IRS provides guidance on new Section 250 exclusions

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The IRS recently issued Notice 2025-78 (PDF - 110 KB), announcing its intent to issue proposed regulations addressing the scope of Section 250(b)(3), which generally excludes from deduction eligible income (DEI) any income and gain from the sale or other disposition of certain property described in new Section 250(b)(3)(A)(i)(VII). The provision was included in the One Big Beautiful Bill Act (OBBBA) and applies to sales or other dispositions occurring after June 16, 2025.

Section 250(a)(1) allows a domestic corporation a deduction equal to a percentage of its foreign-derived deduction-eligible income (FDDEI). FDDEI is generally DEI derived in connection with sales of property for foreign use or services to foreign recipients. The OBBBA added a new DEI exclusion for income and gain derived from a “sale or other disposition” (including deemed sales/deemed dispositions and transactions subject to Section 367(d)), except as otherwise provided by the Secretary, of:

• Intangible property (as defined in Section 367(d)(4)) and
• Any other property of a type that is subject to depreciation, amortization or depletion by the seller.

Notice 2025-78 previews the core definitional rules expected in forthcoming regulations. It provides that “sale or other disposition” is determined under general tax principles and includes deemed sales or dispositions and Section 367(d) transactions but does not include a transaction that would be characterized as a lease or license under general tax principles.

The Notice also notes that the OBBBA amended Section 250(b)(5)(E) — redesignated as Section 250(b)(2)(E) for years beginning after Dec. 31, 2025 — so that the special rule treating sales to include leases and licenses does not apply for purposes of the new DEI exclusion in Section 250(b)(3)(A)(i)(VII).

The notice further defines “intangible property” by reference to Section 367(d)(4), but excludes a “copyrighted article” within the meaning of Treas. Reg. §1.861-18(c)(3). It defines “other excluded property” broadly to include property that, in the seller’s hands, is or has been depreciable under Section 167, amortizable (other than depreciation), or depletable under Section 611. As a result, income or gains from the disposition of fully depreciated business assets may still be excluded from DEI.

By contrast, the notice’s examples illustrate that property held as inventory generally is not “other excluded property” because it is not of a character subject to depreciation or amortization.

Finally, Notice 2025-78 contains a related-party anti-abuse rule that can “taint” property in the buyer’s hands. Where property was “other excluded property” in the hands of a member of the seller’s modified affiliated group and the seller acquires the property in a basis carryover transaction (or series of transactions) with a principal purpose of avoiding the new exclusion, the property is treated as “other excluded property” with respect to the seller. For this purpose, “modified affiliated group” is determined under Treas. Reg. §1.250(b)-1(c)(17) with an 80% ownership threshold. The examples show this rule can apply even where the transferee holds the property in inventory.

The forthcoming proposed regulations, once finalized, are expected to apply to sales or other dispositions — including deemed sales or dispositions and transactions subject to Section 367(d) — occurring after June 16, 2025. Pending regulations, a taxpayer may rely on the notice for dispositions occurring before the forthcoming proposed regulations are published in the Federal Register, provided the rules are applied in their entirety and consistently for all applicable years.

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