These synopses are intended only as aids to the reader in

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2025–8

February 18, 2025

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

EMPLOYEE PLANS

REG-100669-24, page 819.

These proposed regulations would provide guidance regarding a change made by the SECURE 2.0 Act that requires

certain retirement plans to automatically enroll eligible

employees beginning in 2025. Among other exceptions,

this requirement does not apply to plans established before

December 29, 2022. These proposed regulations also would

amend the rules regarding notice requirements for plans that

include eligible automatic contributions arrangements to

reflect changes made by the SECURE 2.0 Act. The proposed

regulations would affect participants in, beneficiaries of,

employers maintaining, and administrators of these plans.

EMPLOYEE PLANS, EXCISE TAX

Notice 2025-12, page 813.

This notice provides the indexing factors to be used by group

health plans and health insurance issuers to calculate the

qualifying payment amount (QPA) for items or services provided on or after January 1, 2025, and before January 1,

2026. The QPA is the basis for determining individual cost

sharing for items and services covered by the balance-billing

protections in the NSA, under certain circumstances. The

QPA for a given calendar year is based on information regarding median rates for certain items and services from prior

years and is indexed based on changes in the consumer

price index. In addition to providing the indexing factor for

adjusting 2024 amounts for 2025, the notice also provides

cumulative adjustments for prior years.

EMPLOYEE PLANS, INCOME TAX

REG-101268-24, page 836.

These proposed regulations would provide guidance for retirement plans that permit participants who have attained age 50

Finding Lists begin on page ii.

to make additional elective deferrals (catch-up contributions)

under section 414(v) of the Code. Specifically, these proposed

regulations would amend the regulations under sections

414(v), 401(k), and 403(b) to reflect statutory changes made

by section 603 of the SECURE 2.0 Act of 2022 (SECURE 2.0

Act), which require that catch-up contributions made by certain catch-up eligible participants be designated Roth contributions. These proposed regulations also would amend the

regulations under section 414(v) of the Code to reflect the

statutory changes made by sections 109 and 117 of the

SECURE 2.0 Act, which increase the catch-up contribution limits under section 414(v) of the Code in certain cases.

REG-118988-22, page 869.

Section 162(m)(1) generally limits to $1,000,000 the allowable deduction for a taxable year for applicable employee

remuneration paid by any publicly held corporation with

respect to a covered employee. Section 9708 of the American

Rescue Plan Act of 2021 (ARP) (Pub. L. 117-2, 135 Stat. 206

(2021)) amended the definition of “covered employee.” In addition to the principal executive officer, principal financial officer,

and the three other highest compensated executive officers

for the taxable year or any previous taxable year, ARP added

§162(m)(3)(C) to expand the definition of “covered employee”

to include any other employee who is among the five highest

compensated employees for the taxable year. This amendment is effective for taxable years beginning after December

31, 2026. The proposed regulations propose guidance on the

application of §162(m) as amended by section 9708 of ARP.

INCOME TAX

Notice 2025-6, page 799.

This notice requests comments on any potential implications

if the characterization rules currently contained in §§1.86118 and 1.861-19, as amended and added, respectively, by

Treasury Decision 10022, were to apply to all provisions of

the Internal Revenue Code, including the need for additional

guidance, and seeks specific comments on the possible

impacts and guidance that may be necessary with respect to

certain identified provisions.

Notice 2025-8, page 800.

This notice contains modifications to Notice 2023-38, 202322 I.R.B. 872, that are similar to the modifications contained in

section 3 of Notice 2024-41, 2024-24 I.R.B. 1615. For electing Applicable Projects, this notice modifies and supersedes

Notice 2024-41 by expanding the elective safe harbor cost

table in Notice 2024-41 for Solar Photovoltaic (PV) facilities

to include updated cost percentages, providing new cost percentages for PV modules that incorporate crystalline silicon

PV cells and wafers that are manufactured in the U.S., renaming, redefining, reclassifying, and removing certain solar PV

components, and expanding and clarifying the type of facilities

eligible to qualify as a representative type of solar PV facility.

This notice further modifies and supersedes Notice 2024-41

by renaming certain components for the Land-Based Wind

Table; renaming, redefining, and reclassifying certain Battery

Electric Storage System (BESS) Table components; providing

updated cost percentages for these BESS components; and

permitting taxpayers that are eligible to claim a Domestic Content Bonus Credit by virtue of the 80/20 Rule to elect to use

the safe harbor cost tables in this notice, or the safe harbor in

Notice 2024-41, before Notice 2024-41 is superseded.

REG-107420-24, page 854.

This document contains proposed rules for determining the

source of income from cloud transactions for purposes of

the international provisions of the Internal Revenue Code.

These proposed rules would generally affect taxpayers who

earn gross income from engaging in cloud transactions.

REG-116085-23, page 865.

These proposed regulations would require multi-year tax

reporting for corporate separations and related transactions. The information to be reported under these proposed

regulations would establish the taxpayer’s position that the

corporate separation and related transactions qualify for

nonrecognition treatment under subchapter C of the Internal

Revenue Code.

Rev. Proc. 2025-13, page 816.

The revenue procedure provides a streamlined method by

which taxpayers who have elected the application of the

alternative tax under section 831(b) may obtain automatic

consent of the Secretary to revoke such election by making

certain representations.

T.D. 10022, page 773.

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.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

February 18, 2025 

Bulletin No. 2025–8

Part I

Treasury Regulation Section 1.861-18 and Treasury

Regulation Section 1.861-19

TD 10022

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

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) 3176989 (not toll-free numbers).

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 (REG130700-14) 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

SUPPLEMENTARY INFORMATION:

I. General Classification Issues

Authority

A. Replacement of de minimis rule with a

predominant character rule

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

Bulletin No. 2025–8

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,

773

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 “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 on-demand 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

February 18, 2025

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, §1.9541(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

February 18, 2025

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

774

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 §1.86118(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 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 trans-

Bulletin No. 2025–8

action 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 on-demand 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 cus-

Bulletin No. 2025–8

tomer 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 §1.86119(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, includ-

775

ing 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

non-disclosure 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 §1.86118 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.

February 18, 2025

One comment noted that under the

proposed regulations, an online database

that allows customers on-demand access

to a collection of non-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 non-copyrightable 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 com-

February 18, 2025

puter 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 §1.86118(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

know-how 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

776

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 (REG251520-96) 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 caus-

Bulletin No. 2025–8

ing 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 §1.86118(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 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 §1.86118(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-

Bulletin No. 2025–8

a-service 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).

777

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, pre-existing 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

February 18, 2025

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 §1.86118(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 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

February 18, 2025

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

778

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 onetime 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

Bulletin No. 2025–8

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.

Bulletin No. 2025–8

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 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 noncloud 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

779

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

February 18, 2025

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 cloud-based

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

February 18, 2025

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 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 on-demand 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

780

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-a-service, 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-a-service 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

Bulletin No. 2025–8

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

Bulletin No. 2025–8

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 electronic medium using

781

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 real-world 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).

February 18, 2025

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 anti-abuse 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

February 18, 2025

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,

782

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 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 (90 FR 3075) that provide

Bulletin No. 2025–8

rules for determining the source of gross

income from a cloud transaction.

C. Removal of Example 5 from §1.9373(e)

The proposed regulations would have

removed Examples 4 and 5 from §1.9373(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 pur-

Bulletin No. 2025–8

poses 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 low-taxed 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 Trea-

783

sury 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 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 prop-

February 18, 2025

erty” 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 1.86119, 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 §1.4461(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 tax-

February 18, 2025

payers 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.

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.

VIII. Applicability Date

I. Regulatory Planning and Review—

Economic Analysis

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

784

Special Analyses

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 Con-

Bulletin No. 2025–8

trol Numbers 1545-0047 for tax-exempt

entities, 1545-0074 for individuals, 15450123 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

tax-exempt entities, 1545-0074 for individuals, 1545-0123 for business filers and

1545-0092 for trust and estate filers.

These final regulations are not creating

new information collections or changing

information collections already approved

by OMB.

V. Unfunded Mandates Reform Act

PART 1—INCOME TAXES

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.

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:

III. Regulatory Flexibility Act

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.

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-13070014) 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.

Bulletin No. 2025–8

VI. Executive Order 13132: Federalism

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:

785

§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

February 18, 2025

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 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.

February 18, 2025

(3) Determination of predominant character—(i) General rule. For purposes of

paragraph (b)(2) of this section and §1.86119(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.

786

(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 knowhow 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 circum-

Bulletin No. 2025–8

stances, 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

Bulletin No. 2025–8

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 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

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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.

February 18, 2025

(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. The facts are the same as

those in paragraph (h)(2) of this section (Example 2),

where P, the Country Z resident, receives Program X

from Corp A’s home page on the Internet, except that

P may only use Program X for a period of one week

at the end of which an electronic lock is activated and

the program can no longer be accessed. Thereafter,

if P wishes to use Program X, it must return to the

home page and pay Corp A to send an electronic key

to reactivate the program for another week.

(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. 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 distrib-

February 18, 2025

ute 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 that

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

788

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 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

Bulletin No. 2025–8

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

Bulletin No. 2025–8

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

789

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 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,

February 18, 2025

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

February 18, 2025

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 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.

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(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 know-how 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 know-how 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 know-how 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

Bulletin No. 2025–8

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 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

Bulletin No. 2025–8

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 non-exclusive 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

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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

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

February 18, 2025

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.

February 18, 2025

(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

792

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 (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

on-demand 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 c

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