Program X and 

distribute those copies to the public, the 

right to prepare derivative works based 

upon Program X, the right to make 

public performances of Program X, and 

the right to publicly display Program X, 

which would be described under 

paragraphs (b)(1)(i) and (c)(2) of this 

section (transfer of a copyright right) if 

considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under paragraph (b)(1) 

of this section if its predominant 

character is described in that paragraph. 

Pursuant to paragraph (b)(3)(i) of this 

section, the predominant character of 

the transaction is based on the primary 

benefit or value of the transaction to the 

customer, if it is reasonably 

ascertainable. The predominant 

character of this transaction is therefore 

the transfer of copyright rights because 

the primary benefit or value received by 

Corp B from the transaction is the 

ability to exercise the copyright rights 

described in paragraph (c)(2) of this 

section. Therefore, this transaction is 

classified solely as a transfer of 

copyright rights described in paragraph 

(b)(1)(i) of this section. 

(C) Applying the all substantial rights 

test under paragraph (f)(1) of this 

section, Corp A will be treated as having 

sold copyright rights to Corp B. Corp B 

has acquired all of the copyright rights 

in Program X, has received the right to 

use them exclusively within Country Z, 

and has received the rights for the 

remaining life of the copyright in 

Program X. The fact the payments cease 

before the copyright term expires is not 

controlling. Under paragraph (g)(1) of 

this section, the fact that the agreement 

is labelled a license is not controlling 

nor is the fact that Corp A receives a 

sum labelled a royalty. (The result in 

this case would be the same if the copy 

of Program X to be used for the purposes 

of reproduction were transmitted 

electronically to Corp B, as a result of 

the application of the rule of paragraph 

(g)(2) of this section.) 

(6) Example 6: License of copyright 

right to make copies of a computer 

program and distribute to the public— 

(i) Facts. Corp A transfers a disk 

containing Program X to Corp B, a 

Country Z corporation, and grants Corp 

B the non-exclusive right to reproduce 

and distribute for sale to the public an 

unlimited number of disks containing 

Program X at its factory in Country Z in 

return for a payment related to the 

number of disks copied and sold. The 

term of the agreement is two years, 

which is less than the remaining life of 

the copyright. Corp A has ascertained 

that the primary benefit or value from 

the transaction to Corp B is derived 

from the right to reproduce and 

distribute Program X and not from the 

receipt of a copy of Program X. The 

transfer of a copy of Program X is 

merely the means by which Corp A 

provides Corp B access to Program X in 

order to exercise its copyright rights. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp B has 

multiple elements. One element is the 

transfer of a disk with a copy of Program 

X, which would be described under 

paragraph (b)(1)(ii) of this section 

(transfer of a copyrighted article) if 

considered separately. Another element 

is the grant of the right to reproduce and 

distribute for sale to the public an 

unlimited number of disks containing 

Program X, which would be described 

under paragraphs (b)(1)(i) and (c)(2)(i) of 

this section (transfer of a copyright 

right) if considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under paragraph (b)(1) 

of this section if its predominant 

character is described in that paragraph. 

Pursuant to paragraph (b)(3) of this 

section, the predominant character of 

the transaction is based on the primary 

benefit or value of the transaction to the 

customer, if it is reasonably 

ascertainable. The predominant 

character of this transaction is therefore 

the transfer of a copyright right because 

the primary benefit or value received by 

Corp B is the right to reproduce and 

distribute for sale to the public copies 

of Program X. Therefore, this transaction 

is classified solely as a transfer of 

copyright rights described in paragraph 

(b)(1)(i) of this section. 

(C) Taking into account all of the facts 

and circumstances, there has been a 

license of Program X to Corp B. Under 

paragraph (f)(1) of this section, there has 

not been a transfer of all substantial 

rights in the copyright to Program X 

because Corp A has the right to enter 

into other licenses with respect to the 

copyright of Program X, including 

licenses in Country Z (or even to sell 

that copyright, subject to Corp B’s 

interest). Corp B has acquired no right 

itself to license the copyright rights in 

Program X. Finally, the term of the 

license is for less than the remaining life 

of the copyright in Program X. 

(7) Example 7: Sale of disks 

containing copies of a computer 

program to a distributor—(i) Facts. Corp 

C, a distributor, enters into an 

agreement with Corp A to purchase as 

many copies of Program X on disk as it 

may from time-to-time request. Corp C 

will then sell these disks to retailers. 

The disks are shipped in boxes covered 

by shrink-wrap licenses (identical to the 

license described in paragraph (h)(1) of 

this section (Example 1)). 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the transfers of 


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disks with copies of Program X from 

Corp A to Corp C are digital content 

transactions with one element, which is 

the transfer of copies of Program X. 

Therefore, the transactions are classified 

solely as the transfer of copyrighted 

articles under paragraph (b)(1)(ii) of this 

section. The use of the term license is 

not dispositive under paragraph (g)(1) of 

this section. 

(B) Taking into account all of the facts 

and circumstances, Corp C is properly 

treated as the owner of copyrighted 

articles. Therefore, under paragraph 

(f)(2) of this section, there has been a 

sale of copyrighted articles. 

(8) Example 8: License to a computer 

manufacturer of copyright rights to 

make and load copies of a computer 

program onto the hard drive of 

computers—(i) Facts. Corp A transfers a 

disk containing Program X to Corp D, a 

foreign corporation engaged in the 

manufacture and sale of personal 

computers in Country Z. Corp A grants 

Corp D the non-exclusive right to copy 

Program X onto the hard drive of an 

unlimited number of computers, which 

Corp D manufactures, and to distribute 

those copies (on the hard drive) to the 

public. The term of the agreement is two 

years, which is less than the remaining 

life of the copyright in Program X. Corp 

D pays Corp A an amount based on the 

number of copies of Program X it loads 

on to computers. Corp A has ascertained 

that the primary benefit or value from 

the transaction to Corp D is the ability 

to copy and distribute Program X onto 

computers manufactured by Corp D, not 

from the receipt of a copy of Program X. 

The transfer of a copy of Program X is 

merely the means by which Corp A 

provides Corp D access to Program X in 

order to exercise its right to make and 

distribute copies. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp D has 

multiple elements. One element is the 

transfer of a disk with a copy of Program 

X, which would be described in 

paragraph (b)(1)(ii) of this section 

(transfer of a copyrighted article) if 

considered separately. Another element 

is the grant of the non-exclusive right to 

copy Program X onto the hard drive of 

an unlimited number of computers and 

distribute those copies (on the hard 

drive) to the public, which would be 

described in paragraphs (b)(1)(i) and 

(c)(2)(i) of this section (transfer of a 

copyright right) if considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under paragraph (b)(1) 

of this section if its predominant 

character is described in that paragraph. 

Pursuant to paragraph (b)(3) of this 

section, the predominant character of 

the transaction is based on the primary 

benefit or value of the transaction to the 

customer, if it is reasonably 

ascertainable. The predominant 

character of this transaction is therefore 

the transfer of copyright rights because 

the primary benefit or value received by 

Corp D is the right to copy Program X 

onto the hard drive of an unlimited 

number of computers and sell those 

copies (on the hard drive) to the public. 

Therefore, this transaction is classified 

solely as a transfer of copyright rights 

described in paragraph (b)(1)(i) of this 

section. 

(C) Taking into account all of the facts 

and circumstances, there has been a 

license of Program X to Corp D. Under 

paragraph (f)(1) of this section, there has 

not been a transfer of all substantial 

rights in the copyright to Program X 

because Corp A has the right to enter 

into other licenses with respect to the 

copyright of Program X, including 

licenses in Country Z (or even to sell 

that copyright, subject to Corp D’s 

interest). Corp D has acquired no right 

itself to license the copyright rights in 

Program X. Finally, the term of the 

license is for less than the remaining life 

of the copyright in Program X. The 

result would be the same if Corp D 

included with the computers it sells a 

copy of Program X on a disk. 

(9) Example 9: Sale of disks 

containing a copy of computer program 

to a computer manufacturer—(i) Facts. 

The facts are the same as those in 

paragraph (h)(8) of this section 

(Example 8), except that Corp D, the 

Country Z corporation, receives 

physical disks. The disks are shipped in 

boxes covered by shrink-wrap licenses 

(identical to the licenses described in 

paragraph (h)(1) of this section 

(Example 1)). The terms of these 

licenses do not permit Corp D to make 

additional copies of Program X. Corp D 

uses each individual disk only once to 

load a single copy of Program X onto 

each separate computer. Corp D 

transfers the disk with the computer 

when it is sold. 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the transfers of 

disks with copies of Program X from 

Corp A to Corp D are digital content 

transactions with one element, which is 

the transfer of copies of Program X. 

Therefore, the transaction is classified 

solely as the transfer of copyrighted 

articles under paragraph (b)(1)(ii) of this 

section. Corp D acquires the disks 

without the right to reproduce and 

distribute publicly further copies of 

Program X. 

(B) Taking into account all of the facts 

and circumstances, Corp D is properly 

treated as the owner of copyrighted 

articles. Therefore, under paragraph 

(f)(2) of this section, the transaction is 

classified as the sale of a copyrighted 

article. The result would be the same if 

Corp D used a single physical disk to 

copy Program X onto each computer, 

and transferred an unopened box 

containing Program X with each 

computer, if Corp D were not permitted 

to copy Program X onto more computers 

than the number of individual copies 

purchased. 

(10) Example 10: Sale of a computer 

program with right to load onto multiple 

employee workstations—(i) Facts. Corp 

A transfers a disk containing Program X 

to Corp E and grants Corp E the right to 

load Program X onto 50 individual 

workstations for use only by Corp E 

employees at one location in return for 

a one-time per-user fee (generally 

referred to as a site license or enterprise 

license). If additional workstations are 

subsequently introduced, Program X 

may be loaded onto those machines for 

additional one-time per-user fees. The 

license which grants the rights to 

operate Program X on 50 workstations 

also prohibits Corp E from selling the 

disk (or any of the 50 copies) or reverse 

engineering the program. The term of 

the license is stated to be perpetual. 

(ii) Analysis. (A) It must be 

determined whether the transfer from 

Corp A to Corp E of a disk containing 

a copy of Program X and the right to 

load Program X onto 50 individual 

workstations is a transaction with 

multiple elements. There is at least one 

element, which is the transfer of a disk 

containing a copy of Program X, which 

either is a digital content transaction 

under paragraph (b)(1) of this section or 

would be a digital content transaction if 

considered separately. If there is no 

additional element, then the transaction 

is classified as a transfer of a 

copyrighted article pursuant to 

paragraph (b)(1)(ii) of this section. If 

there is a second element, then 

paragraph (b)(2) of this section applies 

and the transaction is classified within 

a single category under paragraph (b)(1) 

of this section if its predominant 

character is described in that paragraph. 

The grant of a right to copy, 

unaccompanied by the right to 

distribute those copies to the public, is 

not the transfer of a copyright right 

described in paragraph (c)(2) of this 

section. Therefore, there is no second 

element in this transaction and it is 

classified solely as the transfer of 


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copyrighted articles (50 copies of 

Program X). 

(B) Taking into account all of the facts 

and circumstances, Corp E is properly 

treated as the owner of copyrighted 

articles. Therefore, under paragraph 

(f)(2) of this section, there has been a 

sale of copyrighted articles rather than 

the grant of a lease. Notwithstanding the 

restriction on sale, other factors such as, 

for example, the risk of loss and the 

right to use the copies in perpetuity 

outweigh, in this case, the restrictions 

placed on the right of alienation. 

(C) The result would be the same if 

Corp E were permitted to copy Program 

X onto an unlimited number of 

workstations used by employees of 

either Corp E or other persons that had 

a relationship to Corp E specified in 

paragraph (g)(3) of this section. 

(11) Example 11: Sale of a computer 

program with right to make available to 

multiple employees via local area 

network—(i) Facts. The facts are the 

same as those in paragraph (h)(10) of 

this section (Example 10), except that 

Corp E, the Country Z corporation, 

acquires the right to make Program X 

available to workstation users who are 

Corp E employees by way of a local area 

network (LAN). The number of users 

that can use Program X on the LAN at 

any one time is limited to 50. Corp E 

pays a one-time fee for the right to have 

up to 50 employees use the program at 

the same time. 

(ii) Analysis. Under paragraph (g)(2) 

of this section the mode of utilization is 

irrelevant. Therefore, as in paragraph 

(h)(10) of this section (Example 10), this 

is a digital content transaction with a 

single element that is classified as the 

transfer of a copyrighted article 

pursuant to paragraph (b)(1)(ii) of this 

section. Under the benefits and burdens 

test of paragraph (f)(2) of this section, 

this transaction is a sale of copyrighted 

articles. The result would be the same 

if an unlimited number of Corp E 

employees were permitted to use 

Program X on the LAN or if Corp E were 

permitted to copy Program X onto LANs 

maintained by persons that had a 

relationship to Corp E specified in 

paragraph (g)(3) of this section. 

(12) Example 12: Lease of a computer 

program with right to receive upgrades 

and technical support services—(i) 

Facts. The facts are the same as in 

paragraph (h)(11) of this section 

(Example 11), except that instead of 

paying a one-time fee, Corp E pays a 

monthly fee to Corp A calculated with 

reference to the permitted maximum 

number of users (which can be changed) 

and the computing power of Corp E’s 

server. In return for this monthly fee, 

Corp E receives the right to receive 

upgrades of Program X when they 

become available. The agreement may 

be terminated by either party at the end 

of any month. When the disk containing 

the upgrade is received, Corp E must 

return the disk containing the earlier 

version of Program X to Corp A. If the 

contract is terminated, Corp E must 

delete (or otherwise destroy) all copies 

made of the current version of Program 

X. The agreement also requires Corp A 

to provide technical support in the form 

of troubleshooting and configuration 

assistance to Corp E, but the agreement 

does not allocate the monthly fee 

between the right to use Program X, the 

right to receive upgrades of Program X, 

and the technical support services. The 

amount of technical support that Corp A 

will provide to Corp E is not foreseeable 

when the contract is entered into but is 

expected to be minimal. Corp A has 

ascertained that the primary benefit or 

value to Corp E from the transaction is 

the right to use Program X on the LAN 

(without the ability to exercise any of 

the rights described in paragraphs 

(c)(2)(i) through (iv) of this section), not 

the receipt of technical support services 

with respect to Program X. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp E has 

multiple elements. One element is the 

transfer of a disk with a copy of Program 

X, which would be described in 

paragraph (b)(1)(ii) of this section 

(transfer of a copyrighted article) if 

considered separately. Another element 

is the provision of technical support 

services, which are not services for the 

development or modification of Program 

X described in paragraph (d) of this 

section because Corp E has received no 

copyright rights with respect to Program 

X. Thus, the technical support services 

would not be described in any of the 

categories in paragraph (b)(1) of this 

section if considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under paragraph (b)(1) 

of this section if its predominant 

character is described in that paragraph. 

Pursuant to paragraph (b)(3) of this 

section, the predominant character of 

the transaction is based on the primary 

benefit or value of the transaction to the 

customer. The predominant character of 

this transaction is therefore the transfer 

of a copyrighted article because the 

primary benefit or value received by 

Corp E is the right to use Program X. 

Accordingly, this transaction is 

classified solely as a transfer of a 

copyrighted article described in 

paragraph (b)(1)(ii) of this section. 

(C) Taking into account all facts and 

circumstances, under the benefits and 

burdens test Corp E is not properly 

treated as the owner of the copyrighted 

article. Corp E does not receive the right 

to use Program X in perpetuity, but only 

for so long as it continues to make 

payments. Corp E does not have the 

right to purchase Program X on 

advantageous (or, indeed, any) terms 

once a certain amount of money has 

been paid to Corp A or a certain period 

has elapsed (which might indicate a 

sale). Once the agreement is terminated, 

Corp E will no longer possess any 

copies of Program X, current or 

superseded. Therefore, under paragraph 

(f)(2) of this section there has been a 

lease of a copyrighted article. 

(13) Example 13: Sale of a computer 

program along with right to receive 

upgrades—(i) Facts. The facts are the 

same as those in paragraph (h)(12) of 

this section (Example 12), except that, 

while Corp E must return copies of 

Program X as new upgrades are 

received, if the agreement terminates, 

Corp E may keep the latest version of 

Program X (although Corp E is still 

prohibited from selling or otherwise 

transferring any copy of Program X). 

(ii) Analysis. For the reasons stated in 

paragraph (h)(10)(ii)(B) of this section 

(Example 10), the transfer of the 

program will be treated as a sale of a 

copyrighted article rather than as a 

lease. 

(14) Example 14: Sale of a modified 

computer program—(i) Facts. Corp G 

enters into a contract with Corp A for 

Corp A to modify Program X so that it 

can be used at Corp G’s facility in 

Country Z. Under the contract, Corp G 

is to acquire one copy of the program on 

a disk and the right to use the program 

on 5,000 workstations. The contract 

requires Corp A to rewrite elements of 

Program X so that it will conform to 

Country Z accounting standards and 

states that Corp A retains all copyright 

rights in the modified Program X. The 

agreement between Corp A and Corp G 

is otherwise identical as to rights and 

payment terms as the agreement 

described in paragraph (h)(10) of this 

section (Example 10). 

(ii) Analysis. (A) It must be 

determined whether the transfer of disks 

with modified copies of Program X from 

Corp A to Corp G is a transaction with 

multiple elements. There is at least one 

element, the transfer of copies of 

Program X, which either is a digital 

content transaction under paragraph 

(b)(1) of this section or would be a 

digital content transaction if considered 

separately. If there is no additional 


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element, then the transaction is 

classified as a transfer of a copyrighted 

article pursuant to paragraph (b)(1)(ii) of 

this section. If there is a second element, 

then paragraph (b)(2) of this section 

applies and the transaction is classified 

within a single category under 

paragraph (b)(1) of this section if its 

predominant character is described in 

that paragraph. Pursuant to paragraph 

(d) of this section, the modifications 

made by Corp A before transferring 

Program X to Corp G do not constitute 

the provision of services for the 

development or modification of digital 

content because Corp A retains all 

copyright rights with respect to the 

modified software. Therefore, there is 

no second element in this transaction 

and it is classified solely as the transfer 

of copyrighted articles. 

(B) Taking into account all facts and 

circumstances, Corp G is properly 

treated as the owner of copyrighted 

articles. Therefore, under paragraph 

(f)(2) of this section, there has been the 

sale of a copyrighted article rather than 

the grant of a lease. 

(15) Example 15: Provision of services 

for development of a computer 

program—(i) Facts. Corp H enters into a 

license agreement for a new computer 

program. Program Q is to be written by 

Corp A. Corp A and Corp H agree that 

Corp A is writing Program Q for Corp 

H and that, when Program Q is 

completed, the copyright in Program Q 

will belong to Corp H. Corp H gives 

instructions to Corp A programmers 

regarding program specifications. Corp 

H agrees to pay Corp A a fixed monthly 

sum during development of the 

program. If Corp H is dissatisfied with 

the development of the program, it may 

cancel the contract at the end of any 

month. In the event of termination, Corp 

A will retain all payments, while any 

procedures, techniques or copyrightable 

interests will be the property of Corp H. 

All of the payments are labelled 

royalties. There is no provision in the 

agreement for any continuing 

relationship between Corp A and Corp 

H, such as the furnishing of updates of 

the program, after completion of the 

modification work. 

(ii) Analysis. Under paragraph (b)(1) 

of this section, the provision of 

computer program development 

services by Corp A to Corp H is a digital 

content transaction with one element, 

which is the provision of services for 

the development or modification of 

digital content. Under paragraph (d) of 

this section, the transaction between 

Corp A and Corp H involves the 

provision of services for the 

development of a computer program 

because Corp H bears all of the risks of 

loss associated with the development of 

Program Q and is the owner of all 

copyright rights in Program Q. Taking 

into account all of the facts and 

circumstances, Corp A is treated as 

providing services to Corp H described 

in paragraph (b)(1)(iii) of this section. 

Under paragraph (g)(1) of this section, 

the fact that the agreement is labelled a 

license is not controlling (nor is the fact 

that Corp A receives a sum labelled a 

royalty). 

(16) Example 16: Provision of knowhow by computer programmers—(i) 

Facts. Corp A and Corp I, a Country Z 

corporation, agree that a development 

engineer employed by Corp A will 

travel to Country Z to provide knowhow relating to certain techniques not 

generally known to computer 

programmers, which will enable Corp I 

to more efficiently create computer 

programs. These techniques represent 

the product of experience gained by 

Corp A from working on many 

computer programming projects, and are 

furnished to Corp I under nondisclosure 

conditions. Such information is 

property subject to trade secret 

protection. 

(ii) Analysis. The provision of knowhow with respect to computer 

programming techniques by Corp A’s 

development engineer to Corp I is 

described in paragraph (e) of this 

section. Therefore, the transaction is a 

digital content transaction with one 

element, which is the provision of 

know-how. The transaction is classified 

solely as the provision of know-how 

pursuant to paragraph (b)(1)(iv) of this 

section. 

(17) Example 17: Sale of development 

program in transaction with multiple 

elements—(i) Facts. Corp A transfers a 

disk containing Program Y to Corp E in 

exchange for a single fixed payment. 

Program Y is a computer program 

development program, which is used to 

create other computer programs, 

consisting of several components, 

including libraries of reusable software 

components that serve as general 

building blocks in new software 

applications. Because a computer 

program created with the use of Program 

Y will not operate unless the libraries 

are also present, the license agreement 

between Corp A and Corp E grants Corp 

E the right to distribute copies of the 

libraries with any program developed 

using Program Y. The license agreement 

is otherwise identical to the license 

agreement in paragraph (h)(1) of this 

section (Example 1). Corp A cannot 

reasonably ascertain the primary benefit 

or value of the transaction to Corp E. A 

customer like Corp E derives two 

benefits from this or a substantially 

similar transaction, the first of which is 

the ability to use Program Y to develop 

new software and the second of which 

is the right to utilize the libraries and 

reusable software components in 

Program Y in distributed programs. 

Corp A possesses data arising from 

market research and customer surveys 

indicating that customers utilize 

Program Y primarily for its computer 

program development features and do 

not make significant use of the libraries 

of reusable software components. The 

libraries and reusable software 

components are not significant 

components of any overall new program 

created by using Program Y. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp E has 

multiple elements. One element is the 

transfer of a disk with a copy of Program 

Y, which would be described in 

paragraph (b)(1)(ii) of this section 

(transfer of a copyrighted article) if 

considered separately. Another element 

is the grant of the right to distribute 

copies of the libraries of reusable 

software components with any program 

developed using Program Y, which 

would be described in paragraphs 

(b)(1)(i) and (c)(2)(i) of this section 

(transfer of a copyright right) if 

considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under paragraph (b)(1) 

of this section if its predominant 

character is described in that paragraph. 

Pursuant to paragraph (b)(3)(i) of this 

section, the predominant character of a 

transaction is generally based on the 

primary benefit or value of the 

transaction to the customer. If the 

primary benefit or value is not 

reasonably ascertainable, paragraph 

(b)(3)(ii) of this section provides that the 

predominant character of a transaction 

may be determined based on the 

primary benefit or value to a typical 

customer of a substantially similar 

transaction. This primary benefit or 

value to a typical customer can be 

identified through actual data about use 

or access pursuant to paragraph 

(b)(3)(ii)(A) of this section, or if that data 

is not available, by other evidence 

indicative of the primary benefit or 

value to a typical customer pursuant to 

paragraph (b)(3)(ii)(B) of this section. 

Although there are two benefits in this 

type of transaction, Corp A possesses 

data indicating that a typical customer 

primarily uses Program Y because of its 

computer program development 

features, rather than the right to 


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distribute reusable components. This is 

reinforced by the fact that programs 

created using Program Y do not contain 

libraries of reusable software 

components as significant components. 

These facts indicate that the primary 

benefit or value to a typical customer 

arises from the ability to use Program Y, 

rather than the right to distribute 

reusable components. Therefore, the 

predominant character of this 

transaction is the transfer of a copy of 

Program Y, and this transaction is thus 

classified solely as the transfer of a 

copyrighted article described in 

paragraph (b)(1)(ii) of this section. 

(C) Taking into account all the facts 

and circumstances, Corp E is properly 

treated as the owner of a copyrighted 

article. Therefore, under paragraph (f)(2) 

of this section, there has been the sale 

of a copyrighted article rather than the 

grant of a lease. 

(18) Example 18: Sale of a computer 

program with right to make 

modifications—(i) Facts. Corp A 

transfers a disk containing Program X to 

Corp E. The disk contains both the 

object code and the source code to 

Program X, and the license agreement 

grants Corp E the right to modify the 

source code to correct minor errors and 

make minor adaptations to Program X so 

it will function on Corp E’s computer; 

as well as the right to recompile the 

modified source code. The license does 

not grant Corp E the right to distribute 

the modified Program X to the public. 

The license is otherwise identical to the 

license agreement in paragraph (h)(1) of 

this section (Example 1). Corp A has 

ascertained that the primary benefit or 

value received by Corp E from the 

transaction is the core functionality of 

Program X rather than the limited rights 

to modify the source code. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp E has 

multiple elements. One element is the 

transfer of a disk with a copy of Program 

X, which would be described in 

paragraph (b)(1)(ii) of this section 

(transfer of a copyrighted article) if 

considered separately. Another element 

is the grant of the right to modify the 

source code to Program X and recompile 

the modified source code to create new 

code to correct minor errors, and to 

make minor adaptations to Program X, 

which would be described in 

paragraphs (b)(1)(i) and (c)(2)(ii) of this 

section (transfer of a copyright right) if 

considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under the categories 

described under paragraph (b)(1) of this 

section if its predominant character is 

described in that paragraph. Pursuant to 

paragraph (b)(3) of this section, the 

predominant character of the 

transaction is based on the primary 

benefit or value of the transaction to the 

customer, if it is reasonably 

ascertainable. Since the primary benefit 

or value received by Corp E is the core 

functionality of Program X, rather than 

the limited rights to modify the source 

code, the predominant character of this 

transaction is the transfer of a 

copyrighted article. Therefore, this 

transaction is classified solely as a 

transfer of a copyrighted article under 

paragraph (b)(1)(ii) of this section. 

(C) Taking into account all the facts 

and circumstances, Corp E is properly 

treated as the owner of a copyrighted 

article. Therefore, under paragraph (f)(2) 

of this section, there has been the sale 

of a copyrighted article rather than the 

grant of a lease. 

(19) Example 19: License to website 

operator to make and sell copies of 

electronic books via download—(i) 

Facts. Corp A operates a website that 

offers electronic books for download 

onto customers’ computers or other 

electronic devices. The books offered 

are protected by copyright law. In a 

transaction between Corp A and a 

content owner, Corp A receives from the 

content owner a digital master copy of 

a book, which Corp A downloads onto 

its server. Corp A receives the nonexclusive right to reproduce an 

unlimited number of copies of the book 

for purposes of distribution and sale to 

the public. Corp A pays the content 

owner a specified amount for each copy 

sold to a customer. Corp A may not 

transfer any of the rights it receives from 

the content owner. The term of the 

agreement Corp A has with the content 

owner is shorter than the remaining life 

of the copyright. The content owner has 

ascertained that the primary benefit or 

value Corp A receives in the transaction 

is the right to reproduce and distribute 

an unlimited number of copies of the 

book and not the transfer of a copy of 

the book. In a separate transaction, Corp 

A charges a customer a fixed fee for 

each book purchased. When purchasing 

a book from Corp A on Corp A’s 

website, the customer must 

acknowledge the terms of a license 

agreement with the content owner that 

states that the customer may download 

and view the electronic book in 

perpetuity but may not reproduce, 

distribute, or sell copies of it. Once the 

customer downloads the book from 

Corp A’s server onto a device, the 

customer may access and view the book 

from that device, which does not need 

to be connected to the internet for the 

customer to view the book. The 

customer owes no additional payment 

to Corp A for the ability to view the 

book in the future. 

(ii) Analysis. (A) Notwithstanding the 

license agreement between each 

customer and the content owner 

granting the customer rights to use the 

book, the relevant transactions are the 

transfer of a master copy of the book 

along with the grant from the content 

owners to Corp A of the right to 

reproduce and sell to the public copies 

of the books, and the transfers of copies 

of the books by Corp A to customers. 

Although the content owner is 

identified as a party to the license 

agreement memorializing the customer’s 

rights with respect to the book, each 

customer obtains those rights directly 

from Corp A, not from the content 

owner. Under paragraph (b)(1) of this 

section, the download of a copy of a 

book by a customer is a digital content 

transaction with one element, which is 

the transfer of a digital copy of a book. 

Therefore, the transaction is treated 

solely as a transfer of a copyrighted 

article under paragraph (b)(1)(ii) of this 

section. Under the benefits and burdens 

test of paragraph (f)(2) of this section, 

the transaction is classified as a sale and 

not a lease, because the customer 

receives the right to view the book in 

perpetuity on its device. 

(B) The transaction between the 

content owner and Corp A has multiple 

elements. One element is the transfer of 

a master copy of the book, which would 

be described in paragraph (b)(1)(ii) of 

this section (transfer of a copyrighted 

article) if considered separately. 

Another element is the grant of the right 

to reproduce and sell an unlimited 

number of copies to customers, which 

would be described in paragraphs 

(b)(1)(i) and (c)(2)(i) of this section 

(transfer of a copyright right) if 

considered separately. Because the 

transaction has multiple elements, one 

or more of which would be a digital 

content transaction if considered 

separately, paragraph (b)(2) of this 

section provides that the transaction is 

classified within a single category under 

the categories described under 

paragraph (b)(1) of this section if its 

predominant character is described in 

that paragraph. Pursuant to paragraph 

(b)(3) of this section, the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. Since the 

primary benefit or value Corp A receives 

in the transaction is the right to 

reproduce and distribute an unlimited 


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number of copies, the predominant 

character of this transaction is the 

transfer of a copyright right. Therefore, 

this transaction is classified solely as a 

transfer of copyright rights described in 

paragraph (b)(1)(i) of this section. 

(C) Taking into account all of the facts 

and circumstances, there has been a 

license of books to Corp A. Under 

paragraph (f)(1) of this section, there has 

not been a transfer of all substantial 

rights in the copyright rights to the 

books because each content owner has 

the right to enter into other licenses 

with respect to the copyright of their 

book. Corp A has acquired no right itself 

to license the copyrights in the books. 

Finally, the terms of the licenses are for 

less than the remaining lives of the 

copyrights in the books. 

(20) Example 20: internet platform 

operator as agent for application 

developers—(i) Facts. Corp A operates a 

platform on the internet that offers 

applications for download onto a 

customer’s mobile phone. Under general 

tax principles, Corp A and an 

application developer establish an 

agency relationship whereby Corp A 

acts as the agent to offer the application 

for sale to customers on behalf of the 

application developer. The applications 

are protected by copyright law. Under 

the agreement between Corp A and the 

application developer, Corp A agrees to 

provide the application developer with 

platform and agency services to 

facilitate the sale of the application to 

customers. Corp A also provides the 

application developer with hosting 

services to host the application on Corp 

A’s servers for download by the 

customers. Corp A receives a digital 

master copy of the application along 

with a non-exclusive right to make 

copies of the application and allow 

customers to download copies of the 

application from Corp A’s platform. 

Corp A has ascertained that the primary 

benefit or value from the transaction 

received by the application developer is 

the platform and agency services that 

Corp A provides. Corp A receives the 

right to make copies of the application 

merely to perform its activities as an 

agent on behalf of the application 

developer. When purchasing an 

application on Corp A’s platform, the 

customer must acknowledge the terms 

of a license agreement with the 

application developer that states that 

the customer may use the application 

but may not reproduce or distribute 

copies of it. In addition, the agreement 

provides that the customer may 

download the application onto only one 

mobile phone at a time. A customer 

does not need to be connected to the 

internet to access the application. The 

customer owes no additional payment 

to Corp A or the application developer 

for the ability to use the application in 

perpetuity. Corp A retains a fixed 

percentage of each purchase price of the 

application and remits the remaining 

balance to the application developer. 

(ii) Analysis. (A) The transaction 

between Corp A and the application 

developer has multiple elements. One 

element is the transfer of a master copy 

of an application by the application 

developer to Corp A, which would be 

described in paragraph (b)(1)(ii) of this 

section (transfer of a copyrighted article) 

if considered separately. Another 

element is the transfer of the right to 

make and distribute copies of the 

application by the application developer 

to Corp A, which would be described in 

paragraphs (b)(1)(i) and (c)(2) of this 

section (transfer of a copyright right) if 

considered separately. A third element 

is the platform and agency services 

provided by Corp A to the application 

developer, which would not be 

described in this section if considered 

separately. A fourth element is the 

hosting services provided by Corp A to 

the application developer, which would 

be described in § 1.861–19 if considered 

separately. Under the facts and 

circumstances, although Corp A 

receives a copy of the application and 

the right to make and distribute copies 

of the application, Corp A receives this 

copy and right merely to facilitate the 

sale of applications on behalf of the 

application developer. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under the categories 

described under paragraph (b)(1) of this 

section if its predominant character is 

described in that paragraph. Pursuant to 

paragraph (b)(3) of this section, the 

predominant character of the 

transaction is based on the primary 

benefit or value of the transaction to the 

customer, if it is reasonably 

ascertainable. Since the primary benefit 

or value the application developer 

receives in the transaction is the 

platform and agency services, the 

predominant character of this 

transaction is the platform and agency 

services and not a digital content 

transaction nor a cloud transaction. 

(C) The transfer of a copy of an 

application from the application 

developer to a customer is a digital 

content transaction with one element, 

which is the transfer of a copy of a 

digital program. Therefore, the 

transaction is treated solely as a transfer 

of a copyrighted article under paragraph 

(b)(1)(ii) of this section. Under the 

benefits and burdens test of paragraph 

(f)(2) of this section, this transaction is 

a sale of a copyrighted article because a 

customer has the right to use the 

application in perpetuity. 

(21) Example 21: Movies and TV 

shows available for stream, rent, or 

purchase—(i) Facts. Corp A offers a 

catalog of movies and TV shows, all of 

which are subject to copyright 

protection. Corp A gives customers 

several options for viewing the content, 

each of which has a separate price. A 

‘‘streaming’’ option allows a customer to 

view the video, which is hosted on Corp 

A’s servers, while connected to the 

internet for as many times as the 

customer wants during a limited period. 

A ‘‘rent’’ option allows a customer to 

download the video to its computer or 

other electronic device (which does not 

need to be connected to the internet for 

viewing) and watch the video as many 

times as the customer wants for a 

limited period, after which an electronic 

lock is activated and the customer may 

no longer view the content. A 

‘‘purchase’’ option allows a customer to 

download the video and view it as many 

times as the customer chooses with no 

end date. Under all three options, the 

customer may view the video but may 

not reproduce or distribute copies of it, 

prepare derivative works based on it, or 

publicly display it. 

(ii) Analysis. (A) With respect to the 

‘‘rent’’ option, under paragraph (b)(1) of 

this section the download of a video by 

a customer is a digital content 

transaction with one element, which is 

the transfer of a copy of the video. 

Therefore, the transaction is treated 

solely as the transfer of a copyrighted 

article under paragraph (b)(1)(ii) of this 

section. Although a customer will retain 

a copy of the content at the end of the 

payment term, the customer cannot 

access the content after the electronic 

lock is activated. The activation of the 

electronic lock is the equivalent of 

having to return the copy. Therefore, the 

transaction is classified as a lease of a 

copyrighted article under paragraph 

(f)(2) of this section because the 

customer’s right to view the videos is for 

a limited period. 

(B) With respect to the ‘‘purchase’’ 

option, under paragraph (b)(1) of this 

section the download of a video by a 

customer is a digital content transaction 

with one element, which is the transfer 

of a copy of the video. Therefore, the 

transaction is treated solely as the 

transfer of a copyrighted article under 

paragraph (b)(1)(ii) of this section. The 

transaction is classified as a sale of a 

copyrighted article under paragraph 


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(f)(2) of this section because the 

customer receives the right to view the 

videos in perpetuity. 

(C) With respect to the ‘‘streaming’’ 

option, the transaction is Corp A’s grant 

of the right to its customers to view the 

movies or shows while connected to the 

internet for a limited period. There is no 

transfer of any copyright rights 

described in paragraph (c)(2) of this 

section. There is also no transfer of a 

copyrighted article because the content 

is not downloaded by a customer, but 

rather, is accessed through an ondemand network. The transaction also 

does not constitute the provision of 

services for the development of digital 

content or the provision of know-how 

under paragraph (b)(1) of this section. 

Therefore, the transaction is not a digital 

content transaction described in 

paragraph (b)(1) of this section. Instead, 

the transaction is a cloud transaction 

that is classified under § 1.861–19. See 

§ 1.861–19(b). 

(22) Example 22: Website offering 

third-party videos via stream—(i) Facts. 

Corp A operates a website that allows 

customers to stream videos that thirdparty content creators upload to Corp 

A’s website. Corp A has advertising 

contracts with third-party advertisers 

pursuant to which Corp A earns 

advertising revenue when a customer 

views a video. Customers can either 

stream videos for free with 

advertisements or can pay a 

subscription fee to stream videos 

without advertisements. Under the 

contract between Corp A and content 

creators, content creators retain all 

ownership rights in their videos and 

must own or have the necessary rights 

to publish their videos. The contract 

also states that content creators grant 

Corp A a non-exclusive license to use, 

reproduce, distribute, and display their 

videos in connection with Corp A’s 

website, and grant customers a nonexclusive license to view the videos. 

These licenses terminate within a 

commercially reasonable time after a 

content creator removes or deletes a 

video from Corp A’s website. Content 

creators have ascertained that the 

primary benefit or value Corp A receives 

from transactions with content creators 

is the right to use, reproduce, distribute, 

and display their videos. Corp A pays 

content creators a percentage of 

advertising revenue generated from the 

videos and a percentage of subscription 

fees. 

(ii) Analysis. (A) The transaction 

between Corp A and the content 

creators has multiple elements. One 

element is the uploading of a video by 

a content creator, which would be 

described in paragraph (b)(1)(ii) of this 

section (transfer of a copyrighted article) 

if considered separately. Another 

element is the grant by content creators 

to Corp A of the right to use, reproduce, 

distribute, and display their videos, 

which would be described in paragraph 

(b)(1)(i) of this section (transfer of a 

copyright right) if considered separately. 

Content creators are not providing 

content development services to Corp A 

under paragraph (d) of this section 

because content creators own the 

copyright rights in the videos. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a digital content 

transaction if considered separately, 

paragraph (b)(2) of this section provides 

that the transaction is classified within 

a single category under the categories 

described under paragraph (b)(1) of this 

section if its predominant character is 

described in that paragraph. Pursuant to 

paragraph (b)(3) of this section, the 

predominant character of the 

transaction is based on the primary 

benefit or value of the transaction to the 

customer. The predominant character of 

the transaction is therefore the transfer 

of copyright rights because the primary 

benefit or value received by Corp A is 

the right to use, reproduce, distribute, 

and display videos. Accordingly, this 

transaction is characterized solely as a 

transfer of a copyright right as described 

in paragraphs (b)(1)(i) of this section. 

(C) Taking into account all of the facts 

and circumstances, there has been a 

license of videos to Corp A. Under 

paragraph (f)(1) of this section, there has 

not been a transfer of all substantial 

rights in the copyright rights to the 

videos because each content owner has 

the right to enter into other licenses 

with respect to the copyright of their 

videos. Corp A has acquired no right 

itself to license the copyrights in the 

videos. Finally, the terms of the licenses 

are for less than the remaining lives of 

the copyrights in the videos. 

(D) For both the free streaming and 

subscription streaming transactions 

between Corp A and customers, there is 

no transfer of any copyright rights 

described in paragraph (c)(2) of this 

section. There is also no transfer of a 

copyrighted article, because the content 

is not downloaded by a customer, but 

rather is accessed through an ondemand network. The transactions also 

do not constitute the provision of 

services for the development of digital 

content or the provision of know-how 

under paragraph (b)(1) of this section. 

Therefore, paragraph (b)(1) of this 

section does not apply to such 

transactions. Instead, both transactions 

are cloud transactions that are classified 

under § 1.861–19. See § 1.861–19(b). 

(23) Example 23: Sale of computer 

programs electronically through a 

reseller—(i) Facts. Corp A owns the 

copyright to software (Program S). Corp 

A hosts Program S on its servers. Corp 

A grants Corp B, a foreign corporation 

wholly owned by Corp A, the right to 

distribute copies of Program S (without 

the right to reproduce copies of Program 

S) to Corp B’s customers that are located 

in Corp B’s country. Under the 

agreement between Corp A and Corp B, 

Corp B pays Corp A a fixed fee for each 

copy of Program S that Corp A delivers 

to a customer. In separate transactions, 

customers pay Corp B for the right to 

receive digital copies of Program S that 

they may then use in perpetuity without 

further payment. Corp B is responsible 

for managing the purchase/sale 

interaction with Corp B’s customers, 

including invoicing and collections. 

Corp A is responsible for creating and 

delivering the digital copies of Program 

S to Corp B’s customers from Corp A’s 

servers. Corp B does not perform any 

functions to provide access to Program 

S. 

(ii) Analysis. (A) Although there is a 

single contract between Corp A and 

Corp B that grants a legal right to Corp 

B with respect to Program S, that right 

(the right to distribute) is not a 

copyright right described in paragraphs 

(b)(1)(i) and (c)(2) of this section. 

Instead, the transactions between Corp 

A and Corp B and then Corp B and its 

customers are functionally and 

economically equivalent to back-to-back 

transfers of copyrighted articles. The 

transfers are only superficially different 

from those described in paragraph 

(h)(24) of this section (Example 24) 

where the reseller acquires product keys 

and sells them on to customers. 

Therefore, each sale of a copy of 

Program S by Corp B to a customer 

should be viewed as a transfer of a 

copyrighted article from Corp A to Corp 

B and then from Corp B to the customer. 

(B) The transaction between Corp A 

and Corp B is a digital content 

transaction with a single element that is 

classified as a transfer of a copyrighted 

article described in paragraph (b)(1)(ii) 

of this section. There are no additional 

elements because Corp B’s receipt of the 

right to distribute copies of Program S 

(without the right to make copies) is not 

a copyright right described in paragraph 

(c)(2) of this section. Under the benefits 

and burdens test of paragraph (f)(2) of 

this section, the transfer is classified as 

the sale of a copyrighted article. 

(C) The transaction between Corp B 

and a customer is a digital content 

transaction with a single element that is 

classified as a transfer of a copyrighted 

article described in paragraph (b)(1)(ii) 


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of this section. Under the benefits and 

burdens test of paragraph (f)(2) of this 

section, this transaction is a sale of a 

copyrighted article because the 

customer has the right to use the 

application in perpetuity. 

(24) Example 24: Sale of video games 

with online and offline functionality 

through retailers using digital keys—(i) 

Facts. Corp A owns the copyright in a 

computer program (Program Y). Corp A 

creates digital keys that allow for the 

download of one copy of Program Y 

from Corp A’s website. Corp A sells 

these digital keys to retailers for a onetime fee per key, and the retailers do not 

use Program Y, but instead sell them in 

separate transactions to customers for a 

one-time fee per key. Corp A ascertains 

that the primary benefit or value to 

retailers from the purchase of digital 

keys from Corp A is the right to further 

transfer the digital keys to customers. 

The retailers cannot reasonably 

ascertain the primary benefit or value 

that their specific customers derive from 

Program Y, nor is there data available to 

the retailers about how their customers 

typically use Program Y. Program Y is 

a video game that contains online and 

offline features, both of which can be 

played without paying an additional 

game-specific cost after paying the onetime fee to purchase a key. The offline 

feature is comprised of a single-player 

story that does not require any internet 

connection to play. The online feature is 

comprised of the ability to play 

competitive matches against other 

players that are hosted on servers 

owned by Corp A. The competitive 

matches require an ongoing connection 

to the internet to play. Neither the 

customers nor the retailer receives any 

copyright rights described in paragraph 

(c)(2) of this section with respect to 

Program Y. Customers can use Program 

Y in perpetuity. Program Y is primarily 

marketed as a single-player game in 

television and online advertising, with 

only brief mentions of the multiplayer 

mode in print advertising. The 

development cost for Program Y was 

allocated 40% to developing the singleplayer content, 20% to developing the 

multiplayer content, and 40% to 

developing content that is used by both 

types of content (e.g., cost of developing 

the game engine). 

(ii) Analysis. (A) The transaction 

between Corp A and a retailer has 

multiple elements. One element is the 

transfer of a key with the right to 

download a copy of Program Y for use 

to play the offline story, which would 

be a digital content transaction 

described in paragraph (b)(1)(ii) of this 

section (transfer of a copyrighted article) 

if considered separately. Another 

element is the transfer of the same key 

with a copy of Program Y providing ondemand network access to digital 

content in the form of competitive 

multiplayer functionality, which would 

be a cloud transaction described in 

§ 1.861–19(b) if considered separately. 

(B) Because the transaction has 

multiple elements, one of which would 

be a digital content transaction if 

considered separately and one of which 

would be a cloud transaction if 

considered separately, paragraph (b)(2) 

of this section provides that the 

transaction is classified within a single 

category under paragraph (b)(1) of this 

section if its predominant character is 

described in that paragraph, or the 

transaction is classified solely as a cloud 

transaction if its predominant character 

is a cloud transaction pursuant to 

§ 1.861–19(c)(2). Pursuant to paragraph 

(b)(3)(i) of this section, the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. The 

predominant character of this 

transaction is therefore the transfer of 

copyrighted articles because the primary 

benefit or value received by a retailer is 

the right to further transfer the same 

copyrighted articles to customers in the 

form of digital keys. The retailers do not 

have any intent to utilize the cloud 

functionality of the digital keys, 

although they do have the right to do so. 

Therefore, this transaction is classified 

solely as a transfer of copyrighted 

articles described in paragraph (b)(1)(ii) 

of this section. 

(C) Under the benefits and burdens 

test of paragraph (f)(2) of this section, 

the transfer between Corp A and a 

retailer is classified as the sale of a 

copyrighted article because the retailer 

has the right to use, or sell, Program Y 

in perpetuity without further payment. 

(D) The transfer of a key (with the 

right to download a copy of Program Y) 

by a retailer to a customer also contains 

the same two elements as each 

transaction between Corp A and a 

retailer. However, a retailer cannot 

reasonably ascertain the primary benefit 

or value derived by a specific customer 

from Program Y. In such situations, 

paragraph (b)(3)(ii) of this section 

provides that the predominant character 

of a transaction may be determined 

based on the primary benefit or value to 

a typical customer of a substantially 

similar transaction. This primary benefit 

or value to a typical customer can be 

identified through actual data about use 

or access pursuant to paragraph 

(b)(3)(ii)(A) of this section, or if that data 

is not available, by using other evidence 

indicative of the primary benefit or 

value to a typical customer pursuant to 

paragraph (b)(3)(ii)(B) of this section. 

Because the retailers do not have 

available data about how customers use 

Program Y, they may use the marketing 

with respect to Program Y to determine 

that its predominant character is that of 

a transfer of a copyrighted article 

described in paragraph (b)(1)(ii) of this 

section. The relative development costs 

of the offline and online components of 

the game could also be used if they are 

known to a retailer. Therefore, the 

transfer between a retailer and a 

customer of a digital key containing the 

right to download a copy of Program Y 

is classified solely as a transfer of a 

copyrighted article. 

(E) Under the benefits and burdens 

test of paragraph (f)(2) of this section, 

the transfer between a retailer and a 

customer is classified as the sale of a 

copyrighted article because the 

customer has the right to use Program Y 

in perpetuity without further payment. 

(25) Example 25: Source of income 

from the sale of a copyrighted article 

transferred through an electronic 

medium—(i) Facts. Corp A is the parent 

company of a world-wide group of 

affiliated companies. Corp B is a foreign 

corporation wholly owned by Corp A. In 

the ordinary course of business, Corp B 

acts as a procurement hub for Corp A’s 

affiliated companies. In this role, Corp 

B regularly purchases products that will 

be distributed amongst Corp A’s 

affiliated companies to be used by them 

in their respective businesses. Corp B 

purchases digital copies of a computer 

program (Program Y) from Corp C, an 

unrelated company. Corp B may use 

Program Y in perpetuity without further 

payment. Corp B receives no copyright 

rights in Program Y. Corp B does not use 

Program Y, and instead distributes all of 

its copies of Program Y to various 

affiliates. Corp C sources income from 

the sale of Program Y using sections 

861(a)(6) and 862(a)(6). 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the transfer of 

Program Y from Corp C to Corp B is a 

digital content transaction with one 

element, which is the transfer of a copy 

of Program Y. Therefore, the transaction 

is treated solely as transfers of a 

copyrighted articles under paragraph 

(b)(1)(ii) of this section. Taking into 

account all of the facts and 

circumstances, there have been sales of 

copies of Program Y to Corp B under 

paragraph (f)(2) of this section. 

(B) Income from the sale of Program 

Y by Corp C is sourced pursuant to 

sections 861(a)(6) and 862(a)(6) to the 

place where the sale occurred. Pursuant 

to paragraph (f)(2)(ii) of this section, a 

transfer of a copyrighted article through 


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an electronic medium is treated as 

occurring at the billing address of the 

purchaser, in this case Corp B, unless 

the sales transaction is arranged for a 

principal purpose of tax avoidance. In 

this case, the sale is treated as occurring 

at the billing address of Corp B, and 

Corp C’s income is foreign source, even 

though Corp B will not use Program Y, 

because Corp B regularly purchases 

products that will be distributed 

amongst its affiliates to be used in their 

respective businesses, and therefore 

there is no evidence that Corp B was 

used by Corp A to purchase Program Y 

with a principal purpose of tax 

avoidance. 

(26) Example 26: Application of antiabuse rule for sale of a copyrighted 

article transferred through an electronic 

medium—(i) Facts. Corp A is the parent 

company of a world-wide group of 

affiliated companies. Corp B is a foreign 

affiliate of Corp A. In the ordinary 

course of business, Corp B does not act 

as a procurement hub regularly 

purchasing products for use by Corp A’s 

affiliated companies. Corp A negotiates 

an agreement with Corp C, an unrelated 

company, to purchase digital copies of 

a computer program (Program Y) for use 

in Corp A’s business. The agreement 

grants Corp A the right to use Program 

Y in perpetuity for a one-time payment. 

Corp C requests that Corp B be the 

purchaser of the copies of Program Y 

even though Corp B will not use 

Program Y and is not otherwise 

involved in the transaction between 

Corp A and Corp C for a principal 

purpose of tax avoidance. Corp A 

agrees, and Corp B purchases the copies 

of Program Y and subsequently 

distributes them to Corp A. Corp C 

sources income from the sale of Program 

Y using sections 861(a)(6) and 862(a)(6). 

(ii) Analysis. (A) Under paragraph 

(b)(1) of this section, the transfer of 

Program Y from Corp C to Corp B is a 

digital content transaction with one 

element, which is the transfer of a copy 

of Program Y. Therefore, the transaction 

is classified solely as a transfer of a 

copyrighted article under paragraph 

(b)(1)(ii) of this section. Taking into 

account all of the facts and 

circumstances, there have been sales of 

copies of Program Y to Corp B under 

paragraph (f)(2) of this section. 

(B) Income from the sale of Program 

Y by Corp C is sourced pursuant to 

sections 861(a)(6) and 862(a)(6) to the 

place where the sale occurred. Pursuant 

to paragraph (f)(2)(ii) of this section, a 

transfer of a copyrighted article through 

an electronic medium is treated as 

occurring at the billing address of the 

purchaser, in this case Corp B, unless 

the sales transaction is arranged for a 

principal purpose of tax avoidance. In 

this case, Corp B does not regularly 

purchase products that will be used by 

other companies within Corp A’s group 

of affiliated companies, and Corp B was 

instead used as the purchaser of 

Program Y on behalf of Corp A with a 

principal purpose of tax avoidance. 

Therefore, the place where the sale 

occurred must be determined based on 

all relevant facts and circumstances. 

Corp A negotiated the purchase, and the 

software will be used by Corp A in its 

business. As a result, under paragraph 

(f)(2)(ii) of this section, the sale is 

treated as occurring at the location of 

Corp A and the income derived by Corp 

C from the sale is U.S. source. 

(C) The same result would apply if, 

instead of using Corp B for the 

purchase, Corp A made the purchase 

but rented a P.O. Box outside the United 

States to serve as the billing address for 

the transaction with a principal purpose 

of tax avoidance. 

(i) Applicability date—(1) In general. 

This section applies to taxable years 

beginning on or after January 14, 2025. 

(2) Early application. A taxpayer can 

apply this section to taxable years 

beginning on or after August 14, 2019 

and all subsequent taxable years not 

described in paragraph (i)(1) of this 

section (early application years) if— 

(i) The taxpayer also applies § 1.861– 

19 to the early application years; 

(ii) This section and § 1.861–19 are 

applied to the early application years by 

all persons related to the taxpayer 

(within the meaning of sections 267(b) 

and 707(b)); 

(iii) The period of limitations on 

assessment for each early application 

year of the taxpayer and all related 

parties (within the meaning of sections 

267(b) and 707(b)) is open under section 

6501; and 

(iv) The taxpayer would not be 

required under this section to change its 

method of accounting as a result of such 

election. 

(j) Change in method of accounting 

required by this section. In order to 

comply with this section, a taxpayer 

may be required to change its method of 

accounting. If so required, the taxpayer 

must secure the consent of the 

Commissioner in accordance with the 

requirements of § 1.446–1(e) and the 

applicable administrative procedures for 

obtaining the Commissioner’s consent 

under section 446(e) for voluntary 

changes in methods of accounting. 

■ Par. 4 Section 1.861–19 is added to 

read as follows: 

§ 1.861–19 Classification of cloud 

transactions. 

(a) In general. This section provides 

rules for classifying cloud transactions 

(as defined in paragraph (b) of this 

section). The rules of this section apply 

for purposes of Internal Revenue Code 

sections 59A, 245A, 250, 267A, 367, 

404A, 482, 679, and 1059A; subchapter 

N of chapter 1; chapters 3 and 4; and 

sections 842 and 845 (to the extent 

involving a foreign person), and apply 

with respect to transfers to foreign trusts 

not covered by section 679. 

(b) Cloud transaction defined. A 

cloud transaction is a transaction 

through which a person obtains ondemand network access to computer 

hardware, digital content (as defined in 

§ 1.861–18(a)(2)), or other similar 

resources. A cloud transaction does not 

include network access to download 

digital content for storage and use on a 

person’s computer or other electronic 

device. 

(c) Classification of cloud 

transactions—(1) In general. A cloud 

transaction is classified as the provision 

of services. 

(2) Transaction with multiple 

elements. Taking into account the 

overall transaction and the surrounding 

facts and circumstances, a transaction 

that has multiple elements, one or more 

of which would be a cloud transaction 

if considered separately, is classified in 

its entirety as a cloud transaction if the 

predominant character of the 

transaction as determined under 

§ 1.861–18(b)(3) is a cloud transaction. 

(d) Examples. The examples in this 

paragraph (d) illustrate the provisions of 

this section. Unless otherwise specified, 

assume that Corp A is a domestic 

corporation, no rights described in 

§ 1.861–18(c)(2) (copyright rights) are 

transferred as part of the transactions 

described, and all facts in each example 

occur as part of a single transaction. 

(1) Example 1: Computing capacity— 

(i) Facts. Corp A operates data centers 

on its premises in various locations. 

Corp A provides Corp B computing 

capacity on Corp A’s servers in 

exchange for a monthly fee based on the 

amount of computing power made 

available to Corp B. Corp B provides its 

own software to run on Corp A’s 

servers. 

(ii) Analysis. The provision of ondemand network computing capacity by 

Corp A to Corp B is a cloud transaction 

with one element. Therefore, the 

transaction is treated solely as a cloud 

transaction under paragraph (b) of this 

section and is classified as the provision 

of services under paragraph (c)(1) of this 

section. 


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(2) Example 2: Computing capacity on 

dedicated on-premises servers—(i) 

Facts. The facts are the same as in 

paragraph (d)(1)(i) of this section (the 

facts in Example 1), except that, in order 

to offer more security to Corp B, Corp 

A provides Corp B computing capacity 

exclusively through designated servers, 

which are owned and operated by Corp 

A and located at Corp B’s facilities. Corp 

A agrees not to use the designated server 

for any other customer for the duration 

of its arrangement with Corp B. 

Although the server is located at Corp 

B’s facilities, Corp B accesses the server 

through Corp A’s network and the 

monthly fee is based on the amount of 

computing power made available to 

Corp B. 

(ii) Analysis. As in paragraph (d)(1) of 

this section (Example 1), the transaction 

between Corp A and Corp B is the 

provision of on-demand network 

computing capacity and is therefore a 

cloud transaction with one element. 

Therefore, the transaction is treated 

solely as a cloud transaction under 

paragraph (b) of this section and is 

classified as the provision of services 

under paragraph (c)(1) of this section. If 

the transaction between Corp A and 

Corp B involved only the provision of 

a server by Corp A for use by Corp B, 

and not on-demand network access to 

computing capacity, the transaction 

would not be a cloud transaction and 

this section would not apply. 

(3) Example 3: Access to software 

development platform and website 

hosting—(i) Facts. Corp A provides Corp 

B a software platform that Corp B uses 

to develop and deploy websites with a 

range of features, including blogs, 

message boards, and other collaborative 

knowledge bases. The software 

development platform consists of an 

operating system, web server software, 

scripting languages, libraries, tools, and 

back-end relational database software 

and allows Corp B to use in its websites 

certain visual elements subject to 

copyrights held by Corp A. The software 

development platform is hosted on 

servers owned by Corp A and located at 

Corp A’s facilities. Corp B’s finished 

websites are also hosted on Corp A’s 

servers. Corp B accesses the software 

development platform via a standard 

web browser. Corp B has no ability to 

alter the software code. A small amount 

of copyrighted scripting code is 

downloaded onto Corp B’s computers to 

facilitate secure logins and access to the 

software development platform. All 

other functions of the software 

development platform execute on Corp 

A’s servers, and no portion of the core 

software code is ever downloaded by 

Corp B or Corp B’s customers. Corp A 

has ascertained that the primary benefit 

or value to Corp B from the transaction 

is the right to use the software 

development platform. Corp B pays 

Corp A a monthly fee for the platform 

and website hosting. 

(ii) Analysis. (A) There is one 

transaction with multiple elements 

between Corp A and Corp B. One 

element is Corp A’s provision to Corp B 

of on-demand network access to the 

software platform, which would be a 

cloud transaction described in 

paragraph (b) of this section if 

considered separately. Another element 

is Corp A’s hosting of Corp B’s finished 

websites, which would be a cloud 

transaction described in paragraph (b) of 

this section if considered separately. A 

third element is the grant by Corp A to 

Corp B of the right to use in Corp B’s 

websites certain visual elements subject 

to copyrights held by Corp A, which 

would be a transfer of copyright rights 

under § 1.861–18(b)(1)(i) if considered 

separately. A fourth element is the 

download of scripting code by Corp B, 

which would be a transfer of a 

copyrighted article under § 1.861– 

18(b)(1)(ii) if considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a cloud transaction if 

considered separately, paragraph (c)(2) 

of this section provides that the 

transaction is classified as a cloud 

transaction if its predominant character 

is a cloud transaction. Pursuant to 

§ 1.861–18(b)(3), the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. The 

predominant character of this 

transaction is therefore a cloud 

transaction because the primary benefit 

or value received by Corp B is the right 

to use the software development 

platform. Accordingly, this transaction 

is classified solely as a cloud transaction 

described in paragraph (b) of this 

section and is classified as the provision 

of services under paragraph (c)(1) of this 

section. 

(4) Example 4: Access to online 

software via an application—(i) Facts. 

Corp A provides Corp B word 

processing, spreadsheet, and 

presentation software and allows 

employees of Corp B to access the 

software over the internet through a web 

browser or an application (‘‘app’’) that 

can be downloaded from Corp A’s 

servers onto a computer or mobile 

device. Corp B’s employees usually 

download Corp A’s app onto their 

mobile devices. To access the full 

functionality of the app, the device must 

be connected to the internet. Only a 

limited number of features on the app 

are available without an internet 

connection. Corp B has no ability to 

alter the software code. The software is 

hosted on servers owned by Corp A and 

located at Corp A’s facilities and is used 

concurrently by other Corp A customers 

in addition to Corp B. Corp B pays a 

monthly fee based on the number of 

employees with access to the software. 

Users have the option to save files either 

online using the storage provided by 

Corp B, or offline on their own hard 

drives. Corp B’s employees can also 

download updates to the app as part of 

the monthly fee arrangement. Upon 

termination of the arrangement, Corp A 

activates an electronic lock preventing 

Corp B’s employees from further 

utilizing the app, and Corp B’s 

employees are no longer able to access 

the software via a web browser. Corp A 

has ascertained that the primary benefit 

or value to Corp B from the transaction 

is the right to access Corp A’s software 

over the internet, whether via web 

browser or after downloading the app. 

(ii) Analysis. (A) There is one 

transaction with multiple elements 

between Corp A and Corp B. One 

element is Corp A’s provision to Corp B 

of on-demand network access to Corp 

A’s computer hardware and software 

resources for the purpose of fully 

utilizing Corp A’s software, which 

would be a cloud transaction described 

in paragraph (b) of this section if 

considered separately. Another element 

is the download of Corp A’s app by 

Corp B employees, which would be a 

transfer of a copyrighted article under 

§ 1.861–18(b)(1)(ii) if considered 

separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a cloud transaction if 

considered separately, paragraph (c)(2) 

of this section provides that the 

transaction is classified as a cloud 

transaction if its predominant character 

is a cloud transaction. Pursuant to 

§ 1.861–18(b)(3), the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. The 

predominant character of this 

transaction is therefore a cloud 

transaction because the primary benefit 

or value received by Corp B is the right 

to access Corp A’s software over the 

internet. Accordingly, this transaction is 

classified solely as a cloud transaction 

described in paragraph (b) of this 

section and is classified as the provision 

of services under paragraph (c)(1) of this 

section. 

(5) Example 5: Access to offline 

software with limited online functions— 


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(i) Facts. Corp A provides Corp B word 

processing, spreadsheet, and 

presentation software that is 

functionally similar to the software in 

paragraph (d)(4) of this section 

(Example 4). The software is made 

available for access over the internet but 

only to download the software from 

servers owned by Corp A onto a 

computer or mobile device in the form 

of an app. The downloaded software 

contains all the core functions of the 

software. Employees of Corp B can use 

the software on their computers or 

mobile devices regardless of whether 

their computer or mobile device is 

online. When online, the software 

provides a few ancillary functions that 

are not available offline, such as access 

to document templates and data 

collection for diagnosing problems with 

the software. Whether working online or 

offline, Corp B employees can store 

their files only on their own computer 

or mobile device, and not on Corp A’s 

data storage servers. Corp B’s employees 

can also download updates to the 

software as part of the monthly fee 

arrangement. Upon termination of the 

arrangement, an electronic lock is 

activated so that the software can no 

longer be accessed. Corp A has 

ascertained that the primary benefit or 

value to Corp B from the transaction is 

the right to download and use Corp A’s 

software offline. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp B contains 

multiple elements. One element is the 

transfer of a copy of Corp A’s software 

via download, which would be a 

transfer of a copyrighted article 

described under § 1.861–18(b)(1)(ii) if 

considered separately. Another element 

is the provision of online ancillary 

functionality of the software, which 

would be a cloud transaction described 

in paragraph (b) of this section if 

considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a cloud transaction if 

considered separately, paragraph (c)(2) 

of this section provides that the 

transaction is classified as a cloud 

transaction if its predominant character 

is a cloud transaction. Pursuant to 

§ 1.861–18(b)(3), the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. The 

predominant character of this 

transaction is therefore the transfer of a 

copyrighted article because the primary 

benefit or value received by Corp B is 

the right to download and use Corp A’s 

software offline. Accordingly, this 

transaction is classified solely as a 

transfer of a copyrighted article 

described in § 1.861–18(b)(1)(ii). The 

provision of the software constitutes a 

lease of a copyrighted article under 

§ 1.861–18 because access to the app is 

terminated when the monthly fee is no 

longer paid, even though Corp B 

employees retain the locked files on 

their devices. See § 1.861–18(h)(4). 

(6) Example 6: Data storage, separate 

from access to offline software—(i) 

Facts. The facts are the same as in 

paragraph (d)(5)(i) of this section (the 

facts in Example 5), except that Corp A 

also provides on-demand network data 

storage to Corp B on Corp A’s servers in 

exchange for a monthly fee based on the 

amount of data storage used by Corp B. 

Under the data storage terms, Corp B 

employees may store files created by 

Corp B employees using Corp A’s 

software or other software. Although 

Corp A’s word processing software is 

compatible with Corp A’s data storage 

systems, the core functionality of Corp 

A’s software is not dependent on Corp 

B’s purchase of the storage plan. Corp 

A’s provision of software and data 

storage capacity constitute separate 

transactions. 

(ii) Analysis. (A) As explained in 

paragraph (d)(5)(ii) of this section, Corp 

B’s download of fully functional 

software, along with on-demand 

network access to certain limited online 

features, does not constitute a cloud 

transaction, but rather constitutes a 

lease of a copyrighted article under 

§ 1.861–18. 

(B) The provision of on-demand 

network data storage by Corp A to Corp 

B is a cloud transaction with one 

element. Therefore, the transaction is 

treated solely as a cloud transaction 

under paragraph (b) of this section and 

is classified as the provision of services 

under paragraph (c)(1) of this section. 

(7) Example 7: Streaming and 

temporary download of digital content 

using third-party servers—(i) Facts. 

Corp A offers via stream or temporary 

download digital content in the form of 

videos and music to customers from 

servers located in data centers owned 

and operated by Data Center Operator. 

Each customer uses a computer or other 

electronic device to access unlimited 

streaming or temporary downloads of 

video and music in exchange for 

payment of a flat monthly fee to Corp 

A. The customer may select from among 

the available content the particular 

video or song to be streamed or 

downloaded. Corp A continually 

updates its content catalog, replacing 

content with higher quality versions and 

adding new content at no additional 

charge to the customer. It also provides 

additional functionality such as various 

methods of filtering and sorting the 

library, a watchlist, and 

recommendations based on a customer’s 

preferences. Content that is streamed to 

the customer is not stored locally on the 

customer’s computer or other electronic 

device and therefore can be played only 

while the customer’s computer or other 

electronic device is connected to the 

internet. Content that is temporarily 

downloaded is stored on the customer’s 

computer or other electronic device for 

1 week and therefore can be played 

while the customer’s computer or other 

electronic device is not connected to the 

internet. Corp A cannot reasonably 

ascertain the primary benefit or value 

that its specific customers derive from 

accessing Corp A’s catalog of digital 

content. Data collected by Corp A 

indicates that the vast majority of 

customers stream digital content rather 

than temporarily download the content. 

Corp A pays Data Center Operator a fee 

based on the amount of data storage 

used and computing power made 

available in connection with Corp A’s 

content offerings. 

(ii) Analysis. (A) The provision of data 

storage and computing power by Data 

Center Operator to Corp A is a cloud 

transaction with one element. Therefore, 

the transaction is treated solely as a 

cloud transaction under paragraph (b) of 

this section, and is classified as the 

provision of services under paragraph 

(c)(1) of this section. 

(B) A transaction between Corp A and 

a customer has two elements. One 

element is streaming access to a curated 

and routinely updated library of digital 

content, which would be a cloud 

transaction described in paragraph (b) of 

this section if considered separately. 

Another element is the transfer of a 

copy of digital content via temporary 

download, which would be a transfer of 

a copyrighted article under § 1.861– 

18(b)(1)(ii) if considered separately. 

(C) Because the transaction has 

multiple elements, one or more of 

which would be a cloud transaction if 

considered separately, paragraph (c)(2) 

of this section provides that the 

transaction is classified as a cloud 

transaction if its predominant character 

is a cloud transaction. Pursuant to 

§ 1.861–18(b)(3), the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer if it is 

reasonably ascertainable. However, Corp 

A cannot reasonably ascertain the 

primary benefit or value derived by a 

specific customer from Corp A’s 

offering. In such situations, § 1.861– 

18(b)(3)(ii) provides that the 

predominant character of a transaction 

may be determined based on the 


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primary benefit or value to a typical 

customer of a substantially similar 

transaction. This primary benefit or 

value to a typical customer can be 

identified through actual data about use 

or access pursuant to § 1.861– 

18(b)(3)(ii)(A), or if that data is not 

available, by using other evidence 

indicative of the primary benefit or 

value to a typical customer pursuant to 

§ 1.861–18(b)(3)(ii)(B). Because Corp A 

has data that shows the typical customer 

streams digital content rather than 

temporarily downloading it, the primary 

benefit or value received by a typical 

customer is streaming access to digital 

content. Therefore, the predominant 

character of the transaction is a cloud 

transaction. Under paragraph (c)(1) of 

this section, the cloud transaction is 

classified as the provision of services. 

(8) Example 8: Access to online 

database—(i) Facts. Corp A offers an 

online database of industry-specific 

materials. Customers access the 

materials through Corp A’s website, 

which aggregates and organizes 

information topically and hosts a 

proprietary search engine. Corp A hosts 

the website and database on its own 

servers and provides multiple customers 

access to the website and database 

concurrently. Most materials in Corp 

A’s database are publicly available by 

other means, but Corp A’s website offers 

an efficient way to locate and obtain the 

information on demand. Certain 

materials in Corp A’s database 

constitute digital content within the 

meaning of § 1.861–18(a)(2), and Corp A 

pays the copyright owners a license fee 

for using them. Each customer may 

download any of the materials to its 

own computer and keep such materials 

without further payment. The customer 

pays Corp A a fee based on the number 

of searches or the amount of time spent 

on the website, and such fee is not 

dependent on the amount of materials 

the customer downloads. The fee that 

the customer pays is substantially 

higher than the stand-alone charge for 

accessing the same digital content 

outside of Corp A’s system. Corp A 

cannot reasonably ascertain the primary 

benefit or value that a specific customer 

derives from accessing Corp A’s 

database. Corp A does not have data 

indicating whether the typical customer 

downloads materials from the database. 

Corp A markets its website and online 

database as user-friendly and an 

efficient way to find relevant materials 

because of its proprietary search engine. 

Developing the proprietary search 

engine was the largest cost Corp A 

incurred in creating its website and 

online database. 

(ii) Analysis. (A) The transaction 

between Corp A and a customer has 

multiple elements. One element is Corp 

A’s provision to a customer of access to 

Corp A’s website and online database, 

which is a cloud transaction described 

in paragraph (b) of this section if 

considered separately. Another element 

is the transfer of digital content via 

download, which is the transfer of a 

copyrighted article under § 1.861–18 if 

considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a cloud transaction if 

considered separately, paragraph (c)(2) 

of this section provides that the 

transaction is classified as a cloud 

transaction if its predominant character 

is a cloud transaction. Pursuant to 

§ 1.861–18(b)(3), the predominant 

character of the transaction is based on 

the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. However, Corp 

A cannot reasonably ascertain the 

primary benefit or value derived by a 

specific customer from access to Corp 

A’s database. In such situations, 

§ 1.861–18(b)(3)(ii) provides that the 

predominant character of a transaction 

may be determined based on the 

primary benefit or value to a typical 

customer of a substantially similar 

transaction. This primary benefit or 

value to a typical customer can be 

identified through actual data about use 

or access pursuant to § 1.861– 

18(b)(3)(ii)(A), or if that data is not 

available, by using other evidence 

indicative of the primary benefit or 

value to a typical customer pursuant to 

§ 1.861–18(b)(3)(ii)(B). That Corp A 

focuses on its proprietary search engine 

when marketing its website and 

database, as well as the facts that the 

search engine was the most expensive 

cost incurred by Corp A in creating its 

website and database, and that 

customers pay a substantially higher fee 

to access Corp A’s system than they 

would otherwise pay to access the 

content outside of Corp A’s system, 

indicates that the primary benefit or 

value received by a typical customer is 

the right to use the search engine. 

Therefore, under paragraph (c)(2) of this 

section, the predominant character of 

the transaction between Corp A and a 

customer is a cloud transaction. Under 

paragraph (c)(1) of this section the cloud 

transaction is classified as the provision 

of services. 

(9) Example 9: Temporary or 

perpetual access to a single movie via 

stream or download—(i) Facts. Corp A 

hosts movies on its website and allows 

customers to view a single movie for a 

limited period or perpetually for a onetime fee, with perpetual viewing rights 

costing a higher fee. Corp A does not 

charge customers a separate fee for 

access to the website. In addition, Corp 

A’s website provides recommendations 

for movies based on a customer’s search 

for a particular title and/or the 

customer’s purchase history. Customers 

have no ability to alter the servers, 

website, or movies available on the 

website. The movies in Corp A’s 

database constitute digital content 

within the meaning of § 1.861–18(a)(2), 

and Corp A pays the copyright owners 

a license fee for using them. Corp A 

allows customers to view the movies by 

either streaming the movies from Corp 

A’s servers, or by downloading the 

movies onto the customer’s computer or 

other electronic device. The file size of 

movies offered by Corp A is generally 

large and so customers may be expected 

to download movies only in certain 

situations such as when traveling 

without internet access. Upon the 

expiration of the rental period, 

customers will no longer have access to 

stream the movies, and any movie that 

was downloaded onto a customer’s 

computer or other electronic device will 

auto-delete from the customer’s 

computer or other electronic device. 

Whether a customer chooses to view the 

movie via stream or download, Corp A 

charges the same one-time fee. Corp A 

cannot reasonably ascertain the primary 

benefit or value that a specific customer 

derives from accessing Corp A’s 

website. Corp A maintains aggregate 

data on whether a given movie is 

viewed via stream or download, and 

this data shows that most movies are 

viewed by streaming, even in the case 

where a customer pays for the right to 

view a movie in perpetuity. 

(ii) Analysis. (A) A transaction 

between Corp A and a customer 

contains multiple elements. One 

element is Corp A’s provision to a 

customer of access to Corp A’s website 

in order to view a movie via stream, 

which is a cloud transaction described 

in paragraph (b) of this section if 

considered separately. Another element 

is Corp A’s provision to a customer of 

access to Corp A’s website in order to 

download a movie, which is the transfer 

of a copyrighted article under § 1.861– 

18 if considered separately. 

(B) Because the transaction has 

multiple elements, one or more of 

which would be a cloud transaction if 

considered separately, paragraph (c)(2) 

of this section provides that the 

transaction is classified as a cloud 

transaction if its predominant character 

is a cloud transaction. Pursuant to 

§ 1.861–18(b)(3), the predominant 

character of the transaction is based on 


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the primary benefit or value of the 

transaction to the customer, if it is 

reasonably ascertainable. However, Corp 

A cannot reasonably ascertain the 

primary benefit or value derived by a 

specific customer from access to Corp 

A’s database. In such situations, 

§ 1.861–18(b)(3)(ii) provides that the 

predominant character of a transaction 

may be determined based on the 

primary benefit or value to a typical 

customer of a substantially similar 

transaction. This primary benefit or 

value to a typical customer can be 

identified through actual data about use 

or access pursuant to § 1.861– 

18(b)(3)(ii)(A), or if that data is not 

available, by using other evidence 

indicative of the primary benefit or 

value to a typical customer pursuant to 

§ 1.861–18(b)(3)(ii)(B). Corp A has data 

that shows that the typical customer 

views movies by streaming rather than 

download. Accordingly, under 

paragraph (c)(2) of this section, the 

predominant character of the 

transaction is a cloud transaction 

because the primary benefit or value a 

typical customer receives is access to 

stream movies on Corp A’s website. 

Under paragraph (c)(1) of this section, 

the cloud transaction is classified as the 

provision of services. 

(10) Example 10: Reseller of software 

as a service—(i) Facts. Corp A owns the 

copyright to software (Program S). Corp 

A hosts Program S on its servers. 

Customers access Program S only 

through an internet connection. Corp A 

grants Corp B, a foreign corporation 

wholly owned by Corp A, the right to 

sell access to Program S to Corp B’s 

customers that are located in Corp B’s 

country. Corp B is responsible for 

managing the purchase/sale interaction 

with Corp B’s customers, including 

invoicing and collections. Corp A is 

responsible for providing customers 

with access to Program S. Corp B does 

not perform any functions to provide 

access to Program S. 

(ii) Analysis. (A) The transaction 

between Corp A and Corp B is treated 

as Corp A providing on-demand access 

to Program S to Corp B even though 

Corp B resells that access. This 

transaction is a cloud transaction with 

one element. Under paragraph (c)(1) of 

this section, the cloud transaction is 

classified as the provision of services. 

The transaction does not involve the 

transfer of any copyright rights 

described in § 1.861–18(c)(2), and 

therefore is governed solely by this 

section. 

(B) The transaction between Corp B 

and its customers is the provision of ondemand access to Program S by Corp B, 

which is a cloud transaction with one 

element. Under paragraph (c)(1) of this 

section, the cloud transaction is 

classified as the provision of services. 

The transaction does not involve the 

transfer of any copyright rights 

described in § 1.861–18(c)(2), and 

therefore is governed solely by this 

section. 

(11) Example 11: Computer game with 

online functionality and in-game 

purchases—(i) Facts. Corp A owns the 

copyright to a computer game (Game X). 

Customers can purchase Game X for a 

one-time fee and download it onto their 

computers. A customer may play certain 

aspects of Game X while not connected 

to the internet, but most of the core 

functionality of Game X is available 

only when the customer is connected to 

the internet, including the ability to 

play with other customers. In order to 

access the additional online 

functionality specific to Game X, 

customers must pay a monthly fee to 

Corp A. The additional functionality of 

Game X is hosted on servers owned by 

Corp A. Customers may also pay a onetime fee to access an in-game item that 

can be utilized only when playing Game 

X online. 

(ii) Analysis. (A) There are three 

transactions between Corp A and a 

customer. The first transaction is the 

transfer of a copy of Game X, which is 

a digital content transaction with one 

element because a customer receives 

from Corp A access only to offline 

content in exchange for purchasing a 

copy of the game. Therefore, this 

transaction is treated solely as a transfer 

of a copyrighted article under § 1.861– 

18. 

(B) The second transaction between 

Corp A and a customer is the payment 

of a monthly fee to play Game X online 

on Corp A’s servers, which is a cloud 

transaction with one element. Therefore, 

this transaction is treated solely as a 

cloud transaction, and is classified as 

the provision of services under 

paragraph (c)(1) of this section. 

(C) The third transaction between 

Corp A and a customer is the payment 

of a one-time fee in exchange for an ingame item. Because a customer can 

utilize the item only when playing 

Game X through an internet connection, 

the transaction is a cloud transaction 

with one element. Therefore, this 

transaction is treated solely as a cloud 

transaction, and is classified as the 

provision of services under paragraph 

(c)(1) of this section. 

(e) Applicability date—(1) In general. 

This section applies to taxable years 

beginning on or after January 14, 2025. 

(2) Early application. A taxpayer can 

apply this section to taxable years 

beginning on or after August 14, 2019 

and all subsequent taxable years not 

described in paragraph (e)(1) (early 

application years) if— 

(i) The taxpayer also applies § 1.861– 

18 to the early application years; 

(ii) This section and § 1.861–18 are 

applied to the early application years by 

all persons related to the taxpayer 

(within the meaning of sections 267(b) 

and 707(b)); 

(iii) The period of limitations on 

assessment for each early application 

year of the taxpayer and all related 

parties (within the meaning of sections 

267(b) and 707(b)) is open under section 

6501; and 

(iv) The taxpayer would not be 

required under this section to change its 

method of accounting as a result of such 

election. 

(f) Change in method of accounting 

required by this section. In order to 

comply with this section, a taxpayer 

may be required to change its method of 

accounting. If so required, the taxpayer 

must secure the consent of the 

Commissioner in accordance with the 

requirements of § 1.446–1(e) and the 

applicable administrative procedures for 

obtaining the Commissioner’s consent 

under section 446(e) for voluntary 

changes in methods of accounting. 

§ 1.937–3 [Amended] 

■ Par. 5. Section 1.937–3 is amended by 

removing Examples 4 and 5 from 

paragraph (e). 

Douglas W. O’Donnell, 

Deputy Commissioner. 

Approved: December 18, 2024. 

Aviva R. Aron-Dine, 

Deputy Assistant Secretary of the Treasury 

(Tax Policy). 

[FR Doc. 2024–31372 Filed 1–10–25; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 301 

[TD 10026] 

RIN 1545–BQ72 

Rules Regarding Certain Disregarded 

Payments and Dual Consolidated 

Losses 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final rule. 

SUMMARY: This document contains final 

regulations regarding certain 

disregarded payments that give rise to 

deductions for foreign tax purposes and 


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