Bulletin No. 2020–33

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2020–33

August 10, 2020

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.

INCOME TAX

Announcement 2020-10, page 385.

The competent authorities of the United States of America

and Switzerland hereby enter into the following arrangement

(“the Arrangement”) that references to North American Free

Trade Agreement in the Convention between the Swiss Federation and the United States of America for the Avoidance

of Double Taxation with Respect to Taxes on Income (the

“Convention”) shall be understood as references to the United States-Mexico-Canada Agreement (“USMCA”) upon entry

into force of the USMCA. The Arrangement is entered into under paragraph 3 of Article 25 (Mutual Agreement Procedure)

of the Convention.

Announcement 2020-11, page 385.

This document contains corrections to TD 9900, published in

Internal Revenue Bulletin 2020-30 on Monday, July 20, 2020.

REG-127732-19, page 385.

This document contains proposed regulations under the subpart F income and global intangible low-taxed income provisions of the Internal Revenue Code regarding the treatment

of certain income that is subject to a high rate of foreign tax.

This document also contains proposed regulations under the

information reporting provisions for foreign corporations to

facilitate the administration of certain rules in the proposed

regulations. The proposed regulations would affect United

States shareholders of controlled foreign corporations.

Rev. Proc. 2020-37, page 381.

This revenue procedure provides: (1) tables of limitations on

depreciation deductions for owners of passenger automo-

Finding Lists begin on page ii.

biles first placed in service by the taxpayer during calendar

year 2020; and (2) a table of amounts that must be included

in income by lessees of passenger automobiles first leased

by the taxpayer during calendar year 2020. The tables detailing these depreciation limitations and lessee inclusion

amounts reflect the automobile price inflation adjustments

required by section 280F(d)(7). For purposes of this revenue procedure, the term “passenger automobiles” includes

trucks and vans.

T.D. 9901, page 266.

These final regulations provide guidance on the deduction

for Foreign-Derived Intangible Income and Global Intangible

Low-Taxed Income under section 250 of the Code, which was

added to the Internal Revenue Code (the “Code”) by the Tax

Cuts and Jobs Act, Pub. L. No. 155-97 (2017). The final regulations replace previously issued proposed regulations and

provide guidance on both the computation of the deductions

available under section 250 and the definition and determination of FDII. In addition, the final regulations provide rules,

pursuant to section 1502 of the Code, for the computation

of FDII in a consolidated group. Finally, these final regulations

contain amendments to regulations under sections 962,

6038 and 6038A of the Code.

T.D. 9902, page 349.

This document contains final regulations under the global intangible low-taxed income and subpart F income provisions

of the Internal Revenue Code regarding the treatment of income that is subject to a high rate of foreign tax. The final

regulations affect United States shareholders of foreign corporations. This guidance relates to changes made to the applicable law by the Tax Cuts and Jobs Act, which was enacted

on December 22, 2017.

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.

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monthly indexes are cumulated on a semiannual basis, and are

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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.

August 10, 2020 

Bulletin No. 2020–33

Part I

26 CFR 1.250-0, 1.250-1, 1.250(a)-1, 1.250(b)-1

through 1.250(b)-6, 1.861-8, 1.962-1, 1.150212, 1.1502-13, 1.1502-50, 1.6038-2, 1.6038-3,

1.6038A-2

§§1.1502-12, 1.1502-13 and 1.1502-50,

Michelle A. Monroy at (202) 317-5363

(not toll free numbers).

II. Comments on and Revisions to

Documentation Requirements and

Applicability Dates

T.D. 9901

SUPPLEMENTARY INFORMATION:

A. Documentation requirements for

foreign persons, foreign use, and location

outside the United States

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Deduction for ForeignDerived Intangible Income

and Global Intangible LowTaxed Income

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains

final regulations that provide guidance

regarding the deduction for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI).

This document also contains final regulations coordinating the deduction for

FDII and GILTI with other provisions in

the Internal Revenue Code. These regulations generally affect domestic corporations and individuals who elect to be

subject to tax at corporate rates for purposes of inclusions under subpart F and

GILTI.

DATES: Effective Date: These regulations are effective on September 14, 2020.

Applicability Dates: For dates of applicability, see §§1.250-1(b), 1.962-1(d),

1.1502-50(g), 1.6038-2(m)(4), 1.60383(l), and 1.6038A-2(g).

FOR FURTHER INFORMATION CONTACT: Concerning §§1.250-1 through

1.250(b)-6, 1.6038-2, 1.6038-3, and

1.6038A-2, Brad McCormack at (202)

317-6911 and Lorraine Rodriguez at (202)

317-6726; concerning §1.962-1, Edward

Tracy at (202) 317-6934; concerning

August 10, 2020

Background

Section 250 was added to the Internal Revenue Code (“Code”) by the Tax

Cuts and Jobs Act, Public Law 115-97,

131 Stat. 2054, 2208 (2017) (the “Act”),

which was enacted on December 22,

2017. On March 6, 2019, the Department

of the Treasury (“Treasury Department”)

and the IRS published proposed regulations (REG-104464-18) under sections

250, 962, 1502, 6038, and 6038A in the

Federal Register (84 FR 8188) (the

“proposed regulations”). Corrections to

the proposed regulations were published

on April 11, 2019, and April 12, 2019,

in the Federal Register (84 FR 14634

and 84 FR 14901, respectively). A public hearing on the proposed regulations

was held on July 10, 2019. The Treasury

Department and the IRS also received

written comments with respect to the

proposed regulations.

All written comments received in response to the proposed regulations are

available at https://www.regulations.

gov or upon request. Terms used but

not defined in this preamble have the

meaning provided in these final regulations.

Summary of Comments and

Explanation of Revisions

I. Overview

The final regulations retain the basic

approach and structure of the proposed

regulations, with certain revisions. This

Summary of Comments and Explanation

of Revisions section discusses those revisions as well as comments received in response to the solicitation of comments in

the notice of proposed rulemaking. Comments outside the scope of this rulemaking are generally not addressed but may

be considered in connection with future

guidance projects.

266

As described in parts VII.B, C.1, and

D.1 and VIII.B.1 and B.2.c of this Summary of Comments and Explanation of

Revisions section, the proposed regulations provided that to establish that a

recipient is a foreign person, property

is for a foreign use (within the meaning

of proposed §1.250(b)-4(d) and (e)), or

a recipient of a general service is located outside the United States (within the

meaning of proposed §1.250(b)-5(d)(2)),

the taxpayer must obtain specific types

of documentation described in proposed

§§1.250(b)-4(c)(2), (d)(3), and (e)(3) and

1.250(b)-5(d)(3) and (e)(3). The proposed

regulations also provided a transition rule

whereby for taxable years beginning on or

before March 4, 2019, taxpayers could use

any reasonable documentation maintained

in the ordinary course of the taxpayer’s

business that establishes that a recipient

is a foreign person, property is for a foreign use, or a recipient of a general service is located outside the United States,

as applicable, in lieu of the specific documentation described in the regulations,

provided that such documentation meets

certain reliability requirements described

in proposed §1.250(b)-3(d). See proposed

§1.250-1(b). The preamble requested

comments on this special transition rule.

Several comments recommended either making this transition rule permanent

or extending it for a certain period after

the regulations are finalized. The comments recommending that the transition

rule be made permanent indicated that the

documentation described in the proposed

regulations may be difficult, if not impossible, to obtain in the ordinary course of

business. The comments noted that customers are highly reluctant to provide

some of the types of documents that the

proposed regulations described. A comment noted that the documentation rules

in the proposed regulations could require

taxpayers to renegotiate contracts or make

Bulletin No. 2020–33

inquiries of their customers that could

interfere with the customer relationship.

Several comments were concerned with

how the documentation rules and, in particular, the reliability requirements would

apply to business models with longer-term

contracts, especially those entered into

during the 2019 tax year.

The comments that requested extending the transition rule suggested that this

would allow adequate time for the IRS to

gain experience with the types of documentation taxpayers collect in the ordinary course of business, and for taxpayers to gain experience complying with

such rules by developing or improving

internal compliance systems. Alternatively, some comments suggested that

the next issuance of regulations should

be in temporary form to allow additional time to consider the reasonableness of

the documentation requirements before

final regulations are issued and to allow

taxpayers more time to identify distortive

results.

Other comments recommended changes to the documentation rules if the final

regulations do not make the transition rule

permanent. Several comments suggested

that any list of suitable documents (for

either property sales or services) should

be non-exclusive and include more documents obtained in the ordinary course of

business. Some comments recommended

allowing the use of documentation methods similar to those for sales of fungible

mass property under proposed §1.250(b)4(d)(3)(iii) such as market research, statistical sampling, economic modeling or other similar methods to show foreign person

status or foreign use.

The final regulations address these

comments in several ways. First, the final regulations eliminate the requirement

in the proposed regulations to obtain

specific types of documents to establish

foreign person status, foreign use with respect to sales of certain general property

that are made directly to end users, and

the location of general services provided

to consumers. The Treasury Department

and the IRS have determined that requiring specific documentation with respect

to these requirements is difficult given

the variations in industry practices and is

not necessary to achieve the purpose of

the statute. Accordingly, the final regula-

Bulletin No. 2020–33

tions remove the specific documentation

requirements to establish foreign person

status and foreign use with respect to certain sales of general property and the location of a consumer of a general service.

However, as explained in more detail in

part II.D of this Summary of Comments

and Explanation of Revisions section,

as with any deduction, taxpayers claiming a deduction under section 250 bear

the burden of demonstrating that they

are entitled to the deduction. Therefore,

the general requirement for taxpayers to

substantiate their deductions will apply

without any additional specific requirements as to the content of information or

documents.

Second, the final regulations adopt

a more flexible approach regarding the

types of substantiation required for foreign use with respect to sales of general property to non-end users, foreign

use with respect to sales of intangible

property, and with respect to determining whether services are performed for

business recipients located outside the

United States. Although the substantiation requirements in the final regulations

are more specific as to the nature of the

information required, they are not limited to a narrow set of documents. The

requirements also do not contain the

specific reliability requirement set out

in the proposed regulations because the

reliability of documents or information

can differ depending on the circumstances. For example, documents created in

advance of a sales date (such as a longterm sales contract) may be as reliable

as documents created at the time of the

sale, depending on the facts and circumstances. Further, the final regulations

continue to require that the substantiating documents be supported by credible

evidence. See part II.C of this Summary

of Comments and Explanation of Revisions section.

Finally, the applicability dates of

the regulations have been revised, and

taxpayers are permitted to rely on the

proposed regulations for taxable years

before the final regulations are applicable, including relying on the transition

rules during the entirety of such period.

See part II.F and XII of this Summary of

Comments and Explanation of Revisions

section.

267

B. Specific substantiation for certain

transactions

In lieu of the documentation requirements in the proposed regulations, with

respect to sales of general property to

recipients other than end users, sales of

intangible property, and general services

provided to business recipients, the final

regulations provide substantiation rules

that are more flexible with respect to the

types of corroborating evidence that may

be used. See §1.250(b)-3(f). For these

transactions, specific substantiation requirements are needed to ensure that taxpayers make sufficient efforts to determine whether the regulatory requirement

is met. Therefore, with respect to these

transactions, the final regulations describe

the type of information necessary to meet

the substantiation requirements. The

specific ways a taxpayer must substantiate these elements are described in parts

VII.C.9, VII.D.2, and VIII.B.2.d of this

Summary of Comments and Explanation

of Revisions section. The substantiation

requirements are modeled after substantiation rules under section 170 (requiring

substantiation through receipts for certain

charitable deductions) and section 274(d)

(requiring substantiation by adequate records or a taxpayer statement with corroborating evidence). The Treasury Department and the IRS have determined that

requiring a taxpayer to specifically substantiate certain transactions — in particular transactions where the relevant facts

needed to satisfy the rules are generally

in the hands of a third party with a business relationship with the taxpayer — is

necessary and appropriate for establishing

“to the satisfaction of the Secretary” that

property is sold for a foreign use or that

services are provided to persons located outside the United States. See section

250(b)(4) and (b)(5)(C).

C. Timing to obtain, maintain, and

provide specific substantiation

In general, the substantiation rules require that the substantiating documents

with respect to certain transactions that

give rise to foreign-derived deduction eligible income (a “FDDEI transaction”) be

in existence by the time the taxpayer files

its return (including extensions) with re-

August 10, 2020

spect to the FDDEI transaction (the “FDII

filing date”). See §1.250(b)-3(f)(1). The

final regulations do not impose additional requirements relating to when substantiating documents must be in existence.

However, the timing of when substantiating documents are created may affect

the credibility of the substantiating documents. For example, substantiating documents created at or near the time of the

transaction generally have a higher degree

of credibility as compared to substantiating documents created later in time. With

respect to long-term contracts, substantiating documents created when the transaction was entered into will be more credible

in later years if the taxpayer periodically

confirms that the terms of the long-term

contract are being adhered to.

The final regulations provide that substantiating documents must be provided to

the IRS upon request, generally within 30

days or some other period agreed upon by

the IRS and the taxpayer. See §1.250(b)3(f)(1). This is necessary to allow the substantiation requirements to serve their purpose, including to allow the IRS to timely

examine the taxpayer’s qualification for

the FDII deduction.

D. Substantiation in all other cases

For the rules in the final regulations for

which there are no specific substantiation

requirements, taxpayers are already required under section 6001 to make returns,

render statements, and keep the necessary

records to show whether such person is liable for tax under the Code. Therefore, a

taxpayer claiming a deduction under section 250 will still be required to substantiate that it is entitled to the deduction even

if it is not subject to the specific substantiation requirements contained in the final

regulations. See §1.6001-1(a); INDOPCO

v. Commissioner, 503 U.S. 79, 84 (1992)

(“an income tax deduction is a matter of

legislative grace and . . . the burden of

clearly showing the right to the claimed

deduction is on the taxpayer” (internal citations omitted)).

The Treasury Department and the IRS

expect that taxpayers may use a broader

range of evidence to substantiate a section

250 deduction under the new substantiation requirements (and section 6001

where no specific substantiation require-

August 10, 2020

ments are provided) than they would have

been able to use under the more specific

documentation requirements detailed in

the proposed regulations. Based on comments received, in many cases a taxpayer

will be able to determine whether it meets

the requirements in the final regulations

using documents maintained in the ordinary course of its business, as provided in

the transition rule. In some circumstances, however, it may be necessary for taxpayers to gather additional information to

establish that a requirement is met. The

Treasury Department and the IRS are also

considering issuing additional administrative guidance on acceptable documentation to substantiate the deduction.

E. Small business exception

The final regulations include an exception for small businesses similar to

the exceptions from the documentation

requirements for small businesses that are

in the proposed regulations. See proposed

§§1.250(b)-4(c)(2)(ii)(A) and (d)(3)(ii)

(A), and 1.250(b)-5(d)(3)(ii)(A) and (e)

(3)(ii)(A). The exception provides that

the substantiation requirements described

generally in part II.B of this Summary of

Comments and Explanation of Revisions

section do not apply if the taxpayer and

all related parties of the taxpayer, in the

aggregate, receive less than $25,000,000

in gross receipts during the prior taxable

year. See §1.250(b)-3(f)(2). In response to

comments that the final regulations should

allow for broader application of the small

business exception, the final regulations

modify the threshold amount to qualify

for that exception from $10,000,000 of

gross receipts received by the seller of

general property or renderer of services in

the prior taxable year (the standard used in

the proposed regulations) to $25,000,000

in gross receipts received by the taxpayer

and all related parties. As a result of this

exception, a small business will not need

to satisfy the specific substantiation requirements in the regulations, although it

must continue to comply with the general

substantiation rules under section 6001.

For example, small businesses may be

able to substantiate that a sale of general property is for a foreign use by having

evidence of a foreign shipping address

and memorializing conversations with the

268

recipients explaining where the property

will be resold, if sufficiently reliable, or

having a copy of an export bill of lading.

F. Transition rules

The final regulations modify the applicability dates of the regulations to

give taxpayers additional time to develop systems for complying with the

regulations. Generally, the final regulations are applicable for taxable years

beginning on or after January 1, 2021.

See §1.250-1(b). This applicability date

ensures that all taxpayers, regardless of

whether they are fiscal- or calendar-year

taxpayers, have at least three full taxable

years after the Act was enacted before

the final regulations become applicable. However, for taxable years beginning before January 1, 2021, taxpayers

may apply the final regulations or rely

on the proposed regulations, except that

taxpayers that choose to rely on the proposed regulations may rely on the transition rule for documentation for all taxable years beginning before January 1,

2021 (rather than only for taxable years

beginning on or before March 4, 2019,

which was the limitation contained in

the proposed regulations).

III. Comments on and Revisions to

Proposed §1.250(a)-1 — Deduction for

Foreign-Derived Intangible Income and

Global Intangible Low-Taxed Income

Proposed §1.250(a)-1 provided general

rules to determine the amount of a taxpayer’s section 250 deduction and associated

definitions that apply for purposes of the

proposed regulations.

A. Pre-Act NOLs

Several Code sections, including section 250, include limitations based on a

taxpayer’s taxable income or a percentage

of taxable income. The proposed regulations provided an ordering rule for applying sections 163(j) and 172 in conjunction

with section 250 that provided that a taxpayer’s taxable income for purposes of

applying the taxable income limitation of

section 250(a)(2) is determined after all

of the corporation’s other deductions are

taken into account, without distinguish-

Bulletin No. 2020–33

ing between pre-Act and post-Act net

operating losses (“NOLs”). See proposed

§1.250(a)-1(c)(4).

Several comments noted that the proposed regulations did not explicitly address the impact of pre-Act NOLs on the

deduction under section 250 and recommended that pre-Act NOLs not be taken

into account for purposes of determining

the deduction limit under section 250(a)

(2). This would allow taxpayers to take a

deduction under section 250 for FDII in

lieu of utilizing available pre-Act NOLs.

Section 250(a)(2) limits the FDII deduction based on “taxable income,” which

is defined in section 63 to include gross

income minus deductions, including

NOL deductions under section 172. Section 250(a)(2) contains no language that

would support ignoring pre-Act NOLs

for purposes of determining the amount

of taxable income for purposes of section

250(a)(2). Cf. section 965(n) (providing

an election to forgo usage of a portion of

pre-Act NOLs against a taxpayer’s inclusion under section 965). Therefore, the

comment is not adopted.

B. Ordering rule

As discussed in the previous section,

the deduction under section 250 is subject

to a taxable income limitation under section 250(a)(2). Proposed §1.250(a)-1(c)

(4) provided that the corporation’s taxable

income is determined with regard to all

items of income, deduction, or loss, except

for the deduction allowed under section

250. Example 2 in proposed §1.250(a)1(f)(2) applied the ordering rule with respect to sections 163(j), 172, and 250.

Some comments recommended that the

regulations eliminate the ordering rule in

favor of an approach that used simultaneous equations to compute taxable income

for each Code provision that referred to

taxable income, whereas other comments

expressed concern with the complexity

of performing simultaneous equations.

One comment recommended that the regulations not consider section 163(j) and

172(b) carryforwards or carrybacks.

The Treasury Department and the

IRS have determined that further study

is required to determine the appropriate

rule for coordinating section 250(a)(2),

163(j), 172, and other Code provisions

(including, for example, sections 170(b)

(2), 246(b), 613A(d), and 1503(d)) that

limit the availability of deductions based,

directly or indirectly, upon a taxpayer’s

taxable income. Therefore, the final regulations remove Example 2 in proposed

§1.250(a)-1(f)(2) and reserve a paragraph

in §1.250(a)-1(c)(5)(ii) for coordinating

section 250(a)(2) with other provisions

calculated based on taxable income. The

Treasury Department and the IRS are considering a separate guidance project to

address the interaction of sections 163(j),

172, 250(a)(2), and other Code sections

that refer to taxable income; this guidance

may include an option to use simultaneous equations in lieu of an ordering rule.1

Comments are requested in this regard.

Before further guidance is issued regarding how allowed deductions are taken

into account in determining the taxable income limitation in section 250(a)(2), taxpayers may choose any reasonable method (which could include the ordering rule

described in the proposed regulations or

the use of simultaneous equations) if the

method is applied consistently for all taxable years beginning on or after January

1, 2021.

limitation of the proposed regulations

applies to a given tax year, the final regulations should allow for the creation of a

FDII recapture account by which taxpayers can carry forward previously unused

section 250 deductions to future tax years

when they have enough taxable income to

use these deductions. In contrast, another comment recommended that, consistent with the statute, the final regulations

should not allow for carrybacks or carryforwards in order to limit the potential for

abuse by taxpayers.

The section 250 deduction is an annual

calculation, and nothing in the statute or

legislative history contemplates the creation of carryforwards or carrybacks or

a recapture account. Cf. section 163(j)(2)

(providing for the carryforward of disallowed business interest). As a result, the

final regulations do not adopt these recommendations.

C. Carryovers of excess FDII

IV. Comments on and Revisions to

Proposed §1.250(b)-1 — Computation of

Foreign-Derived Intangible Income

Consistent with the statute, the proposed regulations did not contain any

provision allowing the carryforward or

carryback of a tax year’s FDII deduction in excess of the taxpayer’s taxable

income limitation under section 250(b)

(2) and proposed §1.250(a)-1(b)(2). One

comment argued that a provision allowing

the carryforward or carryback should be

added because the taxable income limitation frustrates the policy goal of the FDII

regime of reducing the tax incentive to

locate intellectual property outside the

United States. A different comment recommended that where the taxable income

D. Definition of GILTI

The final regulations under section 250

revise the definition of GILTI consistent

with the final regulations under section

951A (“section 951A final regulations”).

The term “GILTI” means, with respect to

a domestic corporation for a taxable year,

the corporation’s GILTI inclusion amount

under §1.951A-1(c) for the taxable year.

See §1.250(a)-1(c)(3).

The proposed regulations provided

that a taxpayer’s FDII is the taxpayer’s

deemed intangible income (“DII”) multiplied by the corporation’s foreign-derived

ratio. See proposed §1.250(b)-1(b). A taxpayer’s DII is the excess (if any) of the

corporation’s deduction eligible income

(“DEI”) over its deemed tangible income

return (“DTIR”). See proposed §1.250(b)1(c)(3). A taxpayer’s DTIR is 10 percent

of the taxpayer’s qualified business asset investment (“QBAI”). See proposed

§1.250(b)-1(c)(4). The foreign-derived

Any separate guidance would take into account the recent addition of section 172(a)(2)(B)(ii)(I) by the Coronavirus Aid, Relief, and Economic Security Act, Pub. L. No. 116-136, 134 Stat.

281 (2020). That provision provides in relevant part that, for taxable years beginning after December 31, 2020, the taxable income limitation for purposes of deducting net operating loss

carrybacks and carryovers is determined without regard to the deductions under sections 172, 199A, and 250.

1

Bulletin No. 2020–33

269

August 10, 2020

ratio is the taxpayer’s ratio of foreign-derived deduction eligible income (“FDDEI”) to DEI. See proposed §1.250(b)1(c)(13).

A. Financial services income

Section 250(b)(3)(A)(i)(III) excludes

from DEI financial services income as

defined in section 904(d)(2)(D). One

comment requested a clarification that

income that falls outside of the definition

of section 904(d)(2)(D) should be eligible

for inclusion in DEI, such as leasing or

financing activities outside of the active

conduct of a banking, financing, or similar

business.

Section 250(b)(3)(A)(i)(III) excludes

only financial services income as defined

in section 904(d)(2)(D). Any leasing or

financing activities that are not described

in section 904(d)(2)(D) will not fall within

this exclusion. Therefore, no changes are

necessary.

Another comment suggested that the

proposed regulations do not provide

enough general guidance on non-active

financial services income from financial

instruments (such as derivatives and hedges), and, in particular, how to characterize such income (or losses) as a FDDEI

transaction. Absent such guidance, the

comment asserts that taxpayers could take

inconsistent positions in characterizing a

derivative or hedge and characterizing the

underlying transaction as FDDEI transactions. This comment recommended adding a general rule that associates the income, loss, and expenses of a derivative

or hedge with the underlying transaction.

Alternatively, the comment suggested that

the final regulations treat the derivative or

hedge transaction as a separate transaction

and test it for FDDEI under the rules regarding sales of intangible property.

Consistent with the proposed regulations, the final regulations provide that, in

general, financial instruments are neither

general property nor intangible property,

and therefore their sales cannot give rise to

FDDEI. See §1.250(b)-3(b)(10) (excluding from the definition of general property

a security defined under section 475(c)(2))

and §1.250(b)-3(b)(11) (intangible property has the meaning set forth in section

2

367(d)(4)). However, the final regulations

adopt the suggestion to provide a special

rule for hedges to associate the income or

loss from such hedges with the underlying

transaction. See §1.250(b)-4(f) and part

VII.E of this Summary of Comments and

Explanation of Revisions section.

B. Definition of foreign branch income

Section 250(b)(3) excludes from DEI

foreign branch income as defined in section 904(d)(2)(J), which provides that

foreign branch income is business profits attributable to one or more qualified

business units. Proposed §1.250(b)-1(c)

(11) defined foreign branch income by

cross-reference to §1.904-4(f)(2), which

provides that gross income is attributable

to a foreign branch if the gross income is

reflected on the separate set of books and

records of the foreign branch. Proposed

§1.250(b)-1(c)(11), however, modified

this definition to also include any income

from the sale, directly or indirectly, of

any asset (other than stock) that produces gross income attributable to a foreign

branch, including by reason of the sale of

a disregarded entity or partnership interest.

Several comments requested that the

final regulations remove the modification

to the definition in proposed §1.904-4(f)

(2). Several comments noted that the definition, as proposed, would impermissibly

create a class of income that is neither DEI

nor foreign branch income for section 904

foreign tax credit purposes, and therefore, asserted that the definitions must be

aligned consistently. Another comment

argued that the proposed regulations under section 904 already contain rules that

address the types of transactions that were

described in proposed §1.250(b)-1(c)(11).

Multiple comments also noted that section

250(b)(3)(A)(i)(VI) cross references to

section 904(d)(2)(J) without any modification to that latter provision and argued

that modifying the definition in regulations exceeded the Treasury Department

and IRS’s regulatory authority. One comment argued that the expansion contravenes the Congressional purpose behind

FDII of encouraging the repatriation of intangible property. Another comment noted

that if the definition with the modification

is applied retroactively, it could adversely

affect taxpayers that undertook transactions to repatriate intellectual property before the proposed regulations were issued,

a problem that the comment asserted is exacerbated by the differing effective dates

of the proposed foreign tax credit regulations and the FDII proposed regulations.

If the final regulations were to retain

the expanded definition, one comment

requested that the definition also be used

for purposes of the foreign branch category definition in §1.904-4(f). Another

comment requested that the final regulations provide further clarification of the

treatment of the disregarded transactions,

particularly with respect to the disposition of a partnership interest, and provide

relevant examples of other types of transactions that the expanded definition is intended to capture. Moreover, the comment

requested that the definition of foreign

branch income should be modified such

that it would not include any adjustments

that would increase the gross income attributable to the foreign branch as a result

of the transfer of intangible property from

the foreign branch to the foreign branch

owner.

The Treasury Department and the IRS

agree that there should be one consistent

definition of foreign branch income in

both §§1.250(b)-1(c)(11) and 1.904-4(f)

(2) to avoid the various results suggested

by comments. Accordingly, the final regulations define foreign branch income by

cross reference to §1.904-4(f)(2) and remove the modification to that definition in

the proposed regulations that would have

included as foreign branch income any income from the sale, directly or indirectly,

of any asset (other than stock) that produces gross income attributable to a foreign

branch, including by reason of the sale of

a disregarded entity or partnership interest. See §1.250(b)-1(c)(11).2

C. Cost of goods sold allocation

The proposed regulations provided

that for purposes of determining the gross

income included in gross DEI and gross

FDDEI, cost of goods sold is attributed to

gross receipts with respect to gross DEI or

Under §1.904-4(f)(2), a disposition of an interest in a disregarded entity could still result in foreign branch income. See §1.904-4(f)(4)(ii) Example 2.

August 10, 2020

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gross FDDEI under any reasonable method. See proposed §1.250(b)-1(d)(1). The

final regulations clarify that the method

chosen by the taxpayer must be consistently applied.

For purposes of this rule, any cost of

goods sold associated with activities undertaken in an earlier taxable year cannot

be segregated into component costs and

attributed disproportionately to amounts

excluded from gross FDDEI or to amounts

excluded from gross DEI, similar to the

rules in proposed §1.199-4(b)(2)(iii)(A).

The preamble to the proposed regulations

requested comments on whether there are

alternative approaches for dealing with

timing issues, and whether additional

rules should be provided for attributing

cost of goods sold in determining gross

DEI and gross FDDEI.

One comment recommended that the

final regulations continue to allow cost

of goods sold to be allocated under any

reasonable method to provide flexibility

to different taxpayers. Another comment

agreed with the proposed regulations that

cost of goods sold should be allocated

between gross FDDEI and gross non-FDDEI3 regardless of whether any component of the costs was associated with activities undertaken in a prior tax year. That

comment, however, recommended that for

future periods taxpayers that recognized

revenue under section 451 for advance

payments should be permitted an election

to create an imputed cost of goods sold

deduction based upon the taxpayer’s gross

profit percentage for that particular product or service. The comment argued this

election is needed because recognition of

an advance payment as income without

associated cost of goods sold might be required under section 451 based upon certain facts and circumstances and the election would allow the taxpayer to avoid this

distortive impact.

Sections 451 and 461 provide the general rules on the timing of income recognition and taking a deduction into account,

respectively. Nothing in section 250 suggests that Congress intended to change

the scope of generally applicable income

recognition rules. Therefore, the final regulations do not adopt the comment to per-

mit an election to create an imputed cost

of goods sold deduction in the context of

advance payments with respect to section

250.

D. Expense allocation

1. In General

In calculating DEI under section 250(b)

(3), a taxpayer must determine the deductions that are “properly allocable” to gross

DEI. Proposed §1.250(b)-1(d)(2)(i) further provided that, for purposes of calculating FDDEI, a taxpayer must determine

the deductions that are “properly allocable” to gross FDDEI. Consistent with the

rules for determining the foreign tax credit

limitation under section 904 or qualified

production activities income under former

section 199, the proposed regulations provided that §§1.861-8 through 1.861-14T

and 1.861-17 apply for purposes of allocating deductions to gross DEI and gross

FDDEI. Id. Several comments supported

using these general apportionment rules.

2. Research and Experimentation

Expenditures

Under §1.861-17(b), an exclusive apportionment of research and experimentation (“R&E”) expenditures is made if activities representing more than 50 percent

of the R&E expenditures were performed

in a particular geographic location, such

as the United States. After this initial exclusive apportionment, the remainder of

the taxpayer’s R&E expenditures are apportioned under either the sales or gross

income methods under §1.861-17(c) and

(d). Section 1.861-17(e) provides rules for

making a binding election to use either the

sales or gross income method.

a. Exclusive apportionment and direct

apportionment

The proposed regulations under section 250 specified that the exclusive apportionment rules in §1.861-17(b) did

not apply for purposes of apportioning

R&E expenses to gross DEI and gross

FDDEI. See proposed §1.250(b)-1(d)(2)

(i). Several comments requested that the

final regulations allow taxpayers to use

exclusive apportionment for purposes of

determining FDII. One comment noted

that the preamble to the proposed regulations does not justify the proposed regulations omitting the exclusive apportionment method in the FDII context. Another

comment asserted that allowing exclusive

apportionment would mitigate a significant disincentive for taxpayers to onshore

intangible property into the United States.

Other comments argued that allocating

R&E expenses to FDDEI may discourage

taxpayers from performing R&E activities

in the United States.

Several comments recommended allocating R&E expenditures based on an

optional books and records method that

could be used when there is a clear factual

relationship between the R&E expenditures and a particular amount of income.

These comments noted that some taxpayers are subject to regulatory oversight

with respect to their contract pricing and

costs, and therefore such taxpayers’ books

and records could be an accurate way of

showing the relationship between R&E

expenses and gross income.

Several comments also requested that

the final regulations adopt special rules

for expenses that are market-restricted or

market-required (for example, expenses

required only by the U.S. Food and Drug

Administration concerning the U.S. market), including where the legally mandated rule in §1.861-17(a)(4) would not

apply. One comment noted that this rule

could apply in situations where U.S. law

limits the realization from certain research

activities to the market in which the research is performed (such as export controls) and therefore the R&E expenditures

would not be expected to generate gross

income outside the United States.

Several comments requested that if

none of these recommendations for allocating R&E expenses are adopted, the

final regulations should reserve on this

provision pending the broader ongoing

review of §1.861-17 by the Treasury Department.

In light of the issuance of proposed

rules under §1.861-17 on December 17,

The final regulations rename “gross non-FDDEI” as “gross RDEI” to clarify that the term includes only the residual of gross DEI that is not gross FDDEI, rather than all gross income

(including income that is not gross DEI) that is not gross FDDEI. See §1.250(b)-1(c)(14).

3

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August 10, 2020

2019 (84 FR 69124) (the “2019 FTC proposed regulations”), the final regulations

remove the provision stating that the exclusive apportionment rules in §1.86117(b) do not apply for purposes of apportioning R&E expenses to gross DEI

and gross FDDEI, and generally do not

provide special rules for applying §1.86117 for purposes of section 250. Proposed

§1.861-17 in the 2019 FTC proposed regulations provides that the exclusive apportionment rule applies only to section 904

as the operative section, and also proposes eliminating the special rule for legally mandated R&E. As recommended by

comments to the proposed regulations under section 250, the Treasury Department

and the IRS will consider the issues raised

regarding the application of exclusive apportionment for purposes of section 250

as part of finalizing the 2019 FTC proposed regulations.

b. Use of sales or gross income method

Several comments requested that the final regulations include an election to allocate R&E expenses under either the sales

or gross income method. Comments also

requested that taxpayers should be permitted to make this election annually to give

taxpayers a longer period to assess the

various new regimes that rely on §1.86117 such as section 250, and pending the

finalization of the FDII regulations. Another comment suggested that the final

regulations should provide that the provisions of §1.861-17(c)(3) (requiring sales

to third parties by controlled foreign affiliates to be included) should not apply as

it might artificially apportion more R&E

expense against FDDEI.

As described in the preamble to proposed §1.861-17 in the 2019 FTC proposed regulations, the Treasury Department and the IRS are concerned that the

gross income method could in some cases

produce inappropriate results. See 84 FR

69124, 69129. As a result, the 2019 FTC

proposed regulations proposed to eliminate the optional gross income method described in §1.861-17(d) and require R&E

expenditures in excess of the amount exclusively apportioned under §1.861-17(b)

to be apportioned based on gross receipts.

See proposed §1.861-17(d). Comments

addressing the applicability of the gross

August 10, 2020

income method will be addressed as part

of finalizing the 2019 FTC proposed regulations.

Proposed §1.861-17(e)(3), published

December 7, 2018 (83 FR 63200), permitted taxpayers a one-time exception to

what would otherwise be a five-year binding election period under §1.861-17(e)(1)

to use either the sales or the gross income

method, in light of the many changes to

the foreign tax credit rules made by the

Act. Under proposed § 1.861-17(e)(3),

even if a taxpayer is subject to the binding election period, for the taxpayer’s first

taxable year beginning after December

31, 2017, the taxpayer may change its

apportionment method without obtaining

the Commissioner’s consent. Comments

to the proposed regulations under section

250 requested that this one-time exception be extended to at least a second tax

year beginning after December 31, 2017,

potentially at the election of the taxpayer, pending the Treasury Department’s

ongoing review of §1.861-17. The final

regulations under §1.861-17 issued on

December 17, 2019, provide an additional

year for taxpayers to change their election

of the sales or gross income method. See

§1.861-17(e)(3).

3. Carryovers

Comments requested additional clarification regarding whether taxpayers are

required to apportion expenses incurred

before the effective date of the proposed

regulations. Multiple comments specifically asked for a clarification that taxpayers are not required to apportion NOLs

incurred before the effective date of the

proposed regulations or, in some cases,

before the effective date of the Act, recommending that a clarification could be

along the lines of §1.199-4(c)(2)(ii) (providing that a deduction under section 172

for a net operating loss is not allocated or

apportioned to domestic production gross

receipts or gross income attributable to

domestic production gross receipts).

The final regulations address this comment by providing that the following

provisions (which limit certain deductions and provide for the carryover of the

amounts not currently allowed) do not

apply when allocating and apportioning

deductions to gross DEI or gross FDDEI

272

of a taxpayer for a taxable year: sections

163(j), 170(b)(2), 172, 246(b), and 250.

See §1.250(b)-1(d)(2)(ii). The Treasury

Department and the IRS considered a rule

that would require expenses incurred in

prior years, including in years before the

effective date of the proposed regulations,

to be allocated to gross DEI and gross

FDDEI, but determined that the benefit of

the theoretical precision of this approach

would be outweighed by the burden on

taxpayers and the IRS that would be associated with making retroactive determinations. Further, the approach taken in

the final regulations is consistent with the

premise that the section 250 deduction is

calculated based on annual income and

expenses.

E. Foreign-derived ratio

The proposed regulations provided

rules for determining a taxpayer’s foreign-derived ratio, which is the ratio of

FDDEI to DEI. See proposed §1.250(b)1(c)(13). The preamble to the proposed

regulations observed that as a result of expense apportionment or attribution of cost

of goods sold to gross receipts, a taxpayer’s FDDEI could exceed its DEI, thereby

resulting in a foreign-derived ratio greater

than one. The preamble noted that this

result would be inconsistent with section

250(b)(4), which defines FDDEI as a subset of DEI, as it would lead to having FDII

in excess of DII. Therefore, the proposed

regulations clarified that the foreign-derived ratio cannot exceed one.

Several comments requested that the

final regulations allow the foreign-derived

ratio to exceed one. The comments asserted that the foreign-derived ratio can in fact

exceed one under the statute where the

taxpayer has losses that cause its FDDEI

to exceed its DEI, and that there is no evidence Congress intended to limit the foreign-derived ratio to no greater than one.

One of the comments asserted that FDDEI

and DEI are defined by the statute and that

the Treasury Department and the IRS do

not have the authority to define FDDEI

more narrowly than the statute does. Another comment argued that section 250(a)

(2) provides a separate taxable income

limitation that limits the FDII deduction

based on domestic losses. This comment

further asserted that the foreign-derived

Bulletin No. 2020–33

ratio rule of the proposed regulations reduces a taxpayer’s incentive for repatriating intangible property when the foreign

income from these intangibles cannot be

used to offset domestic losses for purposes

of applying section 250.

One comment further suggested that

the final regulations allow a taxpayer to

elect to determine its FDII deduction, including the various elements of the determination such as DII, QBAI, and DTIR,

based on specific product lines or business

lines, as determined by the taxpayer. The

comment asserted that such an approach

would be analogous to other provisions

that calculate taxable income separately

for different subsets of income such as

former section 199, the foreign tax credit

limitation under section 904(d), separate

limitation loss recapture rules in sections

904(f) and (g), and §§1.994-1(c) and

1.994-2(b). The comment argued that such

an approach to determining FDII is more

consistent with the policy goal of reducing the tax incentive to locate intellectual

property outside the United States, which

the comment asserted would be frustrated if domestic losses reduce FDII-eligible

income.

The Treasury Department and the IRS

do not agree that limiting the foreign-derived ratio to no greater than one is inconsistent with the plain meaning of section

250. Specifically, the approach recommended by the comments would be inconsistent with the statutory language of

section 250(b)(4), which defines FDDEI

as a subset of DEI, that is, “any deduction

eligible income of such taxpayer which is

derived in connection with” certain transactions. Allowing the foreign-derived ratio to exceed one could also lead to anomalous results. For example, a cliff effect

would arise whereby a taxpayer with significant FDDEI but only $1 of DEI would

have a significant FDII deduction, whereas if it has $0 or less of DEI, then no FDII

deduction would be allowed. This would

also create further anomalous results and

incentives with respect to section 163(j),

which is determined taking into account

the section 250 deduction.

In addition, nothing in section 250 provides for FDII to be calculated based on

specific product lines or business lines,

which would entail significant complexity

for taxpayers and administrative burdens

Bulletin No. 2020–33

for the IRS. Instead, the statute is clear

that the FDII deduction is calculated as

an aggregate of all FDDEI transactions.

Therefore, the final regulations do not

adopt this comment.

F. Partnership reporting requirements

The proposed regulations required

partnership information reporting in order

to administer section 250. See proposed

§§1.250(b)-1(e)(2) and 1.6038-3(g)(4).

One comment asserted that the partnership information reporting requirements

of proposed §1.250(b)-1(e)(2) impose

unnecessary administrative burdens on a

partnership that reasonably believes it has

no (direct or indirect) domestic corporate

partners, even after the partnership has

performed reasonable due diligence as

to the identity of its partners and reasonably relied on information provided by the

partners. The comment requested that the

Treasury Department and IRS consider

some form of relief from this reporting;

the comment expressed the view that

this limited reporting requirement would

not prejudice the government’s interest

because the use of partnership items can

only reduce the partner’s tax liability. The

comment further requested the addition of

a reasonable cause exception (consistent

with the penalty defenses available for the

Form 8865 penalties).

The final regulations do not include a

more limited reporting requirement because the Treasury Department and IRS

are concerned that this might undermine

accurate reporting at the partner level. In

addition, the Treasury Department and

IRS disagree with the comment’s observation that reporting by the partnership of

items under section 250 could only reduce

a partner’s tax liability—for example, a

domestic corporate partner might reduce

its tax liability by failing to include partnership QBAI. As to the comment’s request for a reasonable cause exception,

generally applicable penalty exceptions

already apply to the extent information

relevant to FDII is not reported on the

applicable form. See section 6698(a) for

filing Form 1065, section 6038(c)(4)(B)

for filing Form 8865, and section 6724(a)

for filing Schedule K-1 (Form 1065). For

example, under §301.6724-1(a)(2)(ii)

and (c)(6), a partnership may establish

273

reasonable cause because a payee failed

to provide information necessary for the

partnership to comply (or because of incorrect information provided by the payee

or any other person that the partnership

relied on in good faith). However, the final regulations clarify the reporting rules

for tiered-partnership situations as well as

provide guidance on certain computational aspects. See §1.250(b)-1(e)(2). Similar

additions are made to the reporting rules

with respect to controlled foreign partnerships. See §1.6038-3(g)(3).

V. Comments on and Revisions to

Proposed §1.250(b)-2 — Qualified

Business Asset Investment

A. In general

The proposed regulations provided

general rules for determining the QBAI of

a taxpayer for purposes of determining its

DTIR, including defining QBAI, tangible

property, and specified tangible property;

rules regarding dual-use property; rules

for determining adjusted basis; rules regarding short tax years; rules regarding

property owned through a partnership;

and an anti-avoidance rule. See proposed

§1.250(b)-2. Section 250(b)(2)(B) provides that QBAI, for purposes of section

250, is defined under section 951A(d),

and is determined by substituting “deduction eligible income” for “tested income”

and without regard to whether the corporation is a controlled foreign corporation (“CFC”). While the rules provided

in §1.951A-3 for determining QBAI of a

CFC for purposes of section 951A do not

apply in determining QBAI for purposes

of computing the deduction of a taxpayer

under section 250 for its FDII, the proposed regulations under section 250 provided a similar, but not identical, determination of QBAI for purposes of FDII.

The section 951A final regulations

made certain revisions and clarifications

to the proposed regulations under that

section (“section 951A proposed regulations”). See §1.951A-3. The preamble to

the section 951A final regulations noted

that, except as indicated with respect to

the election to use a depreciation method

other than the alternative depreciation system (“ADS”) for determining the adjusted basis in specified tangible property for

August 10, 2020

assets placed in service before the enactment of section 951A (see part V.B of this

Summary of Comments and Explanation

of Revisions section), modifications similar to the revisions to proposed §1.951A3 will be made to proposed §1.250(b)-2.

These modifications generally clarify the

QBAI computation with respect to dual-use property (§1.250(b)-2(d)) and partnerships (§1.250(b)-2(g)). Accordingly,

the final regulations make conforming

changes to QBAI for purposes of FDII

similar to the changes made to proposed

§1.951A-3 in the section 951A final regulations. See §1.250(b)-(2).

B. Determination of basis under ADS

The proposed regulations provided

that, for purposes of determining QBAI,

the adjusted basis in specified tangible

property is determined by using ADS under section 168(g), and by allocating the

depreciation deduction with respect to

such property for the taxpayer’s taxable

year ratably to each day during the period

in the taxable year to which such depreciation relates. See section 951A(d)(3)4 and

proposed §1.250(b)-2(e)(1). ADS applies

to determine the adjusted basis in property

for purposes of determining QBAI regardless of whether the property was placed

in service before the enactment of section

250 or section 951A, or whether the basis

in the property is determined under another depreciation method for other purposes

of the Code. See section 951A(d)(3) and

proposed §1.250(b)-2(e).

A comment recommended that the final regulations for FDII should permit

taxpayers the opportunity to follow U.S.

GAAP for purposes of determining QBAI

where the difference between U.S. GAAP

and ADS is immaterial. The final regulations do not adopt this recommendation.

Section 951A(d)(3) (and, by reference,

section 250(b)(2)(B)) is clear that the adjusted basis in specified tangible property

is determined using ADS under section

168(g). In addition, permitting taxpayers to elect to follow U.S. GAAP in the

context of FDII will impose significant

administrative burdens on the IRS to de-

termine what would be immaterial and account for different depreciation methods

to compute QBAI.

VI. Comments on and Revisions to

Proposed §1.250(b)-3 — FDDEI

Transactions

C. QBAI anti-avoidance rule

The proposed regulations provided that

FDDEI is the excess of gross FDDEI over

deductions properly allocable to gross

FDDEI. See proposed §1.250(b)-1(c)

(12). The proposed regulations defined

gross FDDEI as the portion of a corporation’s gross DEI that is derived from all

of its “FDDEI sales” and “FDDEI services.” See proposed §1.250(b)-1(c)(15).

The proposed regulations defined “sale”

to include a lease, license, exchange, or

other disposition of property, including a

transfer of property resulting in gain or an

income inclusion under section 367. See

proposed §1.250(b)-3(b)(7).

In order to prevent artificial decreases

to the DTIR amount, the proposed regulations disregarded certain transfers of

specified tangible property by a domestic

corporation to a related party where the

corporation continues to use the property

in production of gross DEI. In particular,

proposed §1.250(b)-2(h)(1) disregarded a

transfer of specified tangible property by

the taxpayer to a related party if, within a

two-year period beginning one year before

the transfer, the taxpayer leases the same

or substantially similar property from a

related party and such transfer and lease

occur with a principal purpose of reducing

the taxpayer’s DTIR. In addition, a transfer or leaseback transaction was treated as

per se undertaken for a principal purpose

of reducing the transferor’s DTIR if the

transfer and leaseback each occur within a

six-month span. See proposed §1.250(b)2(h)(3). Comments recommended that

the final regulations contain a transition

period for the QBAI anti-avoidance rule

in proposed §1.250(b)-2(h)(3) for transactions entered into before the date that

the proposed regulations were issued. The

final regulations adopt this comment. See

§1.250(b)-2(h)(5).

Another comment recommended that a

taxpayer be able to rebut the presumption

that a transfer or leaseback transaction was

undertaken for a principal purpose of reducing the transferor’s DTIR if the transfer and leaseback each occurred within a

six-month span. The final regulations do

not adopt this recommendation because a

transfer and lease of the same or similar

property that occurs between related parties within six months does not materially

change the economic risk of the parties

and is unlikely to be motivated by non-tax

reasons. In addition, permitting taxpayers to rebut the presumption that such a

transaction was undertaken for a principal

purpose of reducing the transferor’s DTIR

creates significant administrative burdens.

A. Definition of “general property”

1. Treatment of Commodities

For purposes of determining what is

a FDDEI sale (and relatedly, whether a

sale is for a foreign use), the proposed

regulations distinguished between “general property” and certain other types of

property. The proposed regulations excluded any commodity (as defined in section 475(e)(2)(B) through (D)) from the

definition of general property. See proposed §1.250(b)-3(b)(3). The proposed

regulations did not exclude from the definition of general property a commodity

described in section 475(e)(2)(A), and

therefore, the sale of such a commodity

may qualify as a FDDEI sale. A comment

raised a concern that the sale of a physical commodity effected through certain

derivative contracts (described in section

475(e)(2)(B) through (D)) might not be

treated as a sale of general property under

the proposed regulations. The comment

recommended clarifying that the sale of

a physical commodity in satisfaction of a

forward contract is not excluded from the

definition of general property.

The Treasury Department and the IRS

generally agree that a sale of a commodity such as an agricultural commodity or a

natural resource should be a sale of gener-

As enacted, section 951A(d) contains two paragraphs designated as paragraph (3). The section 951A(d)(3) discussed in this part V.B of the Summary of Comments and Explanation of

Revisions section relates to the determination of the adjusted basis in property for purposes of calculating QBAI.

4

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Bulletin No. 2020–33

al property whether it is sold pursuant to

a spot contract or sold pursuant to a forward or option contract, other than a section 1256 contract or similar contract that

is traded and cleared like a section 1256

contract. The sale of such a commodity

through a futures or option contract that is

a section 1256 contract or similar contract

is not treated as a sale of general property because the interposition of a clearing

organization as the counterparty to such

contracts severs the connection between

the original selling and buying parties to

the contract such that no meaningful determination can be made whether the sale

through such a contract is for a foreign

use. The definition of “general property”

in §1.250(b)-3(b)(10) is modified accordingly. The final regulations also clarify

that financial instruments or similar assets

traded through futures or similar contracts

do not qualify as general property.

The Treasury Department and the IRS

are concerned, however, that a taxpayer

could manipulate its FDDEI by selectively physically settling only its commodities

forward or option contracts in which it has

a gain. To prevent this manipulation, the

final regulations provide that the sale of a

commodity pursuant to a forward or option contract is treated as a sale of general

property only to the extent that a taxpayer

physically settled the contract pursuant to

a consistent practice adopted for business

purposes of determining whether to cash

or physically settle such contracts under

similar circumstances. See §1.250(b)-3(b)

(10).

The proposed regulations further provided that a sale of a security (as defined

in section 475(c)(2)) or a commodity (as

defined in section 475(e)(2)(B) through

(D)) is not a FDDEI sale. See proposed

§1.250(b)-4(f). This rule is no longer necessary because the final regulations exclude such property from the definition of

general property.

2. Treatment of Interests in Partnerships

The proposed regulations did not address the conditions under which the sale

of a partnership interest that is not de-

5

scribed in section 475(c)(2) will satisfy

the foreign use requirement. One comment suggested that when a taxpayer sells

a partnership interest, a look-through approach should apply such that the sale of

a partnership interest would be considered

a sale of the partner’s proportionate share

in the partnership’s assets. As such, the

sale of the partnership interest could be

considered a sale of general property and

would qualify as a FDDEI sale so long

as the other relevant requirements of the

regulations were met. The same comment

noted an alternative approach that would

preclude looking through to the underlying assets and instead would require the

foreign purchaser to determine if the acquisition of the partnership interest is for

a foreign use.

The Treasury Department and the IRS

have determined that, like an interest in a

corporation (which is a security under section 475(c)(2)(A) and therefore not general property under §1.250(b)-3(b)(10)),

interests in a partnership are not the type

of property that can be subject to “any

use, consumption, or disposition” outside

the United States. Furthermore, a lookthrough approach would be inconsistent

with the fact that title to the partnership’s

property does not change upon the sale of

an interest in a partnership and also would

be difficult to administer given that the

underlying property that would be tested

for foreign use is not actually being transferred. Accordingly, the final regulations

provide that an interest in a partnership, as

well as an interest in a trust or estate, is not

general property. See §1.250(b)-3(b)(10).

3. Exclusion of Intangible Property

Under the proposed regulations, the

rules applicable to the determination of

whether a sale of property is for a foreign use depends on whether the property

sold is “general property” or “intangible

property.” See proposed §1.250(b)-4(d)

and (e). The proposed regulations defined

general property as property other than

intangible property, a security (as defined

in section 475(c)(2)), or a commodity (as

defined in section 475(e)(2)(B) through

(D)). See proposed §1.250(b)-3(b)(3).

The proposed regulations defined intangible property by cross-reference to section 367(d)(4). See proposed §1.250(b)3(b)(4).

Two examples in the proposed regulations suggested that a limited use license

of a copyrighted article is analyzed under

the rules for sales of intangible property.

See proposed §1.250(b)-4(e)(4)(ii)(D) and

(E) (Example 4 and 5). One comment recommended that if the distinction between

sales of tangible and intangible property

is maintained, then the final regulations

should provide that software transactions

involving the sale or lease of copyrighted

articles are governed by the general property rules and not the intangible property

rules.

The final regulations make several

changes in response to this comment. Consistent with the request in the comment,

the definition of “intangible property” for

purposes of section 250 is clarified to not

include a copyrighted article as defined in

§1.861-18(c)(3). See §1.250(b)-3(b)(11).

However, the rules for determining foreign use that apply to general property are

not suitable for sales of digital content, including copyrighted articles, that are transferred electronically, because those rules

focus on the physical transfer of property

to end users. Therefore, the final regulations provide an additional rule for sales

of general property that primarily contain

digital content. See §1.250(b)-4(d)(1)(ii)

(D). Under the final regulations, “digital

content” is defined as a computer program

or any other content in digital format. See

§1.250(b)-3(b)(1). The determination of

how a transfer of a copyrighted article is

characterized (for example, as a sale or a

service) for purposes of applying the final

regulations is based on general U.S. tax

principles, taking into account the regulations issued under section 861.5

Notwithstanding the final regulations’

treatment of sales of copyrighted articles

for purposes of determining foreign use,

no inference is intended with respect to

the treatment of sales of copyrighted articles under other sections of the Code.

For example, the fact that a sale of a copy-

See proposed §1.861-18(a) (84 FR 40317) (adding section 250 to the list of provisions to which §1.861-18 applies).

Bulletin No. 2020–33

275

August 10, 2020

righted article (or other property) is treated as a FDDEI sale does not necessarily

mean that the income from the sale is foreign source under section 861.

B. Foreign military sales and services

The proposed regulations provided that

for purposes of section 250 a sale of property or a provision of service to the U.S.

government that is governed by the Arms

Export Control Act of 1976, as amended

(22 U.S.C. 2751 et. seq.), is treated as a

sale of property or provision of a service

to a foreign government, and therefore

may qualify as a FDDEI transaction if

the other requirements under proposed

§§1.250(b)-3 through 1.250(b)-6 are satisfied. See proposed §1.250(b)-3(c). The

proposed regulations requested comments

on identifying readily available documentation sufficient to demonstrate that a particular sale or service was made pursuant

to the Arms Export Control Act.

Several comments requested removal

of the requirement in proposed §1.250(b)3(c) that the resale or on-service to a foreign government or agency or instrumentality thereof must be “on commercial

terms.” The comments asserted that this

requirement was ambiguous and observed

that the taxpayer would not necessarily

have access to the contract between the

U.S. government and the foreign counterparty and therefore could not necessarily

evaluate the commerciality of such contract. The comments also objected to the

requirement that the contract between the

taxpayer and the U.S. government specifically refer to the resale or on-service to the

foreign government, stating that the contract may not always specify this information but that the resale or on-service could

be evidenced by the taxpayer’s generally

available records.

In response to the preamble’s request

for comments on suitable documentation

to demonstrate that a foreign military sale

qualifies under this special rule, several

comments noted that no one particular

document will suffice to demonstrate that

a given sale or service qualifies. Nevertheless, comments stated that ordinary course

documentation should suffice to show that

the sale or service qualifies. If the final

regulations were to retain a list of particular documents required to demonstrate

August 10, 2020

that a particular sale or service was made

pursuant to the Arms Export Control Act,

the comments suggested various types of

documents that might be available but

also stated that any list of these documents

should be non-exclusive since any one

document may not exist for a particular

sale or service, and, in any event, the Department of Defense and the State Department modify their forms frequently. One

comment asked for transitional relief for

any pre-existing contracts, if the final regulations were to provide an exclusive list

of required documentation. Another comment requested a presumption of foreign

use in the context of foreign military sales

based on the high likelihood that defense

articles would satisfy foreign use — sales

made pursuant to the Arms Export Control

Act are limited to foreign strategic partners who intend to use articles in a certain

manner, such as, self-defense and internal

security — and the low likelihood that a

foreign person could use a defense article

within the United States.

In general, the final regulations adopt

the comments. Section 1.250(b)-3(c) does

not include a requirement that the foreign

military sale or service be “on commercial terms” or that the contract specifically refer to the resale or on-service to

the foreign government. Instead, if a sale

of property or a provision of a service is

made pursuant to the Arms Export Control Act, then the sale of property or provision of a service is treated as a FDDEI

sale or FDDEI service without needing to

apply the general rules in §1.250(b)-4 or

§1.250(b)-5. See §1.250(b)-3(c). The final

regulations also do not require any particular documentation to substantiate that

a transaction qualifies under the rule in

§1.250(b)-3(c). Taxpayers will continue to

be required to substantiate under section

6001 that any foreign military sale or service qualifies for a section 250 deduction.

C. Reliability of documentation and

reason to know standard

The proposed regulations provided

that to establish that a recipient is a foreign person, property is for a foreign

use, or a recipient of a general service

is located outside the United States, the

taxpayer must obtain specific types of

documentation described in proposed

276

§§1.250(b)-4(c)(2), (d)(3), and (e)(3) and

1.250(b)-5(d)(3) and (e)(3). The proposed

regulations also provided that the seller or

renderer must not know or have reason to

know that the documentation is incorrect

or unreliable. Proposed §1.250(b)-3(d)(1).

One comment requested that the final regulations provide more guidance and relevant examples regarding the scope of this

rule, in particular what knowledge should

be imputed across a large organization and

how the standard should apply when relevant information is legally protected by

data privacy laws.

As described in part II of this Summary of Comments and Explanation of

Revisions section, the final regulations

replace the documentation requirements

with substantiation rules that are more

flexible with respect to the types of corroborating evidence that may be used. The

knowledge or reason to know standard is

retained in §§1.250(b)-3(f)(3) (treatment

of certain loss transactions), 1.250(b)4(c)(1) (foreign person requirement), (d)

(1)(iii)(C) (general property incorporated

into a product as a component) and (d)

(2)(ii)(C)(2) (sale of intangible property

consisting of a manufacturing method

or process to a foreign unrelated party),

and 1.250(b)-5(d)(1) (general services

provided to consumers). In response to

comments, the final regulations provide

additional detail regarding the application of the reason to know standard in

these sections. The final regulations generally provide that a taxpayer has reason

to know that a transaction fails to satisfy

a substantive requirement if the information that the taxpayer receives as part of

the sales process contains information

that indicates that the substantive requirement is not met and, after making

reasonable efforts, the taxpayer cannot

establish that the substantive requirement

is met. See §§1.250(b)-3(f)(3), 1.250(b)4(c)(1), (d)(1)(iii)(C) and (d)(2)(ii)(C)

(2), and §1.250(b)-5(d)(1).

D. Sales or services to a partnership

For purposes of determining a taxpayer’s FDII attributable to sales of property

or services to a partnership, the proposed

regulations adopted an entity approach

to partnerships. See proposed §1.250(b)3(g)(1). One comment suggested that if a

Bulletin No. 2020–33

seller of a good has a greater than 10 percent ownership interest in the recipient

domestic partnership, the final regulations should also permit aggregate treatment of the partnership for this limited

purpose. The comment observed that the

proposed regulations do not permit sales

to a domestic partnership to qualify as a

FDDEI sale because a domestic partnership is not a foreign person under proposed §1.250(b)-3(b)(2). According to

the comment, in certain industries, customers request “teaming arrangements”

that require bidders to form a single domestic bidding entity that will govern the

relationship between the members of the

team, but most of the work is performed

by the partners, under subcontract from

the partnership. The comment recommended that the practice of joint bidding

should not disqualify the activity for

FDII purposes.

With respect to a taxpayer’s sales of

property to a partnership, one comment

suggested that the final regulations consider alternatives to a pure entity approach. The comment outlined two other approaches to determine if a sale to

a partnership qualifies as a FDDEI sale

based on whether the partnership is predominantly engaged in foreign business

or a pure aggregate approach to treat the

partnership as a foreign person to the

extent of its ownership by direct or indirect foreign partners. With respect to a

partnership engaged in multiple lines of

business, each business could be viewed

as a separate person for FDII purposes.

While the comment did not support an

aggregate approach or advocate a specific approach, the comment noted that the

Treasury Department and the IRS should

balance legislative intent, administrative

burden, and precision.

The final regulations do not adopt these

comments. The statute is clear that in the

case of sales of property, the sale must be

to a person that is not a United States person, and a domestic partnership is a United

States person. See part VII.B of this Summary of Comments and Explanation of

Revisions section. In addition, requiring

taxpayers to trace the ownership, potentially through multiple tiers, of third-party

partnership recipients presents significant

administrative hurdles. If, alternatively,

this regime were elective, it would create

Bulletin No. 2020–33

the potential for abuse or uneven results

for similarly situated taxpayers.

E. Treatment of certain loss transactions

The proposed regulations provided

that if a seller or renderer knows or has

reason to know that property is sold to a

foreign person for a foreign use or a general service is provided to a person located

outside the United States, but the seller or

renderer does not satisfy the documentation requirements applicable to such sale

or service, the sale of property or provision of a service is nonetheless deemed a

FDDEI transaction if treating the sale or

service as a FDDEI transaction would reduce a taxpayer’s FDDEI. See proposed

§1.250(b)-3(f). One comment requested

a clarification that taking the FDII deduction should be considered an elective action and that this rule does not impact such

an election.

As described in part II of this Summary of Comments and Explanation of Revisions section, in response to comments,

the final regulations adopt a more flexible

approach to the FDII-specific documentation rules and instead provide specific

substantiation requirements for certain

elements of the regulations. Accordingly,

the rule with respect to loss transactions is

revised so that it only applies to transactions for which there is a specific substantiation requirement. See §1.250(b)-3(f)(3)

(i). However, the fact that §1.250(b)-3(f)

(3) has been narrowed in the final regulations does not mean that the allowed

FDII deduction can be determined on a

transaction-by-transaction basis. As provided in the final regulations, FDII is determined on a single aggregate basis, not

on a transaction-by-transaction basis. See

§1.250(b)-1.

The final regulations also clarify that

for purposes of the loss transaction rule,

whether a taxpayer has reason to know

that a sale of property is to a foreign person

for a foreign use, or that a general service

is provided to a business recipient located

outside the United States, depends on the

information received as part of the sales

process. If the information received as

part of the sales process contains information that indicates that a sale is to a foreign

person for a foreign use or that a general

service is to a business recipient located

277

outside the United States, the requisite

reason to know is present unless the taxpayer can prove otherwise. See §1.250(b)3(f)(3)(ii). With respect to sales, the final

regulations provide a non-exhaustive list

of information that indicates that a recipient is a foreign person or that the sale is

for a foreign use, such as a foreign address

or phone number. While not all sales to a

foreign person are for a foreign use (nor

are all sales for a foreign use made to foreign persons), the final regulations use

the same indicia for both requirements

because a foreign person is more likely to make a purchase for a foreign use

compared to a U.S. person. With respect

to general services, information that indicates that a recipient is a business recipient include indicia of a business status,

such as “LLC” or “Company,” or similar

indicia under applicable law, in its name.

Information that indicates that a business

recipient is located outside the United

States includes, but is not limited to, a foreign phone number, billing address, and

evidence that the business was formed

or is managed outside the United States.

These rules can also apply in the case of

sales made by related parties where the

foreign related party is treated as the seller

and the unrelated party transaction is being analyzed. See §1.250(b)-6(c)(2).

The final regulations do not include a

rule specifying that a taxpayer may choose

not to claim a FDII deduction. Whether

an allowable deduction must be claimed

is governed by general tax principles and

rules on whether such deduction can be

elective is beyond the scope of these regulations.

F. Predominant character rule

The proposed regulations provided

that if a transaction includes both a sale

component and a service component,

the transaction is classified according to

the overall predominant character of the

transaction for purposes of determining

whether the transaction is subject to the

FDDEI sales rules of proposed §1.250(b)4 or the FDDEI services rules of proposed

§1.250(b)-5. See proposed §1.250(b)-3(e).

A comment expressed support for the predominant character rule for transactions

that contain both sale and service components in general but also suggested that the

August 10, 2020

final regulations allow taxpayers to elect

to follow U.S. GAAP accounting, which

may in certain circumstances require the

disaggregation of the sale and service

components of a single transaction.

For purposes of simplicity and to

avoid the need for complex apportionment rules, §1.250(b)-3(d) provides a

rule to determine the predominant character of the transaction when a transaction has multiple elements, such as a sale

of general property and a service or sale

of general property and sale of intangible property. The Treasury Department

and the IRS have determined that an

elective rule that allows for disaggregation would create significant complexity

for taxpayers and be difficult for the IRS

to administer, and could lead to whipsaw for the IRS as taxpayers elect to

disaggregate when it increases the FDII

deduction but not otherwise. Accordingly, the final regulations do not adopt the

comment to include an election to follow U.S. GAAP to disaggregate a single

transaction.

VII. Comments on and Revisions to

Proposed §1.250(b)-4 — FDDEI Sales

Section 250(b)(4)(A) provides that FDDEI includes income from property the

taxpayer sells to any person who is not a

U.S. person and that the taxpayer establishes to the satisfaction of the Secretary

is for a foreign use. Accordingly, the proposed regulations defined a FDDEI sale as

a sale of property to a foreign person for a

foreign use. See proposed §1.250(b)-4(b).

A. End user requirement

The proposed regulations provided that

a sale of intangible property is for a foreign use to the extent the intangible property generates revenue from exploitation

outside the United States, which is generally determined based on the location of

end users purchasing products for which

the intangible property was used in development, manufacture, sale, or distribution.

See proposed §1.250(b)-4(e)(2)(i).

Several comments requested that the final regulations clarify the definition of an

“end user.” One comment recommended

that an “end user” be defined as any consumer or business recipient that purchases

August 10, 2020

a finished good for its own use or consumption (not for resale or further manufacture, assembly, or other processing).

Another recommended that the finished

good manufacturer or original equipment

manufacturer, rather than the ultimate customer of the manufacturer, be treated as

the end user.

The final regulations generally adopt

the comment that the end user should be

the consumer that purchases the property

for its own consumption. See §1.250(b)3(b)(2). Further, as discussed in part

VII.C.1 of this Summary of Comments

and Explanation of Revisions section, the

concept of an end user is also incorporated into the rules for determining whether

a sale of general property, in addition to

intangible property, is for a foreign use.

See §1.250-4(d). In this way, to the extent

possible, the final regulations harmonize

the rules for sales of general property and

intangible property.

Section 1.250(b)-3(b)(2) defines the

“end user” as the person that ultimately

uses the property, and that a person who

acquires property for resale or otherwise

as an intermediary is not an end user. The

definition of end user is modified for intangible property used in connection with

the sale of general property, provision of

services, sale of a manufacturing method

or process intangible property, and for

research and development as provided in

§1.250(b)-4(d)(2)(ii).

The final regulations do not adopt the

comments that in all cases a finished goods

manufacturer may be an end user. However, as described in part VII.C.7 of this

Summary of Comments and Explanation

of Revisions section, the final regulations

continue to provide that sales of general

property for manufacturing, assembly, or

other processing outside the United States

are sales for a foreign use. See §1.250(b)4(d)(1)(iii). In addition, as described in

part VII.D.4 of this Summary of Comments and Explanation of Revisions section, an unrelated manufacturer (such as

an original equipment manufacturer) that

uses intangible property that consists of

a manufacturing method or process, as

provided in §1.250(b)-4(d)(2)(ii)(C), is

treated as the end user if it has purchased

(or licensed) the manufacturing method or

process intangible property from an unrelated party.

278

B. Foreign person

The proposed regulations provided that

a recipient is treated as a foreign person

only if the seller obtains documentation

of the recipient’s foreign status and does

not know or have reason to know that the

recipient is not a foreign person. See proposed §1.250(b)-4(c)(1). The proposed

regulations provided several types of permissible documentation for this purpose,

such as a written statement by the recipient indicating that the recipient is a foreign person. See proposed §1.250(b)-4(c)

(2)(i).

As explained in part II of this Summary of Comments and Explanation of Revisions section, in response to comments,

the final regulations remove the specific

documentation requirements with respect

to certain requirements, including the foreign person requirement, and further identify the substantive standards by which

taxpayers must meet the requirements of

the FDII regime. To address situations

in which taxpayers may not be able to

determine whether the recipient is a foreign person within the meaning of section

7701(a)(1), the final regulations provide

that the sale of property is presumed made

to a recipient that is a foreign person if

the sale is as described in one of four categories: (1) foreign retail sales; (2) sales

of general property that are delivered to

an address outside the United States; (3)

in the case of general property that is not

sold in a foreign retail sale or delivered

overseas, the billing address of the recipient is outside the United States; or (4) in

the case of sales of intangible property, the

billing address of the recipient is outside

the United States. See §1.250(b)-4(c)(2)

(i) through (iv). The presumption does not

apply if the seller knows or has reason to

know that the sale is to a recipient other

than a foreign person. See §1.250(b)-4(c)

(1). The final regulations also specify that

a seller has reason to know that a sale is

to a recipient other than a foreign person

if the information received as part of the

sales process contains information that indicates that the recipient is not a foreign

person and the seller fails to obtain evidence establishing that the recipient is in

fact a foreign person. See §1.250(b)-4(c)

(1). Information that indicates that a recipient is not a foreign person includes, but is

Bulletin No. 2020–33

not limited to, a United States phone number, billing address, shipping address, or

place of residence; and, with respect to an

entity, evidence that the entity is incorporated, formed, or managed in the United

States. Id.

One comment requested that the final

regulations include exceptions similar to

the foreign military sales rule in the proposed regulations for other sales or licenses of property through an intermediate domestic person. The comment asserted that,

for various business reasons including historic relationships with unrelated parties

and efficiencies from entering into global

deals to sell property to unrelated parties,

certain U.S. manufacturers sell products

to another U.S. entity, even though that

intermediary never actually takes possession, and the product is immediately resold to a foreign person and used outside

the United States. In the licensing context,

a U.S. taxpayer may enter a global licensing deal with another U.S. entity whereby

this intermediary is granted the authority

to sub-license the intangible property to

its foreign affiliates. While in both cases

the transactions could potentially be restructured so that the taxpayer enters into

the transactions with a foreign person that

is related to the U.S. intermediary, the

comment suggested that unrelated counterparties could demand compensation

for any restructuring. The comment also

noted that the title to section 250(b)(5)(B)

references rules for “[p]roperty or services

provided to domestic intermediaries,”

suggesting that Congress contemplated

situations where sales to a U.S. intermediary could be treated as a sale to a non-U.S.

person, although the rule itself does not

reference domestic intermediaries.

As explained in the preamble to the

proposed regulations, section 250(b)

(4)(A)(i) requires that a sale of property (which includes licenses of intangible

property) be made to a person who is not

a United States person. This requirement

ensures that only the domestic corporation that makes the final sale to a foreign

person can claim a section 250 deduction

for a FDDEI sale (rather than allowing

the benefit to multiple unrelated domestic

corporations that all participate in a sale).

Furthermore, the Treasury Department

and the IRS do not agree that the heading

to section 250(b)(5)(B) implies an excep-

Bulletin No. 2020–33

tion to the requirement in section 250(b)

(4)(A)(i) that the sale be to a foreign person. The rule in section 250(b)(5)(B)(i)

refers only to other “persons” and is not

limited to domestic persons. In contrast,

the Treasury Department and the IRS have

determined that it is necessary and appropriate to provide a special rule for military

sales in recognition that sales pursuant to

the Arms Export Control Act are required

to be made to the U.S. government, but

are in effect sales to a foreign government.

Therefore, the comment is not adopted.

C. Foreign use of general property

1. Determination of Foreign Use in

General

The proposed regulations provided that

the sale of general property is for a foreign use if either the property is not subject to domestic use within three years of

delivery of the property or the property is

subject to manufacture, assembly, or other

processing outside the United States before any domestic use of the property. See

proposed §1.250(b)-4(d)(2)(i). Domestic

use was defined in the proposed regulations as the use, consumption, or disposition of property within the United States,

including manufacture, assembly, or other

processing within the United States. See

proposed §1.250(b)-4(d)(2)(ii). In order

to establish that general property is for a

foreign use, the seller must generally obtain certain documentation with respect

to the sale, such as proof of shipment of

the property to a foreign address, and the

seller cannot know or have reason to know

that the property is not for a foreign use.

See proposed §1.250(b)-4(d)(1) and (3).

Several comments noted that the definition of foreign use combined with the

narrow documentation requirements make

it difficult for taxpayers to satisfy the foreign use requirement. Several comments

interpreted the proposed regulations as

requiring taxpayers to determine whether

general property that was sold would actually be subject to a domestic use within

three years of the date of delivery. Other

comments similarly expressed confusion

regarding the obligation imposed on taxpayers to determine whether there was a

reason to know that property would be

subject to a domestic use. One comment

279

requested that the Treasury Department

and the IRS treat certain types of sales,

such as foreign retail sales at a physical

store even where the consumer might ultimately use the property within the United

States, as sales for foreign use.

As explained in part II of this Summary of Comments and Explanation of Revisions section, in response to comments on

documentation, the final regulations take

a more flexible approach to documentation and provide specific substantiation

requirements for certain transactions (described in part VII.C.9 of this Summary of

Comments and Explanation of Revisions

section).

In addition, with respect to the requirement of “foreign use” for sales of general

property, the final regulations clarify the

meaning of that term to provide that it generally means the sale (or eventual sale) of

the property to end users outside the United States or the sale of the property to a

person that subjects the property to manufacture, assembly, or other processing outside the United States. See §1.250(b)-4(d)

(1)(ii) and (iii). Consistent with the recommendations from comments, the Treasury

Department and the IRS have determined

that a more flexible definition of foreign

use of general property that accounts for

the possibility of some limited domestic

use is more reasonable for taxpayers to

apply and for the IRS to administer. Accordingly, the final regulations eliminate

the requirement that the taxpayer have

no “reason to know” of some domestic

use for sales of general property. As described in part VII.C.2 through 8 of this

Summary of Comments and Explanation

of Revisions section, the final regulations

generally provide that the sale of general

property is for a foreign use if the seller

determines that such sale is to an end user

described in one of five categories. See

§1.250(b)-4(d)(1)(ii)(A)-(F).

2. Delivery of Property Outside the

United States

The first category of sales that are for a

foreign use is sales to a recipient that are

delivered by a freight forwarder or carrier to an end user if the end user receives

delivery of the general property outside

the United States. See §1.250(b)-4(d)(1)

(ii)(A). The Treasury Department and the

August 10, 2020

IRS have determined that, in general, if

an end user receives delivery of general

property outside the United States, the

general property will be “for a foreign

use” as contemplated by section 250(b)

(4)(A)(ii) and additional detail regarding

the actual use of the property is unnecessary. However, it would be inappropriate

to treat these sales as FDDEI sales if the

seller and buyer arrange for general property to be delivered to a location outside

the United States only to be redelivered

for use or consumption into the United

States with a principal purpose of causing what would otherwise not be a FDDEI sale to be treated as a FDDEI sale.

Therefore, §1.250-4(b)(1)(ii)(A) provides an anti-abuse rule to address these

concerns.

3. Location of Property Outside the

United States

The second category of sales that are for

a foreign use is sales of general property to

an end user where the property is already

located outside the United States, and includes foreign retail sales. See §1.250(b)4(d)(1)(ii)(B). In general, sales of general

property from a foreign retail sale will be

used outside the United States. While it

may be possible that some end users will

purchase property in a foreign retail store

and use it solely within the United States,

the Treasury Department and the IRS have

determined that requiring a determination

of the actual use of these sales would be

unnecessarily burdensome.

4. Resale of Property Outside the United

States

The third category of sales for a foreign

use is sales to a recipient such as a distributor or retailer that will resell the general

property, if the seller determines that the

general property will ultimately be sold to

end users outside the United States. See

§1.250(b)-4(d)(1)(ii)(C). This category is

intended to apply to sales to distributors

and retailers, but may also apply to other

sales to foreign persons for resale. In addition, the final regulations provide that for

purposes of this rule, the seller must substantiate the portion of sales to end users

outside the United States under the rules

described in parts II and VII.C.9 of this

August 10, 2020

Summary of Comments and Explanation

of Revisions section.

The proposed regulations contained

alternative documentation requirements

for a sale of multiple items of general

property that because of their fungible nature are difficult to specifically trace to a

location of use (fungible mass). See proposed §1.250(b)-4(d)(3)(iii). Under the

proposed regulations, a seller establishes

foreign use of a fungible mass through

market research, including statistical sampling, economic modeling and other similar methods. Id. The proposed regulations

also provided that if a seller establishes

that 90 percent or more of a fungible mass

is for a foreign use, the entire fungible

mass is treated as for a foreign use and if

the seller cannot establish that 10 percent

or more of the sale of a fungible mass is

for a foreign use, then no part of the fungible mass is treated as for a foreign use. Id.

One comment stated that the fungible mass rules created overly stringent

documentation requirements that were

unnecessary, impractical, and unreliable

because a U.S. seller would need to perform market research in order to meet the

90 percent threshold to qualify for foreign

use. Conversely, the comment noted that

a U.S. seller that could not meet the 10

percent threshold through market research

could see their deduction eliminated in its

entirety. The comment suggested instead a

rebuttable presumption that fungible mass

property sold outside the United States is

for a foreign use unless a taxpayer knows

or has reason to know that a material

amount will be used within the United

States.

In response to the comment, the final

regulations eliminate the 10 percent and

90 percent thresholds and apply a proportionate rule. See §1.250(b)-4(d)(1)(ii)

(C). Under this rule, in the case of a sale

of a fungible mass of general property, if

a portion of the property sold is not for

a foreign use, the seller may rely on the

proportion of the recipient’s resales of

fungible mass to end users outside the

United States to determine its proportion

of ultimate sales to end users outside the

United States. Id. In addition, the Treasury

Department and the IRS have determined

that prescribing specific methods such as

market research, statistical sampling, economic modeling, and other similar meth-

280

ods to determine foreign use from the sale

of a fungible mass of general property (or

a sale of any general property) is unnecessary given the more flexible approach

to documentation. It should be noted that

market research or information from public data, such as general internet searches

of secondary sources, is generally not a

source of reliable information. In contrast,

statistical sampling, economic modeling,

or market research based on the taxpayer’s

own data will be more reliable.

5. Electronic Transfer of Digital Content

Outside the United States

The fourth category of sales for a foreign use is for sales of digital content that

are transferred electronically. Sales of digital content transferred in a physical medium are for a foreign use if described in one

of the first three categories. The final regulations provide that digital content that is

transferred electronically is for a foreign

use if it is sold to a recipient that is an end

user that downloads, installs, receives, or

accesses the digital content on the end user’s device outside the United States. See

§1.250(b)-4(d)(1)(ii)(D). However, if this

information is unavailable, such as where

the device’s Internet Protocol address (“IP

address”) is not available or does not serve

as a reliable proxy for the end user’s location (for example, using a business headquarters’ IP address when it has employees located both within and outside the

United States who use the digital content),

then the sale is for a foreign use if made to

an end user with a foreign billing address,

but only if the gross receipts from all sales

with respect to the end user (which may be

a business) are in the aggregate less than

$50,000.

6. International Transportation Property

The fifth category of sales for a foreign

use is sales of international transportation property. The proposed regulations

provided a special rule for determining

whether transportation property like aircraft, railroad rolling stock, vessels, motor vehicles or similar property that travels internationally is sold for foreign use

and therefore constitutes a FDDEI sale.

See proposed §1.250(b)-4(d)(2)(iv). Under this rule, such transportation property

Bulletin No. 2020–33

is sold for foreign use only if during the

three-year period from the date of delivery of the property the property is located outside the United States more than

50 percent of the time and more than 50

percent of the miles traversed in the use

of such property will be traversed outside

the United States. The seller can establish

that these criteria are satisfied by obtaining a written statement from the recipient

that the property is anticipated to satisfy

these tests over the requisite three-year

period. See proposed §1.250(b)-4(d)(3)(i)

(A). With respect to air transportation, the

proposed regulations provided that, for

purposes of the above tests, international

transportation property is deemed to be

within the United States at all times during

which it is engaged in transport between

any two points within the United States,

except where the transport constitutes uninterrupted international air transportation

within the meaning of section 4262(c)(3)

and the regulations under that section. See

proposed §1.250(b)-4(d)(2)(iv).

One comment suggested supplementing these tests with a rebuttable presumption that any foreign-registered aircraft

sold to a foreign person is for foreign use.

The comment observes that “cabotage

rules” significantly restrict the use of foreign registered aircraft within the United

States such that a foreign registered aircraft cannot travel between two points in

the United States unless the route is part

of a through trip on the way to, or coming

from, a foreign destination. The comment

further noted that the ability of foreign

persons to register aircraft in the United

States is restricted. Therefore, the comment proposed that a document evidencing foreign registration of an aircraft to a

foreign person should suffice to establish

foreign use.

Other comments suggested changes to

the thresholds in the foreign use tests in

the proposed regulations. Several comments suggested reducing the thresholds

from 50 percent to 20 percent and making

these tests disjunctive. Another comment

would retain the 50 percent threshold but

eliminate the three-year period so that the

foreign use test would only have to be

satisfied as of the filing date of the FDII

return, and that the taxpayer be permitted

to elect annually to bifurcate income from

foreign and domestic use based on the

Bulletin No. 2020–33

percentage of actual time spent or miles

traversed outside and inside the United

States. A different comment suggested reducing the three-year period to one year

after the date of delivery.

The Treasury Department and the IRS

generally agree with the comment that

place of registration is appropriate as evidence of “use.” Therefore, the final regulations provide that international transportation property used for compensation

or hire is considered for a foreign use if

it is sold to an end user that registers the

property with a foreign jurisdiction. See

§1.250(b)-4(d)(1)(ii)(E). The final regulations provide that other international

transportation property is considered for

a foreign use if sold to an end user that

registers the property with a foreign jurisdiction and the property is hangared or

primarily stored outside the United States.

See §1.250(b)-4(d)(1)(ii)(F). This rule

reflects the fact that many recipients of

international transportation property will

not be further using the property for the

provision of international transportation

services. As a result, the property will be

primarily used in the place it is registered

or otherwise hangared or stored. Even if

such property enters the United States, because it originated in a different country,

the use should not be considered domestic

use because the international transportation property will generally be located

outside the United States. As a result, the

Treasury Department and the IRS have

determined that there is no need to determine the amount of time or miles that such

property is inside or outside the United

States.

Finally, one comment suggested expanding the definition of transportation

property to include parts of transportation

property like engines, tires, electronic

equipment and spare parts, even if such

parts would not otherwise satisfy the foreign use tests for general property. The

comment expressed concern that the sale

of parts that were included within international transportation property could fail

the foreign use test for general property

because the parts may enter the United

States as part of the transportation property. At the same time, such parts would

be ineligible for the special rules for international transportation property. The

comment suggested expanding the defini-

281

tion of transportation property to include

additional parts, even if such parts would

not otherwise satisfy the foreign use tests

for general property.

This comment is not adopted. Such a

rule would be administratively burdensome and could lead to inconsistency

through the application of two sets of rules

to the same transaction and property. Furthermore, the Treasury Department and

the IRS have determined that the concerns

that were the basis for the comment are

generally addressed through the adoption

of the new general rules with respect to

general property and international transportation property. In particular, parts that

are used outside the United States by an

end user, including when incorporated

into transportation property through manufacturing, assembly or other processing,

would generally be considered for a foreign use under the general test for general

property. As described in part VII.C.1 of

this Summary of Comments and Explanation of Revisions section, this is the case

even if there is the possibility of some domestic use of the property.

7. Manufacturing, Assembly, or Other

Processing Outside the United States

As described in part VII.C.1 of this

Summary of Comments and Explanation

of Revisions section, the proposed regulations provided that the sale of general

property is for a foreign use if either the

property is not subject to domestic use

within three years of delivery of the property or the property is subject to manufacture, assembly, or other processing outside

the United States before any domestic use

of the property. See proposed §1.250(b)4(d)(2)(i). Under the proposed regulations, general property is subject to manufacturing, assembly, or other processing

only if it meets either of the following two

tests: (1) there is a physical and material

change to the property, or (2) the property

is incorporated as a component into a second product. See proposed §1.250(b)-4(d)

(2)(iii)(A).

The proposed regulations clarified that

a physical and material change does not

include “minor assembly, packaging, or

labeling.” See proposed §1.250(b)-4(d)

(2)(iii)(B). Whether property has undergone a physical and material change (as

August 10, 2020

opposed to minor assembly, packaging,

or labeling) is determined based on all the

relevant facts and circumstances. The proposed regulations provided that general

property is incorporated as a component

into a second product only if the fair market value of the property when it is delivered to the recipient constitutes no more

than 20 percent of the fair market value

of the second product, determined when

the second product is completed. See

proposed §1.250(b)-4(d)(2)(iii)(C). For

purposes of this rule, the proposed regulations included an aggregation rule providing that if the seller sells multiple items

of property that are incorporated into the

second product, all of the property sold

by the seller that is incorporated into the

second product is treated as a single item

of property.

Several comments recommended that

the final regulations provide more flexibility in satisfying the manufacturing, assembly, or other processing rule, especially in

the context of sales to foreign unrelated

parties where information to establish the

two distinct tests may not be readily available. Several comments suggested that

the “physical and material change” test

should be satisfied where general property

is subject to processing or manufacturing

activities that are substantial in nature and

that are generally considered to constitute

manufacturing or production of a substantially different product. Other comments

suggested that the final regulations could

provide for such a “substantial in nature”

rule as a third test in addition to the “physical and material change” and component

tests. Comments also recommended a

rebuttable presumption where a taxpayer

could show that the physical and material change test had been met through reasonable documentation created in the ordinary course of its business. In addition,

these comments suggested that general

property sold to an unrelated party can be

presumed to be sold for use, consumption,

or disposition in the country of destination

of the property sold, unless the taxpayer

knows, or has reason to know otherwise.

With respect to the component test,

comments suggested the 20 percent

threshold should function as a safe harbor

similar to the safe harbor under the subpart F components manufacturing rule

in §1.954-3(a)(4)(iii). Another comment

August 10, 2020

suggested the addition of a facts and circumstances test. Citing concerns with

lack of readily available information,

comments further suggested allowing taxpayers to satisfy the 20 percent threshold

through market research or other methods

similar to the fungible mass rule. Another

comment suggested the 20 percent threshold was too low and should be increased to

50 percent. In the case of sales of multiple

components by the same seller, comments

suggested that the sales should not be integrated unless actual knowledge exists as

to where the products will be incorporated

(such as knowledge that the product will

be included in the same second product or

the nature of the component compels inclusion into the second product).

Comments also noted similarities and

differences with the manufacturing, assembly, or other processing requirement

under FDII and the manufacturing rules

under subpart F. In particular, comments

pointed out that in the subpart F context,

the rules address parties under common

control where information is more readily

available, while in the FDII context, information may not be available. A CFC’s

foreign base company sales income does

not include income of a CFC derived

in connection with the sale of personal property manufactured, produced, or

constructed by such corporation. Notably,

Treasury regulations provide two special

manufacturing rules, often referred to as,

the “substantial transformation” test and

the “component parts” test. See §1.9543(a)(4)(ii) and (iii). Under the first test,

if property is “substantially transformed”

by the CFC before sale, the property sold

is considered manufactured, produced,

or constructed by the selling corporation.

Under the second test, a sale of property

is treated as the sale of a manufactured

product, rather than the sale of component

parts, if the assembly or conversion of the

component parts into the final product by

the selling corporation involves activities

that are substantial in nature and generally

considered to constitute the manufacture,

production, or construction of property.

A CFC is deemed to have manufactured

the product if its conversion costs represent 20 percent or more of the total cost of

goods sold.

In response to comments, the final regulations make several changes to the rule

282

for manufacturing, assembly, and other

processing. The final regulations clarify

that general property is subject to a physical and material change if it is substantially transformed and is distinguishable

from and cannot be readily returned to its

original state. See §1.250(b)-4(d)(1)(iii)

(B). The final regulations also provide a

separate substantive rule for the component test and retain the 20 percent threshold as a safe harbor. See §1.250(b)-4(d)(1)

(iii)(C). Under this substantive rule, general property is a component incorporated

into another product if the incorporation

of the general property into another product involves activities that are substantial

in nature and generally considered to constitute the manufacture, assembly, or other processing of property based on all the

relevant facts and circumstances. Id. The

final regulations also clarify that general

property is not considered a component

incorporated into another product if it is

subject only to packaging, repackaging,

labeling, or minor assembly operations.

See id. While the structure and some of

the mechanics of the rule share similarities with the subpart F manufacturing

component parts test, the rule is different

in terms of purpose and substance.

Finally, in response to comments, the

final regulations revise the safe harbor in

the component test by specifying that the

comparison should be between the fair

market value of the property sold by the

taxpayer and the fair market value of the

final finished goods sold to consumers.

See §1.250(b)-4(d)(1)(iii)(C). Because

some general property could be incorporated into several different finished goods,

the final regulations provide that a reliable

estimate of the fair market value of the

finished good could include the average

fair market value of a representative range

of the finished goods that could incorporate the component. An example of this

is provided in §1.250(b)-4(d)(1)(v)(B)(1)

(Example 1). The final regulations also

modify the aggregation rule so that it applies only if the seller sells the property

to the buyer and knows or has reason to

know that the components will be incorporated into a single item of property (for

example, where multiple components are

sold as a kit). The final regulations specify that a seller has reason to know that

the components will be incorporated into

Bulletin No. 2020–33

a single item of property if the information

received as part of the sales process contains information that indicates that the

components will be included in the same

second product or the nature of the components compels inclusion into the second

product. See §1.250(b)-4(d)(1)(iii)(C).

Summary of Comments and Explanation

of Revisions section for the meaning of

“manufacturing, assembly, or other processing.”

8. Manufacturing, Assembly, or Other

Processing in the United States

The final regulations specifically require a taxpayer to substantiate foreign

use for general property for sales of general property to resellers and manufacturers.

See §1.250(b)-4(d)(3)(ii) and (iii). In the

case of sales to resellers, a taxpayer must

maintain and provide credible evidence

upon request that the general property will

ultimately be sold to end users located

outside the United States. See part VII.C.4

of this Summary of Comments and Explanation of Revisions section. This requirement is satisfied if the taxpayer maintains evidence of foreign use such as the

following: a binding contract that limits

sales to outside of the United States, proof

that the general property is suited only for

a foreign market, or proof that the shipping costs would be prohibitively expensive if sold back to the United States. See

§1.250(b)-4(d)(3)(ii)(A)-(C). Certain information from the recipient or a taxpayer

with corroborating evidence that credibly

supports the information will also suffice.

See §1.250(b)-4(d)(3)(ii)(D)-(E). With respect to manufacturing outside the United

States, the substantiation requirements are

met if a taxpayer maintains proof that the

property is typically not sold to end users without being subject to manufacture,

assembly or other processing, obtains

credible information from a recipient, or,

provides a statement containing certain

information with corroborating evidence.

See §1.250(b)-4(d)(3)(iii).

Section 250(b)(5)(B)(i) provides that

if a seller sells property to another person (other than a related party) for further

manufacture or other modification within the United States, the property is not

treated as sold for a foreign use even if

such other person subsequently uses such

property for a foreign use. Section 250(b)

(5)(B)(i) could apply in the case of a sale

directly to a person that is a foreign person if the property is subject to further

manufacture or other modification in the

United States after the sale but before the

property is delivered to the end user.

As described in the preamble to the

proposed regulations, the proposed regulations did not contain specific rules

corresponding to section 250(b)(5)(B)(i)

because that rule is encompassed within

the general rules relating to FDDEI sales

in the proposed regulations. The proposed

regulations generally provided that general property is not for a foreign use if

the property is subject to a domestic use,

which includes manufacture, assembly, or

other processing within the United States.

See proposed §1.250(b)-4(d)(2)(i) and (ii)

(B).

Because the final regulations no longer define “foreign use” by reference to

whether the property is subject to a domestic use, the rule in section 250(b)(5)

(B)(i) is no longer encompassed within the

general rules in the regulations relating to

FDDEI sales. Accordingly, the final regulations include a rule that provides that if

the seller sells general property to a recipient (other than a related party, for which

separate rules apply) for manufacturing,

assembly, or other processing within the

United States, such property is not sold

for a foreign use even if the requirements

for foreign use are subsequently satisfied.

See §1.250(b)-4(d)(1)(iv). For consistency, the final regulations cross reference

the rules described in part VII.C.7 of this

Bulletin No. 2020–33

9. Specific Substantiation for Foreign Use

of General Property

D. Foreign use of intangible property

1. In General

The proposed regulations provided

that a sale of intangible property (which

includes a license or any transfer of such

property in which gain or income is recognized under section 367) is for a foreign use to the extent revenue is earned

from exploiting the intangible property

outside the United States. See proposed

§1.250(b)-4(e)(1). Where the revenue is

283

considered earned is generally determined

based on the location of the end user. See

proposed §1.250(b)-4(e)(2). The seller of

the intangible property must satisfy certain documentation requirements showing foreign use and have no knowledge,

or reason to know, that the portion of the

sale of the intangible property for which

the seller establishes foreign use is not

for foreign use. The proposed regulations

also provided rules to determine foreign

use for the sale of intangible property to

a foreign person in exchange for periodic payments or a lump sum payment. See

proposed §1.250(b)-4(e)(2).

2. Substantiating Foreign Use of

Intangible Property

Several comments recommended

changes to the documentation rules. In

response to those comments, and as explained in part II of this Summary of

Comments and Explanation of Revisions

section, the final regulations adopt a more

flexible approach to documentation, but

require a taxpayer to specifically substantiate foreign use for sales of intangible

property. See §1.250(b)-4(d)(3)(iv). A

taxpayer must maintain and provide credible evidence upon request that a sale of

intangible property will be used to earn

revenue from end users located outside

the United States. A taxpayer may satisfy

the substantiation requirement by maintaining certain items as specified in the

final regulations. See §1.250(b)-4(d)(3)

(iv). For example, a binding contract providing that the intangible property can be

exploited solely outside the United States

would generally satisfy the substantiation

requirements demonstrating foreign use

of the intangible property. See §1.250(b)4(d)(3)(iv)(A). Certain information from

the recipient obtained or created in the ordinary course of business or corroborating

evidence maintained by the taxpayer that

credibly supports the information may

also suffice. See §1.250(b)-4(d)(3)(iv)(B)(C).

3. Determining Foreign Use of Intangible

Property

Comments suggested that sales with

respect to intangible property be divided

into several subcategories. One comment

August 10, 2020

suggested dividing intangibles into production and marketing categories, with income

from sales of production intangibles used

in the development or manufacture of products outside the United States being FDDEI

sales regardless of the location of the end

user, and income from sales of marketing

intangibles analyzed based on the location

of the end user. Another comment suggested three subcategories of intangible sales:

(i) sales of manufacturing intangibles to

foreign unrelated parties, which would be

considered for a foreign use if manufacturing occurs outside the United States;

(ii) sales of manufacturing intangibles to

related parties, which would be considered

for a foreign use if the end product is sold

to a foreign person for foreign use; and

(iii) sales of marketing intangibles, which

would be considered for a foreign use if the

end user purchases the resulting product

outside the United States.

Consistent with the proposed regulations, the final regulations provide that

foreign use of intangible property is determined based on revenue earned from

end users located within versus outside

the United States. See §1.250(b)-4(d)(2)

(i). The focus on the location of end users

is derived from the requirement in section

250(b)(5)(A) that sales for a foreign use

require “use” or “consumption” outside

the United States and the end user is the

person that ultimately consumes or uses

the intangible property. In the case of legally protected intangible property (such

as patents or trademarks), the location in

which legal rights to the intangible property are granted and exploited generally

determines the location of the end users.

Therefore, for example, in the case of

intangible property such as patents that

provide rights only for markets outside

the United States, the end users will generally be located solely outside the United

States. In the case of intangible property

that allows for worldwide exploitation (or

intangible property that is not legally protected), a more specific determination of

end users will generally be necessary to

determine the portion of intangible property income that is for a foreign use versus

not for a foreign use.

In response to the comments received,

the final regulations provide more detailed

guidance on determining where revenue

is earned from end users of the intangible

property, including rules for intangible

property embedded in general property or

used in connection with the sale of general property, intangible property used to

provide services, and intangible property

used in research and development. See

§1.250(b)-4(d)(2)(ii). The final regulations also include rules for determining

revenue earned from sales of a manufacturing method or process, which is similar

to the separate rule for “production intangibles” or “manufacturing intangibles”

that was suggested by comments.

Revenue is generally earned from intangible property used to manufacture

products or provide services through sales

of such products or services, or from limited use licenses of the intangible property, whether those sales, services, or limited use licenses are executed by an owner,

licensee, or sub-licensee of the intangible

property. Until revenue is earned from

sales, services, or limited-use licenses to

the end user that ultimately consumes the

property or receives the service, the intangible property is generally not “exploited.” Consistent with this view, the final

regulations generally place the location of

use of the intangible property with the location of the end user, which is generally

the person who ultimately uses the general property in which the intangible property is embedded or associated with, or,

if the intangible property is used to provide a service, the service recipient. See

§1.250(b)-4(d)(2)(ii)(A) and (B). These

rules provide the same determination of

location of end user for sales or licenses

of intangible property used in research

and development. See §1.250(b)-4(d)(2)

(ii)(D).

4. Intangible Property Used in

Manufacturing

The preamble to the proposed regulations requested comments regarding

whether to adopt a rule for intangible property similar to proposed §1.250(b)-4(d)(2)

(i)(B) (treating a sale of general property

as for a foreign use if the property is subject to manufacturing, assembly, or other processing outside the United States).

Several comments supported a rule that

treats the sale of intangible property as for

a foreign use where intangibles are used

in manufacturing that takes place outside

the United States. Some of the comments

also suggested that footnote 1522 of the

Conference Report to the Act supported

this position because that footnote did

not specify that its application is limited

to only tangible property that is subject to

manufacturing, assembling, or other processing outside the United States.6

Based on comments received, the final

regulations provide a special rule for sales

to a foreign unrelated party of a manufacturing method or process or for know-how

used to put the manufacturing method

or process to use in manufacturing (the

“manufacturing method or process rule”).

See §1.250(b)-4(d)(2)(ii)(C). The final

regulations provide that when this rule

applies, then the foreign unrelated party

is treated as an end user located outside

the United States, unless the seller knows

or has reason to know that the manufacturing method or process will be used in

the United States, in which case the foreign unrelated party is treated as an end

user located within the United States. For

purposes of this rule, reason to know is

determined based on the information received from the recipient during the sales

process. See §1.250(b)-4(d)(2)(ii)(C)(1).

The manufacturing method or process

rule does not apply to sales or licenses of

a manufacturing method or process to an

unrelated foreign party for purposes of

manufacturing products for or on behalf

of the seller of the manufacturing method

or process or any of the seller’s affiliates.

See §1.250(b)-4(d)(2)(ii)(C)(2). Applying

the manufacturing method or process rule

to determine the end user with respect to

such an arrangement, such as a contract or

toll manufacturing arrangement, is not appropriate because the seller or related party to the seller is using the manufacturing

method or process in manufacturing for

itself. Such use by the seller is effectively

See H. Rept. 115-466, at 625, fn. 1522 (2017) (Conf. Rept.) (“If property is sold by a taxpayer to a person who is not a U.S. person, and after such sale the property is subject to manufacture,

assembly, or other processing (including the incorporation of such property, as a component, into a second product by means of production, manufacture, or assembly) outside the United

States by such person, then the property is for a foreign use.”).

6

August 10, 2020

284

Bulletin No. 2020–33

a circular transfer of the intangible property back to the seller. However, the sale

of the manufactured products by the seller

of the manufacturing method or process or

the seller’s affiliates can still qualify as a

FDDEI sale under other provisions such

as §1.250(b)-4(d)(1)(ii).

The manufacturing method or process

rule applies only to certain types of intangibles that are used in the manufacturing

process. The distinction between the types

of intangibles that qualify for this rule and

other types of intangibles that may be used

by manufacturers is based on a distinction

between use of a patented method or process and use of other types of patented

items. In all other cases, the foreign use

of intangible property is determined based

on revenue earned from end users located

within versus outside the United States.

The manufacturing method or process

rule applies only to sales to unrelated parties (including sales made through related parties that ultimately result in a sale

of the manufacturing method or process

to an unrelated party). Section 250(b)(5)

(C) provides that sales to related parties

are treated as for a foreign use only if

the property is ultimately sold or used in

connection with property that is sold to an

unrelated party who is not a United States

person. While §1.250(b)-6(c) gives effect

to this rule by providing special rules for

sales of general property to related parties

(which apply in the case of sales of property to related parties for further manufacturing), those rules do not apply to sales

of intangible property. Under the proposed

regulations, a related party rule was not

needed for sales of intangible property,

including property consisting of a manufacturing method or process, because the

proposed regulations generally provided

that intangible property used in the manufacture of a product is treated as exploited

at the location of the end user when the

product is sold to the end user. Proposed

§1.250(b)-4(e)(2)(i). Under the final regulations, limiting the manufacturing method or process rule to unrelated party sales

serves the purpose of ensuring that such

sales are FDDEI sales only to the extent

contemplated by section 250(b)(5)(C).

For example, if the taxpayer sells to a foreign related party a manufacturing method

used to produce general property, then the

sale of the manufacturing method is for a

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foreign use to the extent that the foreign

related party’s sales of the general property are for a foreign use under the rules

applicable to sales of general property.

See §1.250(b)-4(d)(2)(ii)(A). This result

is generally consistent with the result if

the related party sale had instead been of

general property that was used in manufacturing.

5. Bundled Intangible Property

One comment requested that where a

taxpayer licenses a bundle of intangibles,

it should be allowed to elect the application of the potentially applicable rules

based either on the predominant feature

of the bundle or using any reasonable

method. The Treasury Department and the

IRS recognize that intangible property is

sometimes sold or licensed as a bundle,

such as the license of patents, copyrights,

trademarks, tradenames, and know-how

in a single transaction, without specifying

the amount of payment required for each

item of intangible property. The final regulations provide for a predominant character determination when a transaction

has multiple elements, such as a service

and sale or a sale of general property and

intangible property, to determine whether

to apply the provisions for sales of general

property, sales of intangible property, or

the provision of services. See §1.250(b)3(d).

In the case of a sale or license of bundled intangible property, the final regulations will generally base the location of

exploitation on the location of the end user

who ultimately uses the general property

in which the intangible property is embedded or associated with, or, if the intangible property is used to provide a service,

the location of the service recipient. See

§1.250(b)-4(d)(2)(ii)(A)-(B), (D). Only in

an unrelated party transaction involving

the manufacturing method or process rule

will the end user location be determined

differently than a transaction involving

intangible property used with general

property, services, or research and development. However, the manufacturing

method or process rule does not determine

the location of the end user of other intangible property bundled with the manufacturing method or process. As a result,

the final regulations do not provide for an

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election to treat or characterize the sale or

license of bundled intangible property that

includes manufacturing method or process intangibles as well as other intangible

property as falling entirely within one of

the categories of intangible property specified in §1.250(b)-4(d)(2).

6. Treatment of Product Intangibles as

Components

One comment suggested that the final

regulations include a rule that would treat

certain “product intangibles” as a component of the finished product and provide a

rule that is analogous to the rule for sales

of general property that is incorporated as

a component of another product outside

the United States. See §1.250(b)-4(d)(1)

(iii)(A) and (C). The final regulations do

not adopt this comment. Intangible property has no physical properties, and therefore cannot be incorporated into a finished

good or otherwise be a “component”

of the finished good in the same way as

items of general property that are considered to be components. See section 367(d)

(4) (defining intangible property). For

example, a patent on an article of manufacture is not a component of the finished

product protected by the patent. Similarly,

while a trademark design may be placed

on a component of a finished product, the

trademark itself is not a component of the

finished product. Therefore, the final regulations do not provide a component rule

for the sale or license of intangible property. Instead, the general rule that use is

determined based on where the intangible

property is exploited applies to these types

of sales.

7. Intangible Property Used to Enhance

Other Intangible Property

One comment discussed intangibles

that are sold to an unrelated foreign person who enhances the intangible (for example, by adapting it to local markets) or

uses the intangible property to develop

other intangible property and subsequently sells such enhanced or newly created

intangible property outside the United

States. In these situations, the comment

recommended that the sale of the original

intangible property should be presumed

to be for foreign use if the location of the

August 10, 2020

research and development is outside the

United States and the recipient is unrelated to the original seller, and suggested that

footnote 1522 of the Conference Report

supports such a rule.

The final regulations do not adopt the

comment. As discussed in part VII.D.3 of

this Summary of Comments and Explanation of Revisions section, revenue is

generally earned from intangible property

used to manufacture products or provide

services through sales of such products

or services, or from limited use licenses

of the intangible property, whether those

sales, services, or limited use licenses

are executed by an owner, licensee, or

sub-licensee of the intangible property.

Until revenue is earned from sales, services, or limited-use licenses to the end

user that ultimately consumes the property or receives the service, the intangible property is generally not “exploited.”

Although the final regulations provide a

limited exception from this end user requirement for intangible property that

consists of a manufacturing method or

process (see part VII.D.4 of this Summary of Comments and Explanation of Revisions section), no exception is included

for intangible property used to enhance

or create other intangible property. The

Treasury Department and the IRS have

determined that the activities described

in the comment do not constitute “use”

by end users but rather are intermediate

steps in the development of the intangible

property before being exploited and used.

In addition, nothing in the text of section

250 or footnote 1522 of the Conference

Report suggests that a different definition

of foreign use should apply in the case of

research and development.

However, in response to comments, the

final regulations clarify the rule for sales

of intangible property used to develop

other intangible property or to modify existing intangible property. See §1.250(b)4(d)(2)(ii)(D). In such a case, the end user

of the intangible property (primary IP)

used to develop other intangible property

or to modify existing intangible property

(secondary IP) is the end user of the property in which the secondary IP is embedded. If the secondary IP is used to provide

a service, the end user is the unrelated

party recipient. If the secondary IP qualifies as a manufacturing method or pro-

August 10, 2020

cess (as described in part VII.D.4 of this

Summary of Comments and Explanation

of Revisions section), then the rules applicable to sales of a manufacturing method

or process apply to determine if the sale of

the secondary IP is for a foreign use. See

§1.250(b)-4(d)(2)(ii)(C).

8. Intangible Property Used to Provide

Services

One comment noted that intangible

property may be sold to recipients that

provide services, rather than solely to recipients that manufacture and sell goods,

and that the proposed regulations did not

specifically address the sale of intangible

property used to provide services. For

such sales, the comment recommended

that the intangible property be treated as

exploited in the locations in which the

recipient receives legal rights to the intangible property under the terms of the

contract or other applicable law. Another

comment recommended that for sales of

intangible property to unrelated persons

for use in the provision of services, the

sales should be presumed to be for foreign use if the services will be performed

outside the United States without regard

to the location of the person or persons receiving such services.

Revenue may be earned from intangible property through the provision of services, but until that revenue is earned, the

intangible property is generally not used

or “exploited.” Consistent with this view,

the final regulations generally place the

location of use of the intangible property

with the location of the end user, which in

the case of intangible property used to provide a service, is the service recipient. See

§1.250(b)-4(d)(2). These rules are generally consistent with the location in which

legal rights to the intangible property are

granted and exploited, with exploitation

generally being located where the end

user ultimately consumes the property or

the services the intangible property is used

to provide. See §1.250(b)-4(d)(2)(i). The

rules in §1.250(b)-5 for FDDEI services

generally apply for purposes of determining the location of the end user. Therefore,

for example, the location of the end user of

intangible property that is used to provide

advertising services is determined based

on the location of the individuals viewing

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the advertisements. See §1.250(b)-5(e)(2)

(ii).

However, the regulations do not provide a presumption that a sale to a foreign unrelated party that uses that intangible property to provide services outside

the United States is presumed to be for

foreign use. Such a presumption could

produce results that would be inconsistent with the general approach for determining the location of use of intangible

property by reference to the location of

exploitation (which, in the case of intangible property used to provide services,

is generally the location of the person or

persons receiving such services), and the

Treasury Department and the IRS have

determined that a departure is not warranted in this case.

9. Determination of Revenue

The proposed regulations provided

that when intangible property is sold in

exchange for periodic payments, the extent to which the sale qualifies for a foreign use is made annually based on actual

revenue earned by the recipient. Proposed

§1.250(b)-4(e)(2)(ii). In the case of a sale

of intangible property in exchange for a

lump sum payment, the extent to which

the sale qualifies for foreign use is determined based on the ratio of total net

present value the seller would have reasonably expected to earn from exploiting

the intangible property outside the United

States to total net present value the seller

reasonably expected to earn from exploiting the intangible property worldwide.

Proposed §1.250(b)-4(e)(2)(iii). However,

for purposes of satisfying the documentation requirements, the proposed regulations provided that in the case of sales

in exchange for periodic payments that

are not contingent on the revenue or profit of a foreign unrelated party, a taxpayer

may establish the extent to which a sale

of intangible property is for a foreign use

using the principles applicable to sales

in exchange for a lump sum payment,

except that the taxpayer must make projections on an annual basis. See proposed

§1.250(b)-4(d)(3)(ii). This rule recognized that if the recipient of the intangible

property makes periodic payments that are

not contingent on the recipient’s sales or

revenue, the recipient may not be willing

Bulletin No. 2020–33

to provide information about the end users

of the intangible property.

a. Periodic payments

Like the proposed regulations, the final

regulations provide that for periodic payments (such as annual royalty payments or

fixed installment payments) in exchange

for rights to intangible property, other than

intangible property consisting of a manufacturing method or process that is sold to

a foreign unrelated party, taxpayers may

estimate revenue earned by unrelated party recipients from any use of the intangible

property based on the principles for determining revenue from lump sum sales, if

actual revenue earned by the foreign party

cannot be obtained after reasonable efforts. See §1.250(b)-4(d)(2)(iii)(A). While

the proposed regulations required estimated revenue to be determined on an annual

basis when a taxpayer relies on this rule,

the final regulations eliminate this requirement. The Treasury Department and the

IRS have determined that when estimated

revenue earned by unrelated party recipients must be used, information available

at the time of the sale will be more reliable

than information available subsequently.

In addition, eliminating the requirement

to determine estimated revenue annually

reduces the administrative burden on the

taxpayer. See §1.250(b)-4(d)(2)(iii)(A).

b. Lump sum payments

One comment recommended that the

seller be allowed to use revenue the recipient (rather than the seller) earns or

expects to earn from use of the intangible

property to determine the extent to which

a sale of intangible property in exchange

for a lump sum payment qualifies for foreign use because using the recipient’s expected or actual revenue is more accurate

for determining foreign use. The comment

acknowledges the administrative difficulty inherent in determining foreign use in

the case of sales of intangible property

for a lump sum payment and in obtaining

actual or expected revenue data from the

recipient.

In response to the comment, the final

regulations allow taxpayers to use net

present values using reliable inputs, which

may include net present values of revenue

Bulletin No. 2020–33

that the recipient expected to earn from

the exploitation of the intangible property within and outside the United States if

the seller obtained such revenue data from

the recipient near the time of the sale and

such revenue data was used to negotiate

the lump sum price paid for the intangible

property. See §1.250(b)-4(d)(2)(iii)(B). In

determining whether such inputs are reliable, the extent to which the inputs are

used by the parties to determine the sales

price agreed to between the seller and a

foreign unrelated party purchasing the intangible property will be a factor. The final

regulations do not allow for use of actual

revenue earned by the recipient from the

use of the intangible property in a lump

sum sale because actual revenue earned

by the recipient for all the years the recipient uses the intangible property will not be

known when the seller files its tax return

for the tax year in which the sale of the

intangible property occurred.

c. Payments for manufacturing method or

process

With respect to sales to a foreign unrelated party of intangible property consisting of a manufacturing method or process,

the final regulations provide that the revenue earned from the end user is equal to

the amount received from the recipient in

exchange for the manufacturing method

or process. See §1.250(b)-4(d)(2)(iii)(C).

In the case of a bundled sale of intangible

property consisting of a manufacturing

method or process and other intangible

property, the value of the manufacturing

method or process relative to the total

value of the intangible property must be

determined using the principles of section

482.

E. Treatment of Certain Hedging

Transactions

Several comments recommended that

gain or loss from certain hedging transactions with respect to commodities be considered gain or loss from sales of general

property. In support, the comments noted

that the Federal income tax treatment of

certain hedging transactions (for example, character and timing) corresponds to

the treatment of the underlying physical

transaction. Comments noted that these

287

rules exist, in part, because the combined

value of the hedging transaction and the

underlying physical transaction generally

reflects a taxpayer’s true economic exposure to the underlying physical commodity. Consistent with that approach and

rationale, these comments recommended

a similar approach for purposes of determining FDDEI sales income.

The Treasury Department and the IRS

agree that certain hedging transactions

should be treated in a manner that is similar to the treatment of the commodities

hedged by those transactions. Furthermore, the Treasury Department and the

IRS have determined that the adjustment

for qualified hedging transactions should

apply to all general property, rather than

only commodities. Hedges of property

other than commodities have the same

economic effect as hedges of commodities, such that the rationale for determining FDDEI sales income from hedges by

reference to hedges of commodities applies equally to other types of property.

Accordingly, the final regulations generally provide that a corporation’s or partnership’s gross income resulting from

FDDEI sales of general property is adjusted by reference to certain hedging transactions. See §1.250(b)-4(f). The hedging

transaction must meet the requirements

of §1.1221-2, including the identification requirement under §1.1221-2(f), the

transaction must hedge price risk or currency fluctuation with respect to ordinary

property, and the property being hedged

must be general property that is sold in

a FDDEI sale. The Treasury Department

and the IRS are considering issuing more

detailed guidance on hedging transactions in the form of future proposed regulations. Comments are requested on this

topic.

VIII. Comments on and Revisions to

Proposed §1.250(b)-5 — FDDEI Services

Section 250(b)(4)(B) provides that FDDEI includes income from services provided by a domestic corporation to any

person, or with respect to property, not

located within the United States. Section

250 does not prescribe rules for determining whether a person or property is “not

located within the United States.” Accordingly, proposed §1.250(b)-5 provided

August 10, 2020

rules for determining whether a service

is provided to a person, or with respect

to property, located outside the United

States.

B. General services

A. Categories of services

The proposed regulations provided that

a consumer is located where the consumer resides when the service is provided

and required documentation to establish the place of residence. See proposed

§1.250(b)-5(d)(2) and (3). Special rules

for small transactions or small taxpayers allowed the taxpayer to establish the

consumer’s location using the taxpayer’s

billing address for the consumer. See proposed §1.250(b)-5(d)(3)(ii).

Comments suggested that rather than

limiting taxpayers to a finite list of documentation, the rules should allow taxpayers to support the status of the consumer

as a person located outside the United

States using documentation that is collected in the ordinary course of the taxpayer’s

trade or business.

As discussed in part II of this Summary of Comments and Explanation of

Revisions section, the final regulations

adopt a more flexible approach to documentation requirements compared to

the proposed regulations. While the final

regulations include specific substantiation requirements for certain elements

of the regulations, no such rules are

provided for general services to consumers. Furthermore, to minimize the

burden associated with determining the

residence of consumers, the final regulations provide that if the renderer does not

have (or cannot after reasonable efforts

obtain) the consumer’s location of residence when the service is provided, the

consumer of a general service is treated

as residing outside the United States if

the consumer’s billing address is outside

of the United States. See §1.250(b)-5(d)

(1). However, this rule does not apply if

the renderer knows or has reason to know

that the consumer does not reside outside

the United States. The final regulations

clarify that “reason to know” is determined based only on whether the information received as part of the provision

of the service contains information that

indicates that the consumer resides in the

United States. Because this rule applies

to all services provided to consumers

(with the modification for electronically

The proposed regulations separated

all services into five mutually exclusive

and comprehensive categories: general

services provided to consumers, general

services provided to business recipients,

proximate services, property services,

and transportation services. See proposed

§1.250(b)-5(b). Whether a service is a FDDEI service is determined under the rules

relevant to the applicable category.

One comment requested that the final

regulations address how “digital services”

are treated and classified under the FDDEI

services regulations, although no recommendation was provided. Another comment requested more guidance on the application of the rules for general services

to business recipients in the software-as-aservice context.

In response to these comments, the

final regulations provide additional guidance, as described in parts VIII.B.1 and

VIII.B.2.c of this Summary of Comments

and Explanation of Revisions section,

with respect to services that are “electronically supplied.” Services that are provided electronically typically will be categorized as general services because they will

not meet the definitions of proximate services, property services, or transportation

services. To provide additional guidance

for determining the location of the recipients of services that are electronically

supplied, the final regulations create a new

category of general services defined as

“electronically supplied services,” which

includes general services (other than advertising services, described in the following sentence) that are delivered over

the internet or an electronic network. See

§1.250(b)-5(c)(5). In addition, the final

regulations create a new subcategory of

general services for advertising services,

including advertising services to display

content via the internet, and provide additional guidance with respect to these services as described in part VIII.B.2.c of this

Summary of Comments and Explanation

of Revisions section. See §1.250(b)-5(c)

(1).

August 10, 2020

1. General Services Provided to

Consumers

288

supplied services described in the next

paragraph), the final regulations do not

provide a special rule for small transactions or small taxpayers.

With respect to electronically supplied

services that are provided to consumers,

the final regulations provide that the consumer is deemed to reside at the location

of the device used to receive the service,

which may be an IP address, if available.

However, if the renderer cannot determine

the location of that device after reasonable

efforts, the general rule based on billing

address applies, subject to the renderer not

knowing or having reason to know that

the consumer does not reside outside the

United States.

2. General Services Provided to Business

Recipients

The proposed regulations determined

the location of a business recipient based

on the location of its operations, and the

operations of any related party of the recipient, that receive a benefit (as defined

in §1.482-9(l)(3)) from such service.

See proposed §1.250(b)-5(e)(2) and (4).

The proposed regulations provided that a

service is generally provided to a business recipient located outside the United

States to the extent that the renderer’s

gross income from providing the service

is allocated to the business recipient’s

operations outside the United States. See

proposed §1.250(b)-5(e)(2)(i). Where

the service confers a benefit on the operations of the business recipient in specific locations, the proposed regulations

provided that gross income of the renderer is allocated based on the location

of the operations in specific locations

that receive the benefit. See proposed

§1.250(b)-5(e)(2)(i)(A). Where a service confers a benefit on the recipient’s

business as a whole, or where reliable

information about the particular portion

of the operations that specifically receive

a benefit from the service is unavailable,

the proposed regulations provided that

the service is deemed to confer a benefit

on all of the business recipient’s operations. See proposed §1.250(b)-5(e)(2)(i)

(A). For purposes of this rule, a business

recipient is treated as having operations

in any location where it maintains an

office or other fixed place of business.

Bulletin No. 2020–33

See proposed §1.250(b)-5(e)(2)(ii). The

proposed regulations also required a taxpayer to obtain documentation sufficient

to establish the location of a business

recipient’s operations that benefit from

the service. See proposed §1.250(b)-5(e)

(1) and (3). Under the proposed regulations, special rules for small transactions

or small taxpayers allowed the taxpayer

to establish the consumer’s location using the taxpayer’s billing address for the

consumer. See proposed §1.250(b)-5(e)

(3)(ii).

a. Operations of a business recipient of

general services

Several comments requested clarification regarding the definition of a business

recipient’s operations. Some comments

requested that the rule be expanded to

include operations performed outside of

the locations where the business recipient

maintains an office or other fixed place

of business. For example, where business

recipients operate satellites or vessels,

the comment suggested that business recipients should be treated as having operations at the location of the satellite or

vessel.

The location of a business recipient’s

operations that benefit from a general service is based on the geographical location

where the business recipient’s activities

are regular and continuous and is not based

on the current location of mobile property

such as satellites or vessels. Moreover, as

noted in the next paragraph, the final regulations clarify that an office or other fixed

place of business is a fixed facility through

which the business recipient engages in

a trade or business. See §1.250(b)-5(e)

(3)(i). In the case of services performed

with respect to a satellite, the location of

the business recipient that receives services with respect to the satellite is based

on where the business recipient remotely

performs activities with respect to the satellite (which could be within the United

States or in a foreign country), rather than

in space. In addition, services performed

with respect to a vessel owned by a business recipient may qualify as proximate

services or property services, depending

on the nature of the services. Therefore,

no further changes to the regulations are

necessary to respond to the comment.

Bulletin No. 2020–33

One comment requested further clarification of the term “fixed place of business,” such as whether it has the same

meaning as it does for section 864(c)

purposes. The comment did not specify

whether using the meaning that the term

has for section 864(c) purposes would be

appropriate. However, the Treasury Department and the IRS have determined

that it would not be appropriate to adopt

the definition that applies for purposes

of section 864(c). Because the final regulations define a business recipient as

including all related parties of the recipient, whereas section 864(c) applies on a

taxpayer-by-taxpayer basis, adopting the

definition of an office or other fixed place

of business that is in §1.864-7 would

cause confusion. However, the final regulations clarify that an office or other fixed

place of business is a fixed facility, that

is, a place, site, structure, or other similar facility, through which the business

recipient engages in a trade or business.

See §1.250(b)-5(e)(3)(i). In addition,

the final regulations provide that for

purposes of determining the location of

the busine

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