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distribution of Property X to Partner A,
and the increase to the basis of Property
X by $10 million in Partner A’s hands,
ABC Partnership is required to reduce
the adjusted basis of its remaining
properties under section 734(b)(2)(B) by
$10 million. Partner B’s and Partner C’s
share of ABC Partnership’s basis
decrease to its remaining properties is
$5 million each. Neither Partner A nor
ABC Partnership engages in any other
transaction described in paragraph (c) of
this section for taxable year 2025.
(ii) Analysis. For purposes of
paragraphs (c)(1)(ii) and (c)(3)(i) of this
section, under paragraph (c)(3)(iv) of
this section, only $5 million of the $10
million basis increase to Property X
counts toward the applicable threshold
because $5 million of the basis increase
corresponds to unrelated Partner C’s
share of the decrease to the basis of ABC
Partnership’s remaining properties
under section 734(b)(2)(B) and thus, is
excluded from the calculation of the
applicable threshold. Thus, the
distribution of Property X to Partner A
is not a transaction described in
paragraph (c)(1)(ii) of this section with
respect to either Partner A or ABC
Partnership because the applicable
threshold is not met for taxable year
2025.
(h) Extension of time—(1) Taxpayer
disclosures. Taxpayers will be treated as
having met their requirements to
disclose timely under § 1.6011–4(e)(2)(i)
if they file their disclosure with the
OTSA by July 14, 2025.
(2) Material advisor disclosures.
Material advisors who have made a tax
statement before January 14, 2025 will
be treated as having met their
requirements to disclose timely under
§ 301.6111–3(e) of this chapter if they
file their disclosure with the OTSA by
the date that is an additional 90 days
beyond the last day for filing specified
in § 301.6111–3(e) of this chapter.
(i) Applicability date—(1) In general.
This section’s identification of
transactions that are the same as or
substantially similar (within the
meaning of § 1.6011–4(c)(4)) to the
transactions described in paragraph (c)
of this section as transactions of interest
for purposes of § 1.6011–4(b)(6) and
sections 6111 and 6112 of the Code is
effective January 14, 2025.
(2) Material advisors.
Notwithstanding § 301.6111–3(b)(4)(i)
and (iii) of this chapter, material
advisors are required to disclose only if

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they have made a tax statement on or
after January 14, 2019.
Douglas W. O’Donnell,
Deputy Commissioner.
Approved: January 3, 2025.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 2025–00324 Filed 1–10–25; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10022]
RIN 1545–BM41

Classification of Digital Content
Transactions and Cloud Transactions
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations modifying the rules for
classifying transactions involving
computer programs, including by
applying the rules to transfers of digital
content. These final regulations also
provide rules for the classification of
cloud transactions. These rules apply
for purposes of the international
provisions of the Internal Revenue Code
and generally affect taxpayers engaging
in transactions involving digital content
or cloud transactions.
DATES:
Effective date: These regulations are
effective on January 14, 2025.
Applicability date: For dates of
applicability, see §§ 1.861–18(i) and
1.861–19(e).
FOR FURTHER INFORMATION CONTACT:
Christopher E. Fulle, (202) 317–5367, or
Michelle L. Ng, (202) 317–6989 (not tollfree numbers).
SUPPLEMENTARY INFORMATION:
SUMMARY:

Authority
These final regulations are issued
under the express delegation of
authority under section 7805 of the
Internal Revenue Code (Code). Section
7805(a) directs the Secretary of the
Treasury or her delegate to prescribe all
needful rules and regulations for the
enforcement of that section and others
in the Code, including all rules and
regulations as may be necessary by
reason of any alteration of law in
relation to internal revenue.

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Background
On August 14, 2019, the Department
of the Treasury (Treasury Department)
and the Internal Revenue Service (IRS)
published proposed regulations (REG–
130700–14) under section 861 of the
Code in the Federal Register (84 FR
40317) (the proposed regulations). The
Treasury Department and the IRS
received written comments on the
proposed regulations, and a public
hearing was held on February 11, 2020.
All written comments received in
response to the proposed regulations are
available at www.regulations.gov or
upon request. Terms used but not
defined in this preamble have the
meaning provided in these final
regulations.
These regulations (the final
regulations) extend the classification
rules in existing § 1.861–18 to transfers
of digital content other than computer
programs and clarify the source of
income for certain transfers of digital
content. The final regulations also
clarify the classification of transactions
involving on-demand network access to
computing and other similar resources.
The final regulations retain the overall
approach of the proposed regulations,
with certain revisions discussed in the
preamble. The preamble also discusses
comments received in response to the
solicitation of comments in the notice of
proposed rulemaking.
Summary of Comments and
Explanation of Revisions
I. General Classification Issues
A. Replacement of De Minimis Rule
With a Predominant Character Rule
Section 1.861–18(b)(1), as in effect
before this Treasury decision, described
four transactions involving computer
programs: the transfer of a copyright
right, the transfer of a copyrighted
article, the provision of services for the
development or modification of a
computer program, and the provision of
know-how relating to the development
of a computer program. Section 1.861–
18(b)(2) required any transaction that
consisted of more than one of the
transactions described in § 1.861–
18(b)(1) to be treated as separate
transactions, unless a transaction was de
minimis, in which case it would be
treated as part of another transaction.
The proposed regulations generally
retained the four types of transactions
(with the expansions described in Part
II.A of this Summary of Comments and
Explanation of Revisions) and preserved
the de minimis rule, but for clarification
purposes, § 1.861–18(b)(2) was proposed
to be modified by introducing the term

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‘‘arrangement’’ and providing that
multiple transactions in an arrangement
generally must be characterized
separately.
Proposed § 1.861–19(b) defined a
cloud transaction as a transaction
through which a person obtains ondemand network access to computer
hardware, digital content (as defined in
proposed § 1.861–18(a)(3)), or other
similar resources, other than on-demand
network access that is de minimis taking
into account the overall arrangement
and the surrounding facts and
circumstances. Similar to proposed
§ 1.861–18(b)(2), proposed § 1.861–
19(c)(3) required separate classification
of each transaction comprising an
arrangement, except that any transaction
that was de minimis would be treated as
part of another transaction rather than
being classified separately.
Comments recommended replacing
these rules in proposed §§ 1.861–
18(b)(1) and (b)(2), and 1.861–19(c)(3),
with a predominant character rule, such
that a transaction consisting of more
than one category of transactions
described in proposed § 1.861–18(b)(1),
or a transaction consisting of one or
more categories of transactions
described in both proposed §§ 1.861–
18(b)(1) and 1.861–19(b), would be
characterized as only one of those
categories of digital content transactions
or as a cloud transaction in accordance
with the predominant character of that
transaction. As an example of a mixed
transaction that would be difficult to
characterize under the proposed
regulations, comments pointed to video
game business models where the
customer purchases a copy of the game
but primarily plays the video game
online with other players. As another
example, comments pointed to software
antivirus programs that include code
that executes on the user’s equipment as
well as code that is deployed in the
cloud to detect and capture viruses
before they reach the user’s equipment.
The comments argued that the
predominant character rule would avoid
the difficult and burdensome task of
determining whether an element is de
minimis in the context of the overall
transaction and allocating income from
the transaction among the non-de
minimis categories as if they were
separate transactions. The comments
also argued that a de minimis standard
is imprecise, and a predominant
character rule that compares
components of a transaction to
determine which component is
predominant would be much more
administrable. Furthermore, one
comment suggested that a predominant
character standard would better align

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with existing Treasury regulations and
other authorities, for instance, § 1.954–
1(e)(3), which provides for a
predominant character approach in the
subpart F context. Finally, the
comments noted confusion arising from
the use of the term ‘‘transaction’’ to
mean two different things in the same
provision under proposed § 1.861–
18(b)(2), and also recommended
removing the term ‘‘arrangement’’ on
the grounds that the term was unclear,
particularly because it was not defined
and rarely appears in other tax rules.
The comments recommended that the
predominant character of a transaction
be determined based on the facts and
circumstances. Comments suggested
that the relevant facts may include the
overall commercial purpose, the
taxpayer’s treatment for non-tax
purposes, the relative cost of each
component (including the cost of
maintaining online and offline
components), and a comparison of unit
prices for components sold separately.
Comments suggested that the facts and
circumstances should provide at least a
reasonable basis for determining the
predominant character of the
transaction.
Further, the comments suggested
defining a transaction based on the facts
and circumstances or as an agreement
entered into in the ordinary course.
Several comments suggested that
relevant factors for determining the
scope of a transaction could include the
availability of separate pricing, the use
of separate stock keeping units
(‘‘SKUs’’), and the taxpayer’s definition
for non-tax purposes.
The final regulations adopt these
comments, in part. The final regulations
replace the de minimis rule and the
concept of an arrangement with a
predominant character rule, which
applies to both digital content
transactions and cloud transactions. The
Treasury Department and the IRS agree
that, for purposes of the final
regulations, a transaction with multiple
elements (including de minimis
elements) should be characterized based
on the predominant character of the
transaction. Predominant character rules
also exist in other regulations for
international provisions of the Code,
such as foreign-derived intangible
income and subpart F, and thus are
familiar to taxpayers. See §§ 1.250(b)–
3(d) and 1.954–1(e)(3). Further, in many
business models that include both
online and offline functionality it may
be difficult to bifurcate a single
transaction into a digital content
transaction and a cloud transaction. The
Treasury Department and the IRS expect
that bifurcation will remain difficult

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and may increase in difficulty as
business models and technology evolve.
Therefore, § 1.861–18(b)(2) of the final
regulations provides that, taking into
account the overall transaction and the
surrounding facts and circumstances, a
transaction that has multiple elements,
one or more of which would be a digital
content transaction if considered
separately, is classified in its entirety as
a digital content transaction under one
of the categories described in § 1.861–
18(b)(1) if the predominant character of
the transaction is described in one of the
categories in that paragraph. Section
1.861–19(c)(2) of the final regulations
provides a corresponding rule for
transactions that have multiple
elements, one or more of which is a
cloud transaction. Further, the
references to ‘‘de minimis’’ and
‘‘arrangement’’ are also removed in
§ 1.861–19(a) of the final regulations so
that the final regulations define a cloud
transaction as a transaction through
which a person obtains on-demand
network access to computer hardware,
digital content (as defined in § 1.861–
18(a)(2)), or other similar resources.
The final regulations define a digital
content transaction as a transaction that
constitutes a transfer of digital content
or the provision of modification or
development services or of know-how
with respect to digital content. See
§ 1.861–18(b)(1). The final regulations
do not, however, define the term
transaction. The Treasury Department
and the IRS have concluded that it is
not necessary to introduce a specialized
definition in these regulations because
the concept is already well-established
under general tax principles, case law,
and existing administrative guidance.
Section 1.861–18(b)(3) of the final
regulations (cross-referenced in § 1.861–
19(c)(2)) provides a general rule and a
special rule for determining the
predominant character of a transaction
that contains multiple elements, one or
more of which would be a digital
content transaction or a cloud
transaction if considered separately.
Under the general rule, the predominant
character is determined by the primary
benefit or value received by the
customer. If that information is not
reasonably ascertainable, the special
rule provides that the predominant
character is determined by the primary
benefit or value received by a typical
customer in a substantially similar
transaction, which is determined by
data on how a typical customer uses or
accesses the digital content. If data on
how a typical customer uses or accesses
the digital content is not available, then
all factors indicative of the primary
benefit or value received by a typical

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customer must be examined, including
how the transaction is marketed, the
relative development costs of each
element of the transaction, and the
relative price paid in an uncontrolled
transaction for one or more elements
compared to the total contract price of
the transaction in question.
B. Distinction Between Temporary
Downloads and Streaming
One comment requested guidance on
‘‘streaming’’ and ‘‘temporary
downloading’’ transactions. The
comment expressed the view that
whether a customer can download
digital content should not determine
whether a transaction is characterized as
a service or a lease. The comment noted
that when a customer’s rights are
limited to downloading and viewing a
discrete item of digital content, such as
a movie, for a limited time, the
transaction would be treated as a lease
of digital content. However, if the
customer can access and download as
many movies as desired from a catalog
of thousands of movies for a monthly
fee, and once the subscription ends
access to the downloaded movies ends,
the transaction would be treated as a
cloud transaction and classified as a
service according to the comment. The
comment suggested that the
characterization of these two
transactions should not depend on
whether the content is actually
downloaded by any particular customer.
Another comment asserted that ondemand access to digital content should
not be treated differently than
temporary downloads of digital content
because the two transactions are
functionally equivalent in that both
provide temporary access to digital
content. The comment observed that the
decision to provide on-demand access
or temporary downloads of digital
content is typically driven by the nature
of the technology involved (for example,
the memory capacity of a user’s
computer or the download speeds
available), and generally has no bearing
on the economic substance of the
transaction.
Where the provider chooses whether
to offer either temporary downloads or
streaming the Treasury Department and
the IRS disagree that these two types of
transactions should be treated the same.
A fundamental requirement of a digital
content transaction, unlike a cloud
transaction involving digital content, is
that there must be a transfer of digital
content to the customer. This
distinction between property and
services transactions has been in place
since the original issuance of § 1.861–18
in 1998 and applying it consistently

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provides a degree of certainty for an
otherwise factual case-by-case
determination.
When a customer downloads digital
content, there is a transfer of a copy of
that digital content to the customer and
the customer must use its own device to
host the copy of content for viewing or
listening, for example. In contrast, when
a customer streams digital content, there
is no transfer of digital content. Instead,
the customer receives access to the
digital content through the provider’s
servers. Especially for large file-size
content, performing the hosting function
in order to allow the customer
continuous access places a higher
burden on the provider. Similarly, for a
temporary download, the customer must
have sufficient storage on its device for
the temporary download that is not
necessary in a streaming transaction.
There are also differences in how the
customer may experience the digital
content. For example, once a customer
downloads digital content, the customer
is able to access the content regardless
of whether the customer is connected to
the internet and could thus watch a
downloaded movie or read a
downloaded book when the customer is
unable to connect to the internet. In
these ways, there are fundamental
differences in character between a
temporary download and streaming that
warrant different characterization and
sourcing rules for each type of
transaction. Where the customer may
choose whether to temporarily
download or stream content, the
predominant character rule in the final
regulations would apply to characterize
the transaction. See § 1.861–19(d)(7)
(Example 7) and (d)(9) (Example 9) of
the final regulations.
II. Transactions Involving Digital
Content
A. Definition of Digital Content
Section 1.861–18, as in effect before
this Treasury decision, applied only to
computer programs. The proposed
regulations expanded the scope of
§ 1.861–18 to apply to transactions
involving ‘‘digital content,’’ defined as
‘‘a computer program or any other
content in digital format that is either
protected by copyright law or no longer
protected by copyright law solely due to
the passage of time.’’
Several comments recommended
broadening the definition of digital
content to encompass content not
protected by copyright law that is
transferred electronically and is similar
to copyrightable content, such as
consumer or user data, text files of
recipes, government-produced

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documents, and sets of font and
typefaces. One comment suggested
expansion to any property in digital
format in which a person has a right or
interest, including any property bought
and sold in real marketplaces, in virtual
marketplaces and in in-game economies.
These comments generally suggested
that transfers of this non-copyrightable
digital property are economically and
functionally equivalent to the transfer of
digital content and that characterization
of the transfers should be treated the
same. One comment asserted that such
content may be subject to other forms of
intellectual property protection such as
contractual restrictions and nondisclosure agreements, such that
transfers of that content are functionally
similar to transfers of digital content.
The final regulations do not broaden
the definition of digital content beyond
content protectable by copyright law.
Section 1.861–18, as in effect before this
Treasury decision, generally followed
copyright law, and the Treasury
Department and the IRS are of the view
that it is appropriate to continue to
apply this longstanding copyright law
framework. This framework is not
workable for non-copyrightable content
given that the legal rights associated
with such content generally are not the
same as those associated with content
protectable by copyright law. For
example, in a digital transfer of property
that is not protected by copyright law,
the transferee may (unless otherwise
restricted, such as by contract) have the
unfettered ability to make and distribute
copies to the public, to prepare
derivative works, or to publicly display
or publicly perform the property. As a
result, if the framework of § 1.861–18
were applied to the transaction, such a
transfer would generally be
characterized as a license or sale of a
copyright right, regardless of whether
the transferee intends to exploit those
abilities or whether those powers have
any value or relevance in the context of
the transaction. Therefore, the existing
framework could result in a
classification at odds with the
economics and reality of the transaction.
Further, where non-copyrightable
digital property is transferred subject to
contractual or other restrictions, those
restrictions may not fit cleanly within
the existing framework and may require
a different analysis to determine the
correct characterization. Accordingly,
including non-copyrightable content
would require a different set of rules
that are beyond the scope of § 1.861–18.
One comment noted that under the
proposed regulations, an online
database that allows customers ondemand access to a collection of non-

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copyrightable content such as recipes or
court opinions is a cloud transaction.
See § 1.861–19(d)(8) (Example 8). This
is because the definition of a cloud
transaction in proposed § 1.861–19(b)
refers to on-demand network access to
computer hardware, digital content, or
‘‘other similar resources.’’ The comment
suggested that the inclusion of ‘‘other
similar resources’’ in the definition of
cloud transaction may provide a road
map for expanding the definition of
digital content in proposed § 1.861–18.
The Treasury Department and the IRS
disagree. The cloud transaction
definition includes access to noncopyrightable content because curation
of such content is a common business
model that, unlike the framework of
§ 1.861–18, does not depend on whether
the content is copyrightable because
there is no transfer to the customer.
The final regulations therefore do not
adopt these comments and continue to
characterize digital content transactions
based on the distinction between a
transfer of a copyrighted article and a
transfer of copyright rights, which
depends on whether the customer
receives copyright rights as part of the
transfer. The Treasury Department and
the IRS may, however, consider these
comments for possible future guidance
specific to types of digital property that
are not protectable by copyright law.
The final regulations do provide,
however, that digital content includes
content that is not protected by
copyright law solely because the creator
dedicated the content to the public
domain. The regulations include this
refinement because monetization of
such content generally also involves
digital content that is protected by
copyright law and therefore fits within
the framework of § 1.861–18. See
§ 1.861–18(a)(2).
B. Provision of Know-How Relating To
Development of Digital Content
Section 1.861–18(b)(1)(iv), as in effect
before this Treasury decision, provided
that one of the categories of transactions
relating to computer programs was
‘‘[t]he provision of know-how relating to
computer programming techniques.’’
Section 1.861–18(e) provided that the
provision of information with respect to
computer programs will be treated as
the provision of know-how for purposes
of § 1.861–18 only if the information (1)
relates to computer programming
techniques; (2) is furnished under
conditions preventing unauthorized
disclosure, specifically contracted for
between the parties; and (3) is
considered property subject to trade
secret protection. The proposed
regulations would modify § 1.861–

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18(b)(1)(iv) and (e)(1) by replacing
‘‘computer programming techniques’’
with ‘‘development of digital content,’’
but would not otherwise change
§ 1.861–18(b)(1)(iv) and (e)(1).
One comment asked for confirmation
that the changes to § 1.861–18(b)(1)(iv)
and (e)(1) would not change the scope
of § 1.861–18(b)(1)(iv), and that § 1.861–
18(b)(1)(iv) in the final regulations
describes only know-how transferred
under terms that constitute a license for
United States Federal tax purposes. The
Treasury Department and the IRS
confirm that § 1.861–18(b)(1)(iv) in the
proposed and final regulations is
intended to describe the same type of
know-how covered by § 1.861–
18(b)(1)(iv) as in effect before this
Treasury decision, except that knowhow may relate to any development of
digital content and not merely computer
programming techniques. The Treasury
Department and the IRS have
determined that § 1.861–18(b)(1)(iv) and
(e)(1) are sufficiently clear in this regard
and that additional guidance on the
treatment of such know-how is
unnecessary.
C. Rights To Prepare Derivative Digital
Content
Section 1.861–18(c)(2)(ii), as in effect
before this Treasury decision, provided
that one of the copyright rights referred
to in that paragraph was the right to
prepare derivative computer programs
based upon a copyrighted computer
program. The proposed regulations
would replace the references to
computer programs with references to
digital content but would not otherwise
change § 1.861–18(c)(2)(ii). One
comment recommended that the right to
prepare derivative digital content based
upon digital content should be treated
as a copyright right only if it is coupled
with the right to distribute the
derivative digital content to the public.
The comment expressed the belief that
this change would be consistent with
one of the underlying policies of these
regulations, which is to treat as a license
a transaction in which the transferee
exercises a copyright right to exploit the
rights in the market, and to treat as a
sale or lease a transaction in which the
transferee consumes the digital content.
The comment also suggested that this
change would address the ambiguity in
copyright law as to what modifications
of a copyrighted work are necessary to
create a derivative work, and whether,
for example, rights to modify software
during installation or customization
would constitute rights to create a
derivative work.
The final regulations do not adopt this
comment. The preamble to Treasury

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Decision 8785 (which promulgated
§ 1.861–18 in 1998) stated in response to
similar comments to the proposed
regulations (REG–251520–96) that were
finalized in Treasury Decision 8785 that
the right to make copies (which must be
coupled with the right to distribute the
copies to the public to constitute a
copyright right under the regulations,
despite such a requirement not being
present under copyright law) is treated
differently from the other copyright
rights in the context of the regulations
because of the unique characteristics of
computer programs, including the ease
with which computer programs can be
copied. However, as explained in that
preamble, it is generally consistent with
copyright law to treat as a copyright
right a non-de minimis right to make a
derivative work, regardless of whether it
is coupled with the right to distribute to
the public, and there is no sufficiently
unique aspect of digital content that
would compel a different result for
purposes of § 1.861–18. The Treasury
Department and the IRS continue to be
of the view that that the right to make
a derivative work without further rights
to distribute to the public should be
treated as a copyright right and that the
unique characteristics of digital content
do not compel a different result.
However, the predominant character
rule in § 1.861–18(b)(2) and (3) of the
final regulations (discussed in Part I.A
of this Summary of Comments and
Explanation of Revisions) should
alleviate concerns about minor
customization rights causing what
would otherwise be a transfer of digital
content to be treated as a license of a
copyright right. See § 1.861–18(h)(18)
(Example 18) of the final regulations.
D. Right To Make a Public Performance
or Public Display for Purposes of
Advertising
Section 1.861–18(c)(2), as in effect
before this Treasury decision,
designated as copyright rights the right
to make a public performance of a
computer program and the right to
display a computer program to the
public. The proposed regulations would
replace the references to computer
programs with references to digital
content, and also provide exceptions for
the right to publicly perform or publicly
display digital content for the purpose
of advertising the sale of the digital
content performed or displayed.
Proposed § 1.861–18(c)(2)(iii) and (iv).
The preamble to the proposed
regulations used an example of rights
provided to a video game retailer that
allow the retailer to display screenshots
of a video game on television
commercials promoting the game, and

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noted that these rights, on their own,
would not be significant. Two
comments agreed with the addition of
the regulatory language and one of the
comments suggested that the preamble
example be included in the regulatory
text.
The final regulations retain the
exceptions for the public performance
or public display of digital content for
the purpose of advertising the sale of the
digital content performed or displayed.
See § 1.861–18(c)(2)(iii) and (iv). The
Treasury Department and the IRS have
determined, however, that the language
of the regulation is sufficiently clear
without an example and therefore the
final regulations do not include the
example in the regulatory text.
E. Copyright Rights Related to Digital
Content Used for Cloud Transactions
One comment questioned whether the
transfer of the right to use software or
other digital content for a cloud
transaction should be treated as the
transfer of a copyright right. The
comment included an example wherein
A, a domestic corporation, transfers
computer software to B, a foreign
affiliate. B also gets the right to use the
software to provide software-as-aservice transactions, but does not get the
right to sell copies of the software or
make derivative works. The comment
stated that it appears that a copyright
right has been transferred in this
scenario, but that it is not clear which
of the enumerated copyright rights is
transferred. The comment recommend
that the final regulations allow
taxpayers to elect to characterize this
type of transaction as a transfer of a
copyright right.
The Treasury Department and the IRS
agree that a transfer of digital content
accompanied by the right to use the
digital content to provide a cloud
transaction will generally result in the
transfer of the right to either publicly
display or publicly perform the digital
content, depending on the type of
digital content and specific rights
transferred. To display a work means to
show a copy of it, either directly or by
means of a film, slide, television image,
or any other device or process or, in the
case of a motion picture or other
audiovisual work, to show individual
images nonsequentially. 17 U.S.C. 101.
To perform a work means to recite,
render, play, dance, or act it, either
directly or by means of any device or
process or, in the case of a motion
picture or other audiovisual work, to
show its images in any sequence or to
make the sounds accompanying it more
audible. Id. Further, 17 U.S.C. 101
includes a ‘‘transmit clause’’ that

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provides that to publicly display or
perform a work means, in relevant part,
to transmit or otherwise communicate a
performance or display of the work to
the public, by means of any device or
process, whether the members of the
public capable of receiving the
performance or display receive it in the
same place or in separate places and at
the same time or at different times.
Reading these provisions of 17 U.S.C.
101, the Treasury Department and the
IRS have concluded that the use of
digital content to provide a cloud
transaction should be treated as the
exercise of a copyright right under both
copyright law and the final regulations.
See American Broadcasting Companies,
Inc. v. Aereo, Inc., 573 U.S. 431 (2014)
(holding that capture of broadcast
copyrighted content and retransmission
to subscribers who stream the content to
their personal devices was a public
performance of a copyrighted work
under the transmit clause of 17 U.S.C.
101). However, whether the transferred
right is a right to display or a right to
perform will depend on the type of
digital content, the type of copyright
obtained, and the manner in which the
digital content is used in the cloud
transaction. Due to the factual nature of
these issues and the important role of
copyright law in those determinations,
the final regulations do not specify
which copyright right has been
transferred when digital content is
transferred for use in a cloud
transaction.
F. Examples Illustrating § 1.861–18
Several comments requested new
examples describing common business
models or modifications to examples
provided in the proposed regulations. In
response to these comments, the final
regulations contain several new
examples and make certain
modifications to the examples in the
proposed regulations. In addition, preexisting examples that were in effect
before the issuance of this Treasury
decision have been modified to follow
the same analytical structure as the
examples added by the final regulations.
One comment requested an example
of a wholesaler of computer software
buying and selling a limited number of
product keys. A product key is a
specific software-based key for a
computer program that certifies the
copy of the program is original. Instead
of using physical media such as a CD or
DVD to install software onto a computer
or other electronic device, a user can
enter a product key to download the
software and then install it from their
computer’s hard drive. A customer that
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channels often receives a link to
download and a product key to activate
the software. The comment asserted that
an underlying principle of these
regulations is to treat economically
similar income equally, regardless of
whether the income is earned through
electronic means or through more
conventional channels of commerce,
and therefore the income earned by a
wholesaler of product keys for software
should be treated the same as a
wholesaler of physical copies of
software. The Treasury Department and
the IRS agree that § 1.861–18 does not
characterize otherwise similar
transactions differently solely because
one transaction was effected through
electronic means and the other was not.
See § 1.861–18(g)(2) of the final
regulations. In response to the comment,
a new example added in the final
regulations, § 1.861–18(h)(24) (Example
24), addresses a business model in
which a video game copyright owner
transfers product keys to retailers, and
then the retailers transfer those keys to
customers. Based on the facts in the
example, the transfer of product keys to
the retailers is characterized as a sale of
copyrighted articles, and the transfer of
product keys from the retailers to
customers is also classified as the sale
of copyrighted articles.
Two comments asked for an example
addressing a business model in which
an operator of a platform offers for
download digital content (for example,
video games or electronic books) as an
agent of the digital content developers.
The platform operator receives the
copyright right to make and sell digital
copies of the digital content, but this
right is granted only so that the platform
operator can act in its capacity as an
agent facilitating sales of the digital
content between digital content
developers and customers. As such, the
comments asserted that the transaction
between the platform operator and
digital content developers should not be
treated as the transfer of copyright
rights. One of these comments also
suggested several clarifying changes to
proposed § 1.861–18(h)(19) (Example
19) to distinguish the business model
described in that example, which
involves a licensed reseller that utilizes
an online platform, from the agency
platform operator described in the
comment.
The Treasury Department and the IRS
recognize that an agency platform
operator business model exists, and
therefore the final regulations include a
new example at § 1.861–18(h)(20)
(Example 20) that describes a scenario
in which a platform operator offers
applications for sale as an agent of the

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application developers. The facts in
Example 20 assume that the platform
operator acts as an agent of the
application developers under general
tax principles and concludes that the
characterization of the transaction
between the platform operator and
application developers is not a digital
content transaction nor a cloud
transaction. Whether a taxpayer is
acting as an agent on behalf of another
taxpayer is determined under general
tax principles and that determination is
outside the scope of these final
regulations. Additionally, § 1.861–
18(h)(19) (Example 19) of the final
regulations contains certain changes to
the facts in the proposed regulations
that are intended to distinguish the
licensed reseller platform operator
business model described in that
example from the agency platform
operator model described in Example
20, namely that the primary benefit or
value that the distributor (Corp A)
receives in the transaction in Example
19 is the right to reproduce and
distribute an unlimited number of
copies of the book.
One comment recommended adding
an example describing a business model
in which a video game that can be
played on a particular game console or
a computer is sold in physical copies
through retailers, or digitally through
the game console’s store or through an
internet store for a one-time fee. The
game’s core functionality is accessed
online and, if played on the game
console, requires paying an annual or
monthly subscription fee to the console
maker which grants the customer access
to the online functionality of the
console, thereby allowing the customer
to play the online component of the
video game (and all other video games)
on the console. This fee is charged by
the console maker for purposes of using
the console online, so if the game is
played on a computer, there is no
additional fee to access the online
content. The example in the comment
concluded that the purchase of the
console version of the video game,
whether from a retailer, the game
console store, or the internet store, is a
cloud transaction because most
customers purchase the game primarily
to enjoy the online functionality. This
comment also recommended another
similar example, except the core
functionality of the video game is offline
content, and therefore the purchase of
the video game is the sale of a
copyrighted article.
The comment underscores the fact
that there are many different business
models and types of transactions in the
video game industry. The determination

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of the character of each transaction will
necessarily be fact-specific based on the
rights obtained by the customer and, if
relevant, the predominant character of
the transaction. However, to address
certain aspects of these scenarios, a new
example at § 1.861–18(h)(24) (Example
24) of the final regulations describes the
purchase of a video game for a one-time
fee that has online and offline
functionality, and that does not require
paying a periodic subscription fee that
is specific to that game to access the
online content. Additionally, a new
example at § 1.861–19(d)(11) (Example
11) of the final regulations describes the
purchase of a video game for a one-time
fee whose primary functionality is
online and requires paying a monthly
fee to the game developer to access the
online content specific to the game. The
examples conclude in both cases that,
under the facts presented, a customer’s
purchase of a game has the predominant
character of a sale of a copyrighted
article. Neither example introduces
additional complexity by describing a
separate subscription fee that the
customer must pay to a console maker
to enable the online functionality of the
console for all games played on that
console. The Treasury Department and
the IRS have concluded that such a fee
would not be relevant to determining
the character of transactions specific to
the game itself under the final
regulations. Such a fee is more akin to
the monthly amount that a customer
may pay to an internet service provider
for internet access to play games online
in general, because the fee is not
specific to the game and is instead
required to enable online functionality
on a device that has other functions.
One comment recommended changes
to the facts in § 1.861–18(h)(19) through
(21) (Examples 19 through 21) of the
proposed regulations, which contained
a restriction on the transfer of the digital
content by limiting the number of
devices onto which the customer could
download the content. Specifically, the
comment recommended modernizing
these examples by replacing the
‘‘limited number of devices’’ restriction
with more general background that
explains that the user agreement and the
conditions and features of the provider’s
website and applications adequately
restrict the end-user’s ability to lend or
otherwise transfer the digital content. In
§ 1.861–18(h)(19) and (21) (Examples 19
and 21) of the final regulations, the
restriction on the number of devices is
removed, and facts were added to make
clear that no copyright rights were
granted. Proposed § 1.861–18(h)(20)
(Example 20), which discussed a

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business that offered end-users
membership to a catalog of copyrighted
music and required the end-users to
download the songs, was removed from
the final regulations because the
Treasury Department and the IRS
determined the facts described in the
example were unrealistic.
III. Cloud Transactions
A. Classification of Cloud Transactions
Proposed § 1.861–19(c)(1) would
provide that a cloud transaction is
classified solely as either a lease of
property or the provision of services,
based on all relevant factors. Proposed
§ 1.861–19(c)(2) would enumerate a
non-exhaustive list of potentially
relevant factors, most of which come
from section 7701(e) of the Code. The
preamble to the proposed regulations
requested comments as to whether the
classification as either a lease or a
service was correct, or whether cloud
transactions are more properly classified
in another category of income. The
preamble also requested comments on
realistic examples of cloud transactions
that would be treated as leases under
proposed § 1.861–19.
Several comments recommended that
all cloud transactions be classified as
services because the commentators
could not identify any realistic cloud
transaction that could be classified as a
lease. One comment requested that the
final regulations include an example of
a cloud transaction that would be
treated as a lease, but did not suggest a
scenario in which a cloud transaction
would be a lease. Alternatively, the
comments recommended that the final
regulations include a rebuttable
presumption that all cloud transactions
are classified as services.
In the absence of a rule stating all
cloud transactions are services, several
comments expressed concerns with, and
suggested modifications to, certain
factors listed in proposed § 1.861–
19(c)(2). For example, some comments
suggested that certain factors were not
relevant for cloud transactions, or
would generally weigh towards a lease
characterization, but that overall, a
cloud transaction should still be
classified as the provision of services.
Comments also recommended clarifying
the treatment as services of related party
data hosting transactions that involve
cost-plus payments from a company
under common control with the hosting
company.
One comment suggested adding an
example that commonly exists in
practice that is similar to proposed
§ 1.861–19(d)(2) (Example 2), involving
the provision of designated servers to

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the customer, but with a shifted focus to
analyze the access that a remote user
may have to data and software on those
servers.
Two comments expressed concerns
that the proposed regulations may be
used to characterize transactions of
infrastructure providers, such as real
estate investment trusts, who lease and
otherwise make available real property
and other infrastructure to cloud
providers and similar tenants. These
comments were concerned that the
proposed regulations referenced the
section 7701(e) factors to determine
whether a cloud transaction was a
service or a lease, and that these
interpretations could affect the
interpretation of the section 7701(e)
factors in the context of non-cloud
transactions.
The final regulations treat all cloud
transactions solely as the provision of
services and remove the section 7701(e)
and other factors listed in the proposed
regulations. Like the comments, the
Treasury Department and the IRS could
not identify a transaction that satisfies
the definition of a cloud transaction that
would be properly classified as a lease.
Further, the Treasury Department and
the IRS would expect future business
models that meet the definition of a
cloud transaction to constitute services
rather than leases or other types of
transactions. The services classification
is appropriate because in a typical
business model that includes a cloud
transaction, the cloud provider retains
economic control and possession over
the relevant property (such as servers,
software, or digital content, depending
on the transaction) and the cloud
transaction meets other hallmarks of a
service transaction such as the provider
having the ability to determine the
specific property used to provide the
cloud transaction and to replace such
property with similar property. Note,
however, that business models may
include transactions involving computer
hardware, such as a server, that is
located at the customer’s premises, and
such a transaction may fall outside the
definition of a cloud transaction (for
example, because there is no on-demand
network access provided in that
transaction) and would therefore be
classified under section 7701(e) and
general tax principles. The Treasury
Department and the IRS have also
concluded that a more definite rule for
characterization based on the definition
of a cloud transaction will allow for
better compliance and tax
administration than the factors test in
the proposed regulations. Because the
final regulations classify all cloud
transactions as the provision of services,

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examples applying the factors from the
proposed regulations to determine
whether a cloud transaction is a service
or a lease have been removed (and no
example concluding that the cloud
transaction is a lease has been added).
Finally, one comment recommended
expanding the characterization of cloud
transactions to include licenses for
transactions in which non-de minimis
copyright rights are transferred. The
comment described an example where
an owner of digital content (a movie)
streams that digital content to a movie
theater and grants the movie theater the
right to show the streamed content to
customers. The comment concluded
that the transaction between the content
owner and the movie theater is a
license. The comment expressed the
belief that the manner in which digital
content and accompanying public
display or performance rights are
delivered should not alone change the
character of a transaction from a license
to a service or lease.
The final regulations do not adopt this
comment. In the scenario posited by the
comment, the movie theater would be
much more likely to download or
otherwise obtain a copy of the movie
than to stream the movie
simultaneously with displaying the
movie to customers, given the
possibility of buffering or other
technology issues that might occur
while streaming and negatively impact
the movie theater’s customers. However,
a somewhat similar scenario could
occur if a bar or similar establishment
streams music, sporting events, or other
content as entertainment for customers
eating or drinking at the establishment.
While the agreement with the streaming
service may grant the bar the right to
perform or to display the streamed
content to its customers, if there is no
transfer of digital content (that is, no
option to download of digital content),
the transaction falls outside the digital
content rules in § 1.861–18 and may be
properly characterized as a cloud
transaction. Whether there is a transfer
of a copyright right that is not described
in § 1.861–18(c)(2) would depend on
copyright law. As described in Part I.B
of this Summary of Comments and
Explanation of Revisions, a fundamental
requirement for a digital content
transaction such as a license of
copyright rights, as opposed to a cloud
transaction involving digital content, is
that the former involves a transfer of the
digital content to the customer. If,
however, the theater or the bar has the
choice to download or stream the
content, then § 1.861–18, including the
predominant character rule, would
apply to the transaction.

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B. Inclusion of Common Cloud Business
Models
One comment suggested that the final
regulations explicitly include as cloud
transactions certain common cloudbased business models, namely: (1)
advertising models where customers
obtain ‘‘free’’ services and advertisers
pay for access to those customers; (2)
marketplace sites and apps that function
as sales agents; (3) gig-economy sites
and apps that put service providers and
customers together; (4) job recruiting
sites and apps that find candidates for
employers; (5) travel sites and apps that
act like sales agents for hotels, flights,
etc.; and (6) game sites that allow users
access to a range of games for a
subscription price.
The final regulations do not adopt this
comment, though some similar
examples are included in § 1.861–18(h).
Although each of the comment’s
suggested scenarios include services or
goods accessed through the internet,
whether each scenario is a cloud
transaction (as defined by § 1.861–19(b))
is fact-specific and cannot be
determined solely on the basis of the
type of offering provided. Section
1.861–19(b) defines a cloud transaction
as a transaction through which a person
obtains on-demand network access to
computer hardware, digital content (as
defined in § 1.861–18(a)(2)), or other
similar resources. The first scenario,
involving customers’ ‘‘free’’ access to
content that is funded by advertising, is
similar to § 1.861–18(h)(22) (Example
22) of the final regulations. The example
addresses the transfer of content to the
platform by content creators (a digital
content transaction) and the access to
the content by customers (a cloud
transaction). However, the example does
not address the transaction between the
advertisers and the platform because
while the ads are viewable online, the
advertising services are likely not cloud
transactions because there is likely no
on-demand network access to computer
hardware, digital content, or similar
resources provided by the platform to
the advertisers (though specific fact
patterns may differ). The second
scenario, involving marketplace sites
and apps that function as sales agents,
may result in a transaction that has a
digital content transaction element and
a cloud transaction element if the
marketplace site or app is used to
transfer digital content to customers.
See § 1.861–18(h)(20) (Example 20).
Similarly, the sixth scenario, involving
game sites allowing access to a range of
games for a subscription price, may
require a predominant character
analysis to determine whether the

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primary benefit to the customer (or a
typical customer) is the download of
games or access to play the games
online. See § 1.861–18(h)(24) (Example
24). In the remaining scenarios
proposed by the comment, the website
or app may provide a service, but it is
likely that the service would not be a
cloud transaction because the recipient
of the service does not receive ondemand network access to computer
hardware, digital content, or similar
resources. The framework of the final
regulations should be applied to the
facts of each specific transaction rather
than making generalizations about broad
categories of content offerings.
C. Examples Illustrating § 1.861–19
Many comments requested
modifications to the examples provided
in proposed § 1.861–19, or new
examples describing common business
models. In response to these comments,
the final regulations contain several new
examples and make certain
modifications to the pre-existing
examples. The final regulations also
remove examples illustrating the
proposed regulations’ application of
factors to distinguish between the
characterization of a cloud transaction
as a service or a lease because the final
regulations characterize all cloud
transactions as services.
Proposed § 1.861–19(d)(11) (Example
11) would describe a scenario in which
a taxpayer operates an online database
of industry-specific materials that
utilizes a proprietary search engine.
Certain materials in the database
constitute digital content. The example
concluded that the taxpayer’s provision
of on-demand access to its computer
hardware and software is a cloud
transaction. One comment requested
clarification that the characterization of
this transaction would not be different
if the online database contained no
copyrightable materials. In the final
regulations, the analysis of this example
(which has been redesignated § 1.861–
19(d)(8) (Example 8)) explains that the
cloud transaction is access to the search
engine and online database, rather than
online access to the digital content, and
therefore the conclusion that the
transaction is a cloud transaction would
not change if none of the content in the
database was copyrightable. This
conclusion is consistent with § 1.861–
19(b)’s definition of a cloud transaction
as a transaction through which a person
obtains on-demand network access to
computer hardware, digital content (as
defined in § 1.861–18(a)(2)), or other
similar resources. In this case, the
content accessed would be an ‘‘other
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Two comments expressed concern
that certain jurisdictions around the
world treat income earned by a reseller
of services, such as software-as-aservice, as royalties subject to
withholding. These comments asked for
an example in the final regulations
addressing a reseller of services that
concludes the reseller’s income is
services income. In response to these
comments, section 1.861–19(d)(10)
(Example 10) of the final regulations
addresses a reseller of software-as-aservice and concludes the transaction
between the reseller and its customers is
a cloud transaction classified as the
provision of services.
Proposed § 1.861–19(d)(9) (Example
9) would describe a scenario in which
a taxpayer maintains a catalogue of
videos and music that it streams to
customers in exchange for a monthly
fee. To better reflect current and
developing business practices,
comments recommended adding a fact
to this example that customers have the
ability to download the digital content
for offline viewing, and that such ability
is de minimis in the context of the
overall transaction. Proposed § 1.861–
19(d)(9) (Example 9) is redesignated
§ 1.861–19(d)(7) (Example 7) of the final
regulations, and the ability to download
the digital content has been added to the
facts in the example. As discussed in
Part I.A of this Summary of Comments
and Explanation of Revisions, a
predominant character rule in the final
regulations replaced the de minimis rule
in the proposed regulations. Under the
facts described in Example 7 of the final
regulations, the predominant character
of the transaction is a cloud transaction.
IV. Sourcing Rules
A. Source Rule for Sales of Copyrighted
Articles Transferred Through an
Electronic Medium
1. In General
Section 1.861–18(f)(2), as in effect
before this Treasury decision, provided
that income from sales of copyrighted
articles is sourced under sections
861(a)(6), 862(a)(6), 863, 865(a), (b), (c),
or (e), as appropriate. Proposed § 1.861–
18(f)(2)(ii) would provide that when a
copyrighted article is sold and
transferred through an electronic
medium, the sale is deemed to have
occurred at the location of download or
installation onto the end-user’s device
used to access the digital content for
purposes of § 1.861–7(c). If information
about the location of download or
installation was not available, proposed
§ 1.861–18(f)(2)(ii) would provide that
the sale is deemed to have occurred at
the location of the customer, as

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determined based on the taxpayer’s
recorded sales data for business or
financial reporting purposes.
Comments observed practical
challenges with applying a rule based
on the location of download or
installation, including that: (i) data
privacy laws may prevent taxpayers
from collecting or retaining this
information, (ii) internet Protocol (IP)
addresses may be unreliable because
virtual private networks may obscure an
end-user’s IP address, (iii) it would be
burdensome and expensive for
taxpayers to collect new data on the
location of download or installation, (iv)
there may be difficulties in determining
the location of download or installation
onto an end-user’s device when
software is sold through multi-level
distribution channels, and (v) it may be
difficult to identify the end-user. One
comment suggested that the final
regulations provide examples that
illustrate the application of the
download test in various circumstances.
Instead of endorsing the proposed
rule, most comments addressing this
topic recommended a rule that uses the
billing address of the first unrelated
purchaser to determine the location of
the sale. Some comments observed that
the billing address of the purchaser is
information sellers already collect and
is a more reliable indicator of where the
purchaser will use the digital content.
Several comments suggested that
taxpayers be permitted to elect to use
the location of download or installation
instead of the billing address of the
purchaser if the taxpayer has access to
that information. Some comments
recommended permitting taxpayers to
elect to use the location of actual use of
the digital content, such as when an
employer purchases digital content that
is used by an employee not located in
the same jurisdiction as the employer.
Finally, another comment
recommended that the rule in § 1.861–
7(c) (which provides that the place of
sale is the place where the rights, title,
and interest of the seller in the property
are transferred to the buyer (the title
passage rule)) should be retained for
purposes of sourcing sales of
copyrighted articles transferred through
an electronic medium.
The final regulations adopt these
comments in part. Consistent with the
proposed regulations, § 1.861–18(f)(2)(ii)
of the final regulations moves away
from the ‘‘title passage’’ rule for sales of
copyrighted articles transferred through
an electronic medium. One reason for
the change is that the title passage rule
allowed taxpayers to artificially elect
the source of income from sales of
copyrighted articles through an

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electronic medium using contractual
terms that had no real-world impact due
to the nature of digital content. A digital
download is an almost instantaneous
transfer that occurs with limited risk of
loss; even when a file is corrupted in the
download or installation process, a
noncorrupted copy can be provided to
the customer at virtually no cost to the
seller, and the precise location of the
corruption is typically not relevant. In
contrast, a contractual agreement as to
when and where title passes for
physical property moved through
physical distribution chains has realworld impact because the property may
be lost or become damaged in transit
and the location of title passage
determines whether the seller or buyer
bears the burden of that loss. Because
the nature of the supply chain means
that the seller retains risk of loss until
a successful download, § 1.861–
18(f)(2)(ii) treats the sale as having
occurred at the customer’s location,
using the customer’s billing address as
a proxy. The Treasury Department and
IRS generally agree that a billing address
is more administrable than the location
of download or installation as a suitable
proxy for the place of sale of
electronically transferred copyrighted
articles (subject to the anti-abuse rule
discussed below).
The Treasury Department and IRS
disagree, however, that the billing
address of a subsequent unrelated
purchaser of the same copyrighted
article should be the general rule for
sales between related parties, given the
focus of the statutory sourcing
provisions on place of sale. See sections
861 through 865. It would also be
complex and potentially inaccurate to
attempt to determine whether every sale
is intended for a related or unrelated
purchaser. Therefore, § 1.861–18(f)(2)(ii)
of the final regulations provides that
when a copyrighted article is sold and
transferred through an electronic
medium, the sale is deemed to have
occurred at the location of the billing
address of the purchaser for purposes of
§ 1.861–7(c), regardless of whether that
purchaser is a related or unrelated party.
This billing address rule also resolves
the issue raised by comments regarding
who the end-user is in certain
transactions because the sourcing rule is
based on the immediate purchaser in
the transaction. See § 1.861–18(h)(25)
(Example 25).
The final regulations also do not
provide for an election to treat the sale
of a copyrighted article as occurring at
the location of download or installation.
As noted earlier in this part, one of the
reasons for moving away from ‘‘title
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transferred through an electronic
medium was that it allowed sellers the
ability to artificially elect the source of
the income. Consistent with this
concern about electivity, the final
regulations provide a single,
administrable rule that applies to all
sales (subject to the anti-abuse rule).
The final regulations also add a new
anti-abuse rule for any case in which the
sales transaction is arranged in a
particular manner for a principal
purpose of tax avoidance. See § 1.861–
18(f)(2)(ii) and (h)(26) (Example 26). In
such cases, the foregoing billing address
rule will not be applied, and instead all
relevant facts and circumstances of the
transaction will be considered to treat
the sale as having occurred where the
substance of the transaction occurred.
This anti-abuse rule replaces the antiabuse rule in § 1.861–7(c) with respect
to sales of copyrighted articles sold and
transferred through an electronic
medium.
Finally, several comments asked for
clarification that this source rule applies
solely for purposes of the title passage
rule of § 1.861–7(c). The Treasury
Department and the IRS have concluded
that these comments were already
addressed in proposed § 1.861–
18(f)(2)(ii) by the language that limited
application of the rule ‘‘for purposes of
§ 1.861–7(c),’’ and the final regulations
retain this language.
2. Coordination With Section 863(b)
Some comments recommended
allowing taxpayers to elect to apply a
billing address source rule for sales of
digital content where section 863(b)
may otherwise apply. Section 863(b)
provides, in part, that the gains, profits,
and income from the sale or exchange
of inventory property produced (in
whole or in part) by the taxpayer within
the United States and sold or exchanged
without the United States, or produced
(in whole or in part) by the taxpayer
without the United States and sold or
exchanged within the United States,
shall be allocated and apportioned
between sources within and without the
United States solely on the basis of the
production activities with respect to the
property.
The final regulations do not adopt the
comment recommending allowing
taxpayers to elect to apply a billing
address source rule for sales of digital
content where section 863(b) would
apply. When section 863(b) applies,
property produced and sold by a
taxpayer must be sourced ‘‘solely on the
basis of the production activities with
respect to the property.’’ There is
nothing to suggest that the billing
address of the customer is relevant to

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this statutory rule based on place of
production, and so the final regulations
do not adopt this comment.
3. Interaction With Rules for Sourcing
Leases and Licenses of Digital Content
One comment supported the location
of download or installation rule for
determining the place of sale for
copyrighted articles, and recommended
the final regulations explicitly adopt a
uniform rule for sourcing income from
sales, leases, and licenses of digital
content based on the location of the
end-user. The comment also
recommended allowing taxpayers to
rely on recorded sales data to determine
the location of the end-user for purposes
of determining place of use for leases
and licenses of digital content.
The final regulations do not adopt this
comment. Section 1.861–18(f)(2)(ii)
clarifies how the place of sale of digital
content is determined for purposes of
sections 861 through 865. Those
sections contain different rules for
determining the source of income from
leases and licenses, for which the place
of transfer is not the relevant statutory
rule (generally, the determination is
based on where the property subject to
the lease or license is used, or where the
possessor of the interest has the right to
use the property). See sections 861(a)(4),
862(a)(4). Section 1.861–18(f)(2)(ii)
looks to the customer’s billing address
for purposes of determining the place of
sale for purposes of § 1.861–7(c). While
that may sometimes also be the location
in which the digital content is used, that
is not necessarily the case. For example,
where copyright rights are transferred in
a transaction that is classified as a
license, the copyright rights may be
used in multiple locations, and not just
the location of the customer’s billing
address. Similarly, not all income from
sales is sourced to the place where the
sale occurred. In those cases, the statute
provides the relevant determination,
such as the place of production in
section 863(b) or the residence of the
seller in section 865(a). The location of
download or installation is not
necessarily indicative of any of those
things, and the Treasury Department
and the IRS only intend for the rule in
§ 1.861–18(f)(2)(ii) to be used to
determine the place where the sale
occurred for purposes of statutory
sourcing rules that rely on that
determination. Therefore, § 1.861–
18(f)(2)(ii) of the final regulations is not
extended to provide a sourcing rule for
all sales, licenses, and leases of digital
content.
Finally, a comment suggested that the
regulations clarify that a license of
copyright rights from a copyright owner

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to a distributor is sourced under section
861(a)(4) or 862(a)(4). Because § 1.861–
18(f)(2), as in effect before this Treasury
decision, already provides that income
derived from licensing copyright rights
is sourced under section 861(a)(4) or
862(a)(4), no changes have been made in
response to this comment.

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B. Source Rule for Gross Income From
a Cloud Transaction
Proposed § 1.861–19 would not
provide a source rule for cloud
transactions. As such, the proposed
regulations indicated that existing law,
regulations, and IRS guidance regarding
sourcing services and leases would
apply to sourcing cloud transactions.
Numerous comments were received
regarding whether a specific source rule
for cloud transactions would be
appropriate and several of these
comments included suggestions for such
a rule.
The Treasury Department and the IRS
are of the view that that there would be
benefits for taxpayer compliance and
administrability if gross income from
cloud transactions were sourced using a
uniform rule. Thus, the Treasury
Department and the IRS are issuing
proposed regulations (REG–107420–24)
published elsewhere in this same issue
of the Federal Register that provide
rules for determining the source of gross
income from a cloud transaction.
C. Removal of Example 5 From § 1.937–
3(e)
The proposed regulations would have
removed Examples 4 and 5 from
§ 1.937–3(e). Section 937 provides
residence and source rules involving
territories. Examples 4 and 5 of § 1.937–
3(e) relate to the sourcing of income
from digital content transactions and
cloud transactions, respectively. One
comment suggested that the proposal to
remove Example 5 was premature
because the proposed regulations did
not include a source rule for cloud
transactions. The final regulations do
not accept this comment. As discussed
in Part IV.B of this Summary of
Comments and Explanation of
Revisions, the Treasury Department and
the IRS are issuing a companion notice
of proposed rulemaking addressing the
source of income from cloud
transactions concurrent with these final
regulations. Therefore, to avoid
potentially inconsistent inferences, the
final regulations remove both Examples
4 and 5 of § 1.937–3(e).
V. Comments Outside the Scope of This
Treasury Decision
The preamble to Treasury Decision
8785, which promulgated § 1.861–18 in

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1998, stated that the Treasury
Department and the IRS were
considering whether to issue guidance
regarding whether transactions in
copyrighted articles are transactions in
tangible property, and whether
transactions in copyright rights are
transactions in intangible property, in
each case for purposes of section 482.
The proposed regulations did not
contain further guidance on this topic.
One comment to the proposed
regulations recommended that the
Treasury Department and the IRS
reconsider this matter and issue
guidance on this topic because the
characterization of a transfer of digital
content as tangible or intangible
property is important for purposes of
sections 250, 367(d), and 482. The
Treasury Department and IRS have
determined that guidance on whether
the categories of transactions in § 1.861–
18 are considered tangible or intangible
property for purposes of such Code
sections is outside the scope of these
regulations.
One comment suggested that section
904 should be amended as it relates to
certain sales income earned by U.S.
residents to prevent ‘‘cross-crediting’’ of
high-taxed income and zero- or lowtaxed income within the same foreign
tax credit basket under section
904(d)(1). The comment noted that such
‘‘cross-crediting’’ results in the U.S.
partially or fully bearing the cost of the
high tax rates in some foreign
jurisdictions because a credit related to
the high-taxed income may offset U.S.
tax on the income from low-tax
jurisdictions. Amendments to section
904 are outside the scope of this
Treasury Decision.
Two comments suggested changes to
the regulations under section 250
pertaining to foreign-derived intangible
income (FDII). One comment requested
that the Treasury Department and the
IRS introduce a rule under § 1.250(b)–4
stating that intangible property used in
providing a service that is a cloud
transaction within the meaning of
§ 1.861–19 is, for purposes of section
250, used at the location of the
employees engaged in, and tangible
property used in, providing the cloud
transaction service. That comment also
suggested adding a de minimis rule
under § 1.250(b)–4 providing that any
de minimis use of intangible property is
disregarded in a cloud transaction. A
second comment noted that the
characterization of a cloud transaction
would impact whether income is
eligible for the FDII deduction because
there are different rules for establishing
‘‘foreign use’’ for services and lease
transactions. That comment also

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suggested that the ‘‘foreign use’’ rule for
intangible property should replicate the
rule governing foreign use of general
property. These comments are outside
the scope of this Treasury Decision, but
were considered in finalizing the
section 250 regulations. See T.D. 9901
(85 FR 43042, July 15, 2020).
VI. Final Regulations Apply Only for
Certain International Provisions of the
Code
Section 1.861–18, as in effect before
this Treasury decision, applied only to
certain listed international provisions of
the Code. When § 1.861–18 was
promulgated in 1998, the preamble
stated that the Treasury Department and
the IRS were considering whether the
principles of § 1.861–18 should apply to
other provisions of the Code. The
proposed regulations retained the scope
of § 1.861–18 by applying only to
certain listed international provisions of
the Code, although additional sections
of the Code were added to the scope of
the proposed regulations due to changes
in law between 1998 and the date of the
proposed regulations. Proposed § 1.861–
19 would also apply only to the same
listed international provisions of the
Code.
The Treasury Department and the IRS
received comments recommending
expanding the scope of the final
regulations to apply for all purposes of
the Code, particularly with respect to
§ 1.861–18 for which all comments
received on this topic recommended
expansion to all purposes of the Code.
Multiple comments expressed that the
framework of the proposed regulations
provides sensible rules and certainty
with respect to transactions involving
digital content. One comment also
expressed concern that limiting the
scope of the final regulations to only
international provisions of the Code
could lead to the same transaction being
characterized differently depending on
which Code section was applied.
Another comment expressed the belief
that both taxpayers and the IRS will
utilize the guidance in the final
regulations by analogy even if the final
regulations apply only to international
provisions of the Code, and that it
would be better to make it clear that the
final regulations apply to all provisions
of the Code so that taxpayers and the
IRS will not have to go through the
rigors of trying to convince the other
party that the final regulations are
relevant in a particular case.
Unlike § 1.861–18, some comments
recommended that § 1.861–19 not be
applied beyond the scope provided in
the proposed regulations. These
comments expressed concern that the

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preamble to § 1.861–19 referenced
section 7701(e) (pertaining to the
treatment of certain contracts as leases
rather than service contracts), and
recommended against any guidance
providing that section 7701(e) could
apply throughout the Code, including
Subchapter M. One comment explained
that the extent to which the provision of
services affects the definition of ‘‘rents
from real property’’ for real estate
investment trust purposes is addressed
not only in Subchapter M and the
regulations thereunder, but also in
numerous items of IRS sub-regulatory
guidance and private letter rulings
specifically interpreting Subchapter M.
The comments recommended adding an
explicit disclaimer in the preamble and
the text of the final regulations that any
purported interpretation and
application of section 7701(e) principles
in the final regulations do not apply
outside the intended scope of the final
regulations, and therefore do not apply
to lease-versus-service determinations
under other provisions of chapter 1 of
the Code. As discussed under Part III.A
of this Summary of Comments and
Explanation of Revisions, the final
regulations treat all cloud transactions
as the provision of services, and
accordingly remove the section 7701(e)
factors from the regulatory text.
More broadly, the Treasury
Department and the IRS continue to
study issues related to applying the final
regulations to all provisions of the Code.
Concurrently with the issuance of the
final regulations, the Treasury
Department and the IRS are issuing a
Notice (Notice 2025–6) requesting
comments regarding issues to consider
in deciding whether to apply the
characterization rules in §§ 1.861–18
and 1.861–19, as amended and added,
respectively, by the final regulations to
all provisions of the Code.
VII. Change in Method of Accounting
The proposed regulations would treat
a change in method of accounting that
a taxpayer made in order to comply
with the proposed regulations as a
change initiated by the taxpayer.
Accordingly, the change in method of
accounting would have to be
implemented under the rules of § 1.446–
1(e) and the applicable administrative
procedures that govern voluntary
changes in method of accounting under
section 446(e).
Two comments suggested that if a
taxpayer must change its method of
accounting in order to comply with the
final regulations, then such change
should be eligible for automatic consent.
The final regulations do not adopt
these comments. The Treasury

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Department and the IRS generally do
not anticipate taxpayers needing to
change methods of accounting as a
result of the final regulations.
Additionally, in light of the
aforementioned Notice requesting
comments on applying the
characterization rules in §§ 1.861–18
and 1.861–19, as amended and added,
respectively, by the final regulations for
all purposes of the Code, the Treasury
Department and IRS have determined
that it is important to ensure that any
accounting method changes due to these
regulations are consistent with the
appropriate treatment of the
transactions at issue under all
appropriate Code or regulation sections.
VIII. Applicability Date
The proposed regulations were
proposed to apply to transactions
entered into pursuant to contracts
entered into in taxable years beginning
on or after the date of publication of
final regulations.
Comments recommended the final
regulations apply to transactions
entered into in taxable years beginning
on or after the date that final regulations
are published, regardless of the date of
the contracts pursuant to which such
transactions were entered into. One
comment noted that it would be
difficult to trace particular transactions
to contracts that were entered into in
taxable years that begin on or after the
date of publication of final regulations.
Other comments noted that the
proposed applicability date may result
in different rules applying to similar
transactions of the same taxpayer long
after these regulations are finalized.
One comment suggested allowing
taxpayers to elect application of the
final regulations to taxable years ending
after the date of publication of the
proposed regulations. Another comment
recommended that taxpayers be allowed
to elect to apply the final regulations to
transactions taking place before the
effective date of the final regulations.
In response to these comments, the
final regulations generally apply to
taxable years beginning on or after the
date of publication of this Treasury
decision in the Federal Register.
However, taxpayers may elect to apply
all of the rules of the final regulations
to taxable years beginning on or after
August 14, 2019 and all subsequent
taxable years as long as all related
persons (within the meaning of sections
267(b) and 707(b)) also apply all of the
rules of the final regulations to taxable
years beginning on or after August 14,
2019 and all subsequent taxable years,
the period of limitations on assessment
for each taxable year of the taxpayer and

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all related parties (within the meaning
of sections 267(b) and 707(b)) is open
under section 6501, and the taxpayer
would not be required under this
section to change its method of
accounting as a result of such election.
Special Analyses
I. Regulatory Planning and Review—
Economic Analysis
Pursuant to the Memorandum of
Agreement, Review of Treasury
Regulations under Executive Order
12866 (June 9, 2023), tax regulatory
actions issued by the IRS are not subject
to the requirements of section 6 of
Executive Order 12866, as amended.
Therefore, a regulatory impact
assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501–3520) (PRA) generally
requires that a Federal agency obtain the
approval of the Office of Management
and Budget (OMB) before collecting
information from the public, whether
such collection of information is
mandatory, voluntary, or required to
obtain or retain a benefit. An agency
may not conduct or sponsor, and a
person is not required to respond to, a
collection of information unless it
displays a valid control number
assigned by the Office of Management
and Budget.
The collections of information in
these final regulations contain reporting
and recordkeeping requirements that are
necessary to ensure the correct
classification of digital content
transactions and cloud transactions. The
collections will be used by the IRS for
tax compliance purposes.
The final regulation mentions a
reporting requirement where a taxpayer
may be required to change its method of
accounting. For PRA purposes, Form
3115, Application for Change in
Accounting Method, is already
approved by OMB under Control
Numbers 1545–0047 for tax-exempt
entities, 1545–0074 for individuals,
1545–0123 for business filers and 1545–
0092 for trust and estate filers.
The recordkeeping requirements
include that entities keep records of
their transactions to substantiate the
transaction classification. These
recordkeeping requirements are
considered general tax records under
§ 1.6001–1(e). For PRA purposes,
general tax records are already approved
by OMB under 1545–0047 for taxexempt entities, 1545–0074 for
individuals, 1545–0123 for business
filers and 1545–0092 for trust and estate
filers.

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These final regulations are not
creating new information collections or
changing information collections
already approved by OMB.
III. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires consideration of the regulatory
impact on small businesses. It is hereby
certified that these final regulations will
not have a significant economic impact
on a substantial number of small entities
within the meaning of section 601(6) of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6).
Although data are not readily
available to estimate the number of
small entities that would be affected by
the final regulations, the Treasury
Department and the IRS project that any
economic impact of the regulations
would be minimal for businesses
regardless of size. These final
regulations generally provide
clarification of definitions regarding
how transactions are classified, and thus
are not expected to have an impact on
burden for large or small businesses.
The Treasury Department and the IRS
project that any economic impact would
be small because current industry
practice is generally consistent with the
principles underlying the final
regulations.

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IV. Section 7805(f)
Pursuant to section 7805(f) of the
Code, the proposed regulations (REG–
130700–14) preceding these final
regulations were submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on the impact on small businesses and
no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded
Mandates Reform Act of 1995 requires
that agencies assess anticipated costs
and benefits and take certain other
actions before issuing a final rule that
includes any Federal mandate that may
result in expenditures in any one year
by a State, local, or Tribal government,
in the aggregate, or by the private sector,
of $100 million in 1995 dollars, updated
annually for inflation. The final
regulations do not include any Federal
mandate that may result in expenditures
by State, local, or Tribal governments, or
by the private sector in excess of that
threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled
‘‘Federalism’’) prohibits an agency from
publishing any rule that has federalism
implications if the rule either imposes
substantial, direct compliance costs on

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State and local governments, and is not
required by statutes, or preempts State
law, unless the agency meets the
consultation and funding requirements
of section 6 of the Executive order. The
final regulations do not have federalism
implications, do not impose substantial
direct compliance costs on State and
local governments, and do not preempt
State law within the meaning of the
Executive order.
Drafting Information
The principal authors of these final
regulations are Christopher E. Fulle and
Michelle L. Ng of the Office of the
Associate Chief Counsel (International).
However, other personnel from the
Treasury Department and the IRS
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Adoption of Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS amend 26 CFR part 1 as
follows:
PART 1—INCOME TAXES
Paragraph 1.The authority citation for
part 1 continues to read in part as
follows:

■

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

Par. 2. Section 1.861–7 is amended by
revising paragraph (c) to read as follows:

■

§ 1.861–7

Sale of personal property.

*

*
*
*
*
(c) Country in which sold. For
purposes of part I (section 861 and
following), subchapter N, chapter 1 of
the Code, and the regulations
thereunder, a sale of personal property
is consummated at the time when, and
the place where, the rights, title, and
interest of the seller in the property are
transferred to the buyer. Where bare
legal title is retained by the seller, the
sale shall be deemed to have occurred
at the time and place of passage to the
buyer of beneficial ownership and the
risk of loss. However, in any case in
which the sales transaction is arranged
in a particular manner for the primary
purpose of tax avoidance, the foregoing
rules will not be applied. In such cases,
all factors of the transaction, such as
negotiations, the execution of the
agreement, the location of the property,
and the place of payment, will be
considered, and the sale will be treated
as having been consummated at the
place where the substance of the sale
occurred. For determining the place of
sale of copyrighted articles transferred

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through an electronic medium, see
§ 1.861–18(f)(2)(ii).
*
*
*
*
*
■ Par. 3. Section 1.861–18 is amended
by:
■ a. Revising the section heading;
■ b. Revising paragraphs (a), (b), (c)(1),
(c)(2)(i) through (iv), (c)(3), (d), (e), (f)(1)
through (3), (g)(2), (g)(3)(i) and (ii), and
(h) through (j); and
■ c. Removing paragraph (k).
The revisions read as follows:
§ 1.861–18 Classification of, and source of
gross income from, digital content
transactions.

(a) General—(1) Scope. This section
provides rules for classifying digital
content transactions (as defined in
paragraph (b)(1) of this section) for
purposes of subchapter N of chapter 1
of the Internal Revenue Code, sections
59A, 245A, 250, 267A, 367, 404A, 482,
679, 1059A, chapters 3 and 4, sections
842 and 845 (to the extent involving a
foreign person), and transfers to foreign
trusts not covered by section 679.
(2) Digital content—(i) Digital content
defined. For purposes of this section,
digital content means a computer
program or any other content, such as
books, movies, and music, in digital
format that is—
(A) Protected by copyright law; or
(B) Not protected by copyright law
solely—
(1) Due to the passage of time; or
(2) Because the creator dedicated the
content to the public domain.
(ii) Computer program defined. For
purposes of this section, a computer
program is a set of statements or
instructions to be used directly or
indirectly in a computer in order to
bring about a certain result and includes
any media, user manuals,
documentation, data base, or similar
item if the media, user manuals,
documentation, data base, or other
similar item is incidental to the
operation of the computer program.
(b) Categories of transactions—(1)
General. A transaction that constitutes a
transfer of digital content, or the
provision of services or of know-how
with respect to digital content (each a
digital content transaction), is treated as
being solely one of the following—
(i) A transfer of a copyright right in
the digital content;
(ii) A transfer of a copy of the digital
content (a copyrighted article);
(iii) The provision of services for the
development or modification of the
digital content; or
(iv) The provision of know-how
relating to development of digital
content.
(2) Transaction with multiple
elements. Taking into account the

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overall transaction and the surrounding
facts and circumstances, a transaction
that has multiple elements, one or more
of which would be a digital content
transaction if considered separately, is
classified in its entirety as a digital
content transaction under one of the
categories described in paragraph (b)(1)
of this section if the predominant
character of the transaction is described
in one of the categories in that
paragraph.
(3) Determination of predominant
character—(i) General rule. For
purposes of paragraph (b)(2) of this
section and § 1.861–19(c)(2), the
predominant character of a transaction
is determined by ascertaining the
primary benefit or value received by the
customer in the transaction.
(ii) Special rule. If the primary benefit
or value received by the customer in the
transaction is not reasonably
ascertainable, the predominant
character of a transaction is instead
determined by ascertaining the primary
benefit or value received by a typical
customer in a substantially similar
transaction as determined under
paragraphs (b)(3)(ii)(A) and (B) of this
section.
(A) The primary benefit or value
received by a typical customer is
determined by data on how a typical
customer uses or accesses the digital
content. See paragraph (h)(17) of this
section (Example 17).
(B) If data described in paragraph
(b)(3)(ii)(A) of this section is not
available, then the predominant
character of a transaction subject to the
special rule in paragraph (b)(3)(ii) of this
section is determined by examining
other factors that are indicative of the
primary benefit or value received by a
typical customer, including the
following—
(1) How the transferor or provider
markets the transaction;
(2) The relative development costs to
the transferor or provider of each
element of the transaction; and
(3) The relative price paid in an
uncontrolled transaction for one or more
elements compared to the total contract
price of the transaction in question.
(iii) Identification and development of
data. A transferor or provider must use
reasonable efforts to identify the data
specified in paragraphs (b)(3)(i) and
(ii)(A) of this section, or if necessary, to
apply the factors relevant to paragraph
(b)(3)(ii)(B) of this section. However, a
transferor or provider is not required to
develop any of the data specified in
those paragraphs that it does not
develop in the course of business.
(c) * * *

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(1) Transfers involving transfers of
copyright rights. A digital content
transaction involves a transfer of a
copyright right if, as a result of the
transaction, a person acquires one or
more of the rights described in
paragraphs (c)(2)(i) through (iv) of this
section.
(2) * * *
(i) The right to make copies of the
digital content for purposes of
distribution to the public by sale or
other transfer of ownership, or by rental,
lease or lending;
(ii) The right to prepare derivative
digital content based upon the digital
content;
(iii) The right to make a public
performance of digital content, other
than a right to publicly perform digital
content for the purpose of advertising
the sale of the digital content performed;
or
(iv) The right to publicly display
digital content, other than a right to
publicly display digital content for the
purpose of advertising the sale of the
digital content displayed.
(3) Copyrighted articles. A
copyrighted article includes a copy of
digital content from which the work can
be perceived, reproduced, or otherwise
communicated, either directly or with
the aid of a machine or device. The copy
of the digital content may be fixed in
any medium.
(d) Provision of services. The
determination of whether a transaction
involving newly developed or modified
digital content involves the provision of
services described in paragraph (b)(1) of
this section is based on all the facts and
circumstances of the transaction,
including, as appropriate, the intent of
the parties (as evidenced by their
agreement and conduct) as to which
party is to own the copyright rights in
the digital content and how the risks of
loss are allocated between the parties.
See paragraph (h)(15) of this section
(Example 15).
(e) Provision of know-how. The
provision of information with respect to
digital content involves the provision of
know-how for purposes of this section
only if the information is—
(1) Information relating to the
development of digital content;
(2) Furnished under conditions
preventing unauthorized disclosure,
specifically contracted for between the
parties; and
(3) Considered property subject to
trade secret protection.
(f) * * *
(1) Transfers of copyright rights. The
determination of whether a transfer of a
copyright right is a sale or exchange of
property is made on the basis of

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whether, taking into account all facts
and circumstances, there has been a
transfer of all substantial rights in the
copyright. A transfer of a copyright right
that does not constitute a sale or
exchange because not all substantial
rights have been transferred will be
classified as a license. For this purpose,
the principles of sections 1222 and 1235
apply. Income derived from the sale or
exchange of a copyright right will be
sourced under section 865(a), (c), (d),
(e), or (h), as appropriate. Income
derived from the licensing of a
copyright right will be sourced under
section 861(a)(4) or 862(a)(4), as
appropriate.
(2) Transfers of copyrighted articles—
(i) Classification. The determination of
whether a transfer of a copyrighted
article is a sale or exchange is made on
the basis of whether, taking into account
all facts and circumstances, the benefits
and burdens of ownership have been
transferred. A transfer of a copyrighted
article that does not constitute a sale or
exchange because insufficient benefits
and burdens of ownership of the
copyrighted article have been
transferred, such that a person other
than the transferee is properly treated as
the owner of the copyrighted article,
will be classified as a lease.
(ii) Source. Income from transactions
that are classified as sales or exchanges
of copyrighted articles will be sourced
under section 861(a)(6), 862(a)(6), 863,
or 865(a), (b), (c), or (e), as appropriate.
When a copyrighted article is sold and
transferred through an electronic
medium, the sale is deemed to have
occurred at the location of the billing
address of the purchaser for purposes of
§ 1.861–7(c). However, in any case in
which the sales transaction is arranged
in a particular manner for a principal
purpose of tax avoidance, the foregoing
rules will not be applied. In such a case,
all of the facts and circumstances
relevant to the transaction, such as the
place where the copyrighted article will
be used, the place where negotiations
and the execution of the agreement
occurred, and the terms of the
agreement, will be considered, and the
sale will be treated as having occurred
where the substance of the sale
occurred. Income derived from leasing a
copyrighted article will be sourced
under section 861(a)(4) or 862(a)(4), as
appropriate.
(3) Special circumstances of digital
content. In connection with
determinations under this paragraph (f),
consideration must be given as
appropriate to the special characteristics
of digital content in transactions that
take advantage of these characteristics
(such as the ability to make perfect

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copies at minimal cost). For example, a
transaction in which a person acquires
a copy of digital content on a disk
subject to a requirement that the disk be
destroyed after a specified period is
generally the equivalent of a transaction
subject to a requirement that the disk be
returned after such period. Similarly, a
transaction in which the digital content
deactivates itself after a specified period
is generally the equivalent of a
transaction subject to a requirement that
the disk be returned after a specified
period.
(g) * * *
(2) Means of transfer not to be taken
into account. The rules of this section
shall be applied irrespective of the
physical or electronic or other medium
used to effectuate a digital content
transaction.
(3) * * *
(i) In general. For purposes of
paragraph (c)(2)(i) of this section, a
transferee of digital content shall not be
considered to have the right to
distribute copies of the digital content to
the public if it is permitted to distribute
copies of the digital content to only
either a related person, or to identified
persons who may be identified by either
name or by legal relationship to the
original transferee. For purposes of this
subparagraph, a related person is a
person who bears a relationship to the
transferee specified in section 267(b)(3),
(10), (11), or (12), or section
707(b)(1)(B). In applying section 267(b),
267(f), 707(b)(1)(B), or 1563(a), ‘‘10
percent’’ shall be substituted for ‘‘50
percent.’’
(ii) Use by individuals. The number of
employees of a transferee of digital
content who are permitted to use the
digital content in connection with their
employment is not relevant for purposes
of this paragraph (g)(3). In addition, the
number of individuals with a
contractual agreement to provide
services to the transferee of digital
content who are permitted to use the
digital content in connection with the
performance of those services is not
relevant for purposes of this paragraph
(g)(3).
(h) Examples. The examples in this
paragraph (h) illustrate the provisions of
this section. Unless otherwise specified,
assume that Corp A is a domestic
corporation, the digital content
described in each example does not
contain any online functionality, and all
facts in each example occur as part of
a single transaction.
(1) Example 1: Sale of a computer
program on a disk—(i) Facts. Corp A
owns the copyright in a computer
program, Program X. It copies Program
X onto disks. The disks are placed in

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boxes covered with a wrapper on which
is printed what is generally referred to
as a shrink-wrap license. The license is
stated to be perpetual. Under the license
no reverse engineering, decompilation,
or disassembly of the computer program
is permitted. The transferee receives,
first, the right to use the program on two
of its own computers (for example, a
laptop and a desktop) provided that
only one copy is in use at any one time,
and second, the right to make one copy
of the program on each machine as an
essential step in the utilization of the
program. The transferee is permitted by
the shrink-wrap license to sell the copy
so long as it destroys any other copies
it has made and imposes the same terms
and conditions of the license on the
purchaser of its copy. These disks are
made available for sale to the general
public in Country Z. In return for
valuable consideration, P, a Country Z
resident, receives one such disk.
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the transfer of a
disk containing a copy of Program X
from Corp A to P is a digital content
transaction with one element, which is
the transfer of a copy of Program X.
Therefore, the transaction is treated
solely as a transfer of a copyrighted
article under paragraph (b)(1)(ii) of this
section. Under paragraph (g)(1) of this
section, the label license is not
determinative.
(B) Taking into account all of the facts
and circumstances, P is properly treated
as the owner of a copyrighted article.
Therefore, under paragraph (f)(2) of this
section, there has been a sale of a
copyrighted article rather than the grant
of a lease.
(2) Example 2: Sale of a computer
program via download from the
internet—(i) Facts. The facts are the
same as those in paragraph (h)(1) of this
section (Example 1), except that instead
of selling disks, Corp A decides to make
Program X available, for a fee, on a
World Wide Web home page on the
internet. P, the Country Z resident, in
return for payment made to Corp A,
downloads Program X (via modem) onto
the hard drive of his computer. As part
of the electronic communication, P
signifies his assent to a license
agreement with terms identical to those
in Example 1, except that in this case P
may make a back-up copy of the
program on to a disk.
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the digital transfer
of a copy of Program X from Corp A to
P is a digital content transaction with
one element, which is the transfer of a
copy of Program X. Therefore, the
transaction is treated solely as a transfer
of a copyrighted article under paragraph

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(b)(1)(ii) of this section. Although P did
not buy a physical copy of the disk with
the program on it, paragraph (g)(2) of
this section provides that the means of
transferring the program is irrelevant.
(B) As in paragraph (h)(1) of this
section (Example 1), P is properly
treated as the owner of a copyrighted
article. Therefore, under paragraph (f)(2)
of this section, there has been a sale of
a copyrighted article rather than the
grant of a lease.
(3) Example 3: Lease of a computer
program with requirement to return
disk—(i) Facts. The facts are the same as
those in paragraph (h)(1) of this section
(Example 1), except that Corp A only
allows P, the Country Z resident, to use
Program X for one week. At the end of
that week, P must return the disk with
Program X on it to Corp A. P must also
destroy any copies made of Program X.
If P wishes to use Program X for a
further period he must enter into a new
agreement to use the program for an
additional charge.
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the transfer of a
disk with a copy of Program X from
Corp A to P is a digital content
transaction with one element, which is
the transfer of a copy of Program X.
Therefore, the transaction is treated
solely as a transfer of a copyrighted
article under paragraph (b)(1)(ii) of this
section.
(B) Taking into account all of the facts
and circumstances, P is not properly
treated as the owner of a copyrighted
article. Therefore, under paragraph (f)(2)
of this section, there has been a lease of
a copyrighted article rather than a sale.
Taking into account the special
characteristics of digital content as
provided in paragraph (f)(3) of this
section, the result would be the same if
P were required to destroy the disk at
the end of the one-week period instead
of returning it since Corp A can make
additional copies of the program at
minimal cost.
(4) Example 4: Lease of a computer
program with electronic lock—(i) Facts.
* * *
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the digital transfer
of a copy of Program X from Corp A to
P is a digital content transaction with
one element, which is the transfer of a
copy of Program X. Therefore, the
transaction is treated solely as a transfer
of a copyrighted article under paragraph
(b)(1)(ii) of this section.
(B) As in paragraph (h)(3) of this
section (Example 3), P is not properly
treated as the owner of a copyrighted
article. Therefore, under paragraph (f)(2)
of this section, there has been a lease of
a copyrighted article rather than a sale.

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While P does retain Program X on its
computer at the end of the one-week
period, as a legal matter P no longer has
the right to use the program (without
further payment) and, indeed, cannot
use the program without the electronic
key. Functionally, Program X is no
longer on the hard drive of P’s
computer. Instead, the hard drive
contains only a series of numbers which
no longer perform the function of
Program X. Although in Example 3, P
was required to physically return the
disk, taking into account the special
characteristics of digital content as
provided in paragraph (f)(3) of this
section, the result in this paragraph
(h)(4) (Example 4) is the same as in
Example 3.
(5) Example 5: Sale of copyright rights
to a computer program—(i) Facts. Corp
A transfers a disk containing Program X
to Corp B, a Country Z corporation, and
grants Corp B an exclusive license for
the remaining term of the copyright to
copy and distribute an unlimited
number of copies of Program X in the
geographic area of Country Z, prepare
derivative works based upon Program X,
make public performances of Program
X, and publicly display Program X. Corp
B will pay Corp A a royalty of $y a year
for three years, which is the expected
period during which Program X will
have commercially exploitable value (a
period shorter than the copyright term).
Corp A has ascertained that the primary
benefit or value from the transaction to
Corp B is derived from the four legal
rights obtained in Program X from Corp
A and not from the receipt of a copy of
Program X. The transfer of a copy of
Program X is merely the means by
which Corp A provides Corp B access to
Program X in order to exercise its
copyright rights.
(ii) Analysis. (A) The transaction
between Corp A and Corp B has
multiple elements. One element is the
transfer of a disk with a copy of Program
X, which would be a digital content
transaction described under paragraph
(b)(1)(ii) of this section (transfer of a
copyrighted article) if considered
separately. Another element is the grant
of the right to make an unlimited
number of copies of Program X and
distribute those copies to the public, the
right to prepare derivative works based
upon Program X, the right to make
public performances of Program X, and
the right to publicly display Program X,
which would be described under
paragraphs (b)(1)(i) and (c)(2) of this
section (transfer of a copyright right) if
considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content

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transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under paragraph (b)(1)
of this section if its predominant
character is described in that paragraph.
Pursuant to paragraph (b)(3)(i) of this
section, the predominant character of
the transaction is based on the primary
benefit or value of the transaction to the
customer, if it is reasonably
ascertainable. The predominant
character of this transaction is therefore
the transfer of copyright rights because
the primary benefit or value received by
Corp B from the transaction is the
ability to exercise the copyright rights
described in paragraph (c)(2) of this
section. Therefore, this transaction is
classified solely as a transfer of
copyright rights described in paragraph
(b)(1)(i) of this section.
(C) Applying the all substantial rights
test under paragraph (f)(1) of this
section, Corp A will be treated as having
sold copyright rights to Corp B. Corp B
has acquired all of the copyright rights
in Program X, has received the right to
use them exclusively within Country Z,
and has received the rights for the
remaining life of the copyright in
Program X. The fact the payments cease
before the copyright term expires is not
controlling. Under paragraph (g)(1) of
this section, the fact that the agreement
is labelled a license is not controlling
nor is the fact that Corp A receives a
sum labelled a royalty. (The result in
this case would be the same if the copy
of Program X to be used for the purposes
of reproduction were transmitted
electronically to Corp B, as a result of
the application of the rule of paragraph
(g)(2) of this section.)
(6) Example 6: License of copyright
right to make copies of a computer
program and distribute to the public—
(i) Facts. Corp A transfers a disk
containing Program X to Corp B, a
Country Z corporation, and grants Corp
B the non-exclusive right to reproduce
and distribute for sale to the public an
unlimited number of disks containing
Program X at its factory in Country Z in
return for a payment related to the
number of disks copied and sold. The
term of the agreement is two years,
which is less than the remaining life of
the copyright. Corp A has ascertained
that the primary benefit or value from
the transaction to Corp B is derived
from the right to reproduce and
distribute Program X and not from the
receipt of a copy of Program X. The
transfer of a copy of Program X is
merely the means by which Corp A
provides Corp B access to Program X in
order to exercise its copyright rights.

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(ii) Analysis. (A) The transaction
between Corp A and Corp B has
multiple elements. One element is the
transfer of a disk with a copy of Program
X, which would be described under
paragraph (b)(1)(ii) of this section
(transfer of a copyrighted article) if
considered separately. Another element
is the grant of the right to reproduce and
distribute for sale to the public an
unlimited number of disks containing
Program X, which would be described
under paragraphs (b)(1)(i) and (c)(2)(i) of
this section (transfer of a copyright
right) if considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under paragraph (b)(1)
of this section if its predominant
character is described in that paragraph.
Pursuant to paragraph (b)(3) of this
section, the predominant character of
the transaction is based on the primary
benefit or value of the transaction to the
customer, if it is reasonably
ascertainable. The predominant
character of this transaction is therefore
the transfer of a copyright right because
the primary benefit or value received by
Corp B is the right to reproduce and
distribute for sale to the public copies
of Program X. Therefore, this transaction
is classified solely as a transfer of
copyright rights described in paragraph
(b)(1)(i) of this section.
(C) Taking into account all of the facts
and circumstances, there has been a
license of Program X to Corp B. Under
paragraph (f)(1) of this section, there has
not been a transfer of all substantial
rights in the copyright to Program X
because Corp A has the right to enter
into other licenses with respect to the
copyright of Program X, including
licenses in Country Z (or even to sell
that copyright, subject to Corp B’s
interest). Corp B has acquired no right
itself to license the copyright rights in
Program X. Finally, the term of the
license is for less than the remaining life
of the copyright in Program X.
(7) Example 7: Sale of disks
containing copies of a computer
program to a distributor—(i) Facts. Corp
C, a distributor, enters into an
agreement with Corp A to purchase as
many copies of Program X on disk as it
may from time-to-time request. Corp C
will then sell these disks to retailers.
The disks are shipped in boxes covered
by shrink-wrap licenses (identical to the
license described in paragraph (h)(1) of
this section (Example 1)).
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the transfers of

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disks with copies of Program X from
Corp A to Corp C are digital content
transactions with one element, which is
the transfer of copies of Program X.
Therefore, the transactions are classified
solely as the transfer of copyrighted
articles under paragraph (b)(1)(ii) of this
section. The use of the term license is
not dispositive under paragraph (g)(1) of
this section.
(B) Taking into account all of the facts
and circumstances, Corp C is properly
treated as the owner of copyrighted
articles. Therefore, under paragraph
(f)(2) of this section, there has been a
sale of copyrighted articles.
(8) Example 8: License to a computer
manufacturer of copyright rights to
make and load copies of a computer
program onto the hard drive of
computers—(i) Facts. Corp A transfers a
disk containing Program X to Corp D, a
foreign corporation engaged in the
manufacture and sale of personal
computers in Country Z. Corp A grants
Corp D the non-exclusive right to copy
Program X onto the hard drive of an
unlimited number of computers, which
Corp D manufactures, and to distribute
those copies (on the hard drive) to the
public. The term of the agreement is two
years, which is less than the remaining
life of the copyright in Program X. Corp
D pays Corp A an amount based on the
number of copies of Program X it loads
on to computers. Corp A has ascertained
that the primary benefit or value from
the transaction to Corp D is the ability
to copy and distribute Program X onto
computers manufactured by Corp D, not
from the receipt of a copy of Program X.
The transfer of a copy of Program X is
merely the means by which Corp A
provides Corp D access to Program X in
order to exercise its right to make and
distribute copies.
(ii) Analysis. (A) The transaction
between Corp A and Corp D has
multiple elements. One element is the
transfer of a disk with a copy of Program
X, which would be described in
paragraph (b)(1)(ii) of this section
(transfer of a copyrighted article) if
considered separately. Another element
is the grant of the non-exclusive right to
copy Program X onto the hard drive of
an unlimited number of computers and
distribute those copies (on the hard
drive) to the public, which would be
described in paragraphs (b)(1)(i) and
(c)(2)(i) of this section (transfer of a
copyright right) if considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under paragraph (b)(1)

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of this section if its predominant
character is described in that paragraph.
Pursuant to paragraph (b)(3) of this
section, the predominant character of
the transaction is based on the primary
benefit or value of the transaction to the
customer, if it is reasonably
ascertainable. The predominant
character of this transaction is therefore
the transfer of copyright rights because
the primary benefit or value received by
Corp D is the right to copy Program X
onto the hard drive of an unlimited
number of computers and sell those
copies (on the hard drive) to the public.
Therefore, this transaction is classified
solely as a transfer of copyright rights
described in paragraph (b)(1)(i) of this
section.
(C) Taking into account all of the facts
and circumstances, there has been a
license of Program X to Corp D. Under
paragraph (f)(1) of this section, there has
not been a transfer of all substantial
rights in the copyright to Program X
because Corp A has the right to enter
into other licenses with respect to the
copyright of Program X, including
licenses in Country Z (or even to sell
that copyright, subject to Corp D’s
interest). Corp D has acquired no right
itself to license the copyright rights in
Program X. Finally, the term of the
license is for less than the remaining life
of the copyright in Program X. The
result would be the same if Corp D
included with the computers it sells a
copy of Program X on a disk.
(9) Example 9: Sale of disks
containing a copy of computer program
to a computer manufacturer—(i) Facts.
The facts are the same as those in
paragraph (h)(8) of this section
(Example 8), except that Corp D, the
Country Z corporation, receives
physical disks. The disks are shipped in
boxes covered by shrink-wrap licenses
(identical to the licenses described in
paragraph (h)(1) of this section
(Example 1)). The terms of these
licenses do not permit Corp D to make
additional copies of Program X. Corp D
uses each individual disk only once to
load a single copy of Program X onto
each separate computer. Corp D
transfers the disk with the computer
when it is sold.
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the transfers of
disks with copies of Program X from
Corp A to Corp D are digital content
transactions with one element, which is
the transfer of copies of Program X.
Therefore, the transaction is classified
solely as the transfer of copyrighted
articles under paragraph (b)(1)(ii) of this
section. Corp D acquires the disks
without the right to reproduce and

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distribute publicly further copies of
Program X.
(B) Taking into account all of the facts
and circumstances, Corp D is properly
treated as the owner of copyrighted
articles. Therefore, under paragraph
(f)(2) of this section, the transaction is
classified as the sale of a copyrighted
article. The result would be the same if
Corp D used a single physical disk to
copy Program X onto each computer,
and transferred an unopened box
containing Program X with each
computer, if Corp D were not permitted
to copy Program X onto more computers
than the number of individual copies
purchased.
(10) Example 10: Sale of a computer
program with right to load onto multiple
employee workstations—(i) Facts. Corp
A transfers a disk containing Program X
to Corp E and grants Corp E the right to
load Program X onto 50 individual
workstations for use only by Corp E
employees at one location in return for
a one-time per-user fee (generally
referred to as a site license or enterprise
license). If additional workstations are
subsequently introduced, Program X
may be loaded onto those machines for
additional one-time per-user fees. The
license which grants the rights to
operate Program X on 50 workstations
also prohibits Corp E from selling the
disk (or any of the 50 copies) or reverse
engineering the program. The term of
the license is stated to be perpetual.
(ii) Analysis. (A) It must be
determined whether the transfer from
Corp A to Corp E of a disk containing
a copy of Program X and the right to
load Program X onto 50 individual
workstations is a transaction with
multiple elements. There is at least one
element, which is the transfer of a disk
containing a copy of Program X, which
either is a digital content transaction
under paragraph (b)(1) of this section or
would be a digital content transaction if
considered separately. If there is no
additional element, then the transaction
is classified as a transfer of a
copyrighted article pursuant to
paragraph (b)(1)(ii) of this section. If
there is a second element, then
paragraph (b)(2) of this section applies
and the transaction is classified within
a single category under paragraph (b)(1)
of this section if its predominant
character is described in that paragraph.
The grant of a right to copy,
unaccompanied by the right to
distribute those copies to the public, is
not the transfer of a copyright right
described in paragraph (c)(2) of this
section. Therefore, there is no second
element in this transaction and it is
classified solely as the transfer of

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copyrighted articles (50 copies of
Program X).
(B) Taking into account all of the facts
and circumstances, Corp E is properly
treated as the owner of copyrighted
articles. Therefore, under paragraph
(f)(2) of this section, there has been a
sale of copyrighted articles rather than
the grant of a lease. Notwithstanding the
restriction on sale, other factors such as,
for example, the risk of loss and the
right to use the copies in perpetuity
outweigh, in this case, the restrictions
placed on the right of alienation.
(C) The result would be the same if
Corp E were permitted to copy Program
X onto an unlimited number of
workstations used by employees of
either Corp E or other persons that had
a relationship to Corp E specified in
paragraph (g)(3) of this section.
(11) Example 11: Sale of a computer
program with right to make available to
multiple employees via local area
network—(i) Facts. The facts are the
same as those in paragraph (h)(10) of
this section (Example 10), except that
Corp E, the Country Z corporation,
acquires the right to make Program X
available to workstation users who are
Corp E employees by way of a local area
network (LAN). The number of users
that can use Program X on the LAN at
any one time is limited to 50. Corp E
pays a one-time fee for the right to have
up to 50 employees use the program at
the same time.
(ii) Analysis. Under paragraph (g)(2)
of this section the mode of utilization is
irrelevant. Therefore, as in paragraph
(h)(10) of this section (Example 10), this
is a digital content transaction with a
single element that is classified as the
transfer of a copyrighted article
pursuant to paragraph (b)(1)(ii) of this
section. Under the benefits and burdens
test of paragraph (f)(2) of this section,
this transaction is a sale of copyrighted
articles. The result would be the same
if an unlimited number of Corp E
employees were permitted to use
Program X on the LAN or if Corp E were
permitted to copy Program X onto LANs
maintained by persons that had a
relationship to Corp E specified in
paragraph (g)(3) of this section.
(12) Example 12: Lease of a computer
program with right to receive upgrades
and technical support services—(i)
Facts. The facts are the same as in
paragraph (h)(11) of this section
(Example 11), except that instead of
paying a one-time fee, Corp E pays a
monthly fee to Corp A calculated with
reference to the permitted maximum
number of users (which can be changed)
and the computing power of Corp E’s
server. In return for this monthly fee,
Corp E receives the right to receive

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upgrades of Program X when they
become available. The agreement may
be terminated by either party at the end
of any month. When the disk containing
the upgrade is received, Corp E must
return the disk containing the earlier
version of Program X to Corp A. If the
contract is terminated, Corp E must
delete (or otherwise destroy) all copies
made of the current version of Program
X. The agreement also requires Corp A
to provide technical support in the form
of troubleshooting and configuration
assistance to Corp E, but the agreement
does not allocate the monthly fee
between the right to use Program X, the
right to receive upgrades of Program X,
and the technical support services. The
amount of technical support that Corp A
will provide to Corp E is not foreseeable
when the contract is entered into but is
expected to be minimal. Corp A has
ascertained that the primary benefit or
value to Corp E from the transaction is
the right to use Program X on the LAN
(without the ability to exercise any of
the rights described in paragraphs
(c)(2)(i) through (iv) of this section), not
the receipt of technical support services
with respect to Program X.
(ii) Analysis. (A) The transaction
between Corp A and Corp E has
multiple elements. One element is the
transfer of a disk with a copy of Program
X, which would be described in
paragraph (b)(1)(ii) of this section
(transfer of a copyrighted article) if
considered separately. Another element
is the provision of technical support
services, which are not services for the
development or modification of Program
X described in paragraph (d) of this
section because Corp E has received no
copyright rights with respect to Program
X. Thus, the technical support services
would not be described in any of the
categories in paragraph (b)(1) of this
section if considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under paragraph (b)(1)
of this section if its predominant
character is described in that paragraph.
Pursuant to paragraph (b)(3) of this
section, the predominant character of
the transaction is based on the primary
benefit or value of the transaction to the
customer. The predominant character of
this transaction is therefore the transfer
of a copyrighted article because the
primary benefit or value received by
Corp E is the right to use Program X.
Accordingly, this transaction is
classified solely as a transfer of a

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copyrighted article described in
paragraph (b)(1)(ii) of this section.
(C) Taking into account all facts and
circumstances, under the benefits and
burdens test Corp E is not properly
treated as the owner of the copyrighted
article. Corp E does not receive the right
to use Program X in perpetuity, but only
for so long as it continues to make
payments. Corp E does not have the
right to purchase Program X on
advantageous (or, indeed, any) terms
once a certain amount of money has
been paid to Corp A or a certain period
has elapsed (which might indicate a
sale). Once the agreement is terminated,
Corp E will no longer possess any
copies of Program X, current or
superseded. Therefore, under paragraph
(f)(2) of this section there has been a
lease of a copyrighted article.
(13) Example 13: Sale of a computer
program along with right to receive
upgrades—(i) Facts. The facts are the
same as those in paragraph (h)(12) of
this section (Example 12), except that,
while Corp E must return copies of
Program X as new upgrades are
received, if the agreement terminates,
Corp E may keep the latest version of
Program X (although Corp E is still
prohibited from selling or otherwise
transferring any copy of Program X).
(ii) Analysis. For the reasons stated in
paragraph (h)(10)(ii)(B) of this section
(Example 10), the transfer of the
program will be treated as a sale of a
copyrighted article rather than as a
lease.
(14) Example 14: Sale of a modified
computer program—(i) Facts. Corp G
enters into a contract with Corp A for
Corp A to modify Program X so that it
can be used at Corp G’s facility in
Country Z. Under the contract, Corp G
is to acquire one copy of the program on
a disk and the right to use the program
on 5,000 workstations. The contract
requires Corp A to rewrite elements of
Program X so that it will conform to
Country Z accounting standards and
states that Corp A retains all copyright
rights in the modified Program X. The
agreement between Corp A and Corp G
is otherwise identical as to rights and
payment terms as the agreement
described in paragraph (h)(10) of this
section (Example 10).
(ii) Analysis. (A) It must be
determined whether the transfer of disks
with modified copies of Program X from
Corp A to Corp G is a transaction with
multiple elements. There is at least one
element, the transfer of copies of
Program X, which either is a digital
content transaction under paragraph
(b)(1) of this section or would be a
digital content transaction if considered
separately. If there is no additional

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element, then the transaction is
classified as a transfer of a copyrighted
article pursuant to paragraph (b)(1)(ii) of
this section. If there is a second element,
then paragraph (b)(2) of this section
applies and the transaction is classified
within a single category under
paragraph (b)(1) of this section if its
predominant character is described in
that paragraph. Pursuant to paragraph
(d) of this section, the modifications
made by Corp A before transferring
Program X to Corp G do not constitute
the provision of services for the
development or modification of digital
content because Corp A retains all
copyright rights with respect to the
modified software. Therefore, there is
no second element in this transaction
and it is classified solely as the transfer
of copyrighted articles.
(B) Taking into account all facts and
circumstances, Corp G is properly
treated as the owner of copyrighted
articles. Therefore, under paragraph
(f)(2) of this section, there has been the
sale of a copyrighted article rather than
the grant of a lease.
(15) Example 15: Provision of services
for development of a computer
program—(i) Facts. Corp H enters into a
license agreement for a new computer
program. Program Q is to be written by
Corp A. Corp A and Corp H agree that
Corp A is writing Program Q for Corp
H and that, when Program Q is
completed, the copyright in Program Q
will belong to Corp H. Corp H gives
instructions to Corp A programmers
regarding program specifications. Corp
H agrees to pay Corp A a fixed monthly
sum during development of the
program. If Corp H is dissatisfied with
the development of the program, it may
cancel the contract at the end of any
month. In the event of termination, Corp
A will retain all payments, while any
procedures, techniques or copyrightable
interests will be the property of Corp H.
All of the payments are labelled
royalties. There is no provision in the
agreement for any continuing
relationship between Corp A and Corp
H, such as the furnishing of updates of
the program, after completion of the
modification work.
(ii) Analysis. Under paragraph (b)(1)
of this section, the provision of
computer program development
services by Corp A to Corp H is a digital
content transaction with one element,
which is the provision of services for
the development or modification of
digital content. Under paragraph (d) of
this section, the transaction between
Corp A and Corp H involves the
provision of services for the
development of a computer program
because Corp H bears all of the risks of

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loss associated with the development of
Program Q and is the owner of all
copyright rights in Program Q. Taking
into account all of the facts and
circumstances, Corp A is treated as
providing services to Corp H described
in paragraph (b)(1)(iii) of this section.
Under paragraph (g)(1) of this section,
the fact that the agreement is labelled a
license is not controlling (nor is the fact
that Corp A receives a sum labelled a
royalty).
(16) Example 16: Provision of knowhow by computer programmers—(i)
Facts. Corp A and Corp I, a Country Z
corporation, agree that a development
engineer employed by Corp A will
travel to Country Z to provide knowhow relating to certain techniques not
generally known to computer
programmers, which will enable Corp I
to more efficiently create computer
programs. These techniques represent
the product of experience gained by
Corp A from working on many
computer programming projects, and are
furnished to Corp I under nondisclosure
conditions. Such information is
property subject to trade secret
protection.
(ii) Analysis. The provision of knowhow with respect to computer
programming techniques by Corp A’s
development engineer to Corp I is
described in paragraph (e) of this
section. Therefore, the transaction is a
digital content transaction with one
element, which is the provision of
know-how. The transaction is classified
solely as the provision of know-how
pursuant to paragraph (b)(1)(iv) of this
section.
(17) Example 17: Sale of development
program in transaction with multiple
elements—(i) Facts. Corp A transfers a
disk containing Program Y to Corp E in
exchange for a single fixed payment.
Program Y is a computer program
development program, which is used to
create other computer programs,
consisting of several components,
including libraries of reusable software
components that serve as general
building blocks in new software
applications. Because a computer
program created with the use of Program
Y will not operate unless the libraries
are also present, the license agreement
between Corp A and Corp E grants Corp
E the right to distribute copies of the
libraries with any program developed
using Program Y. The license agreement
is otherwise identical to the license
agreement in paragraph (h)(1) of this
section (Example 1). Corp A cannot
reasonably ascertain the primary benefit
or value of the transaction to Corp E. A
customer like Corp E derives two
benefits from this or a substantially

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similar transaction, the first of which is
the ability to use Program Y to develop
new software and the second of which
is the right to utilize the libraries and
reusable software components in
Program Y in distributed programs.
Corp A possesses data arising from
market research and customer surveys
indicating that customers utilize
Program Y primarily for its computer
program development features and do
not make significant use of the libraries
of reusable software components. The
libraries and reusable software
components are not significant
components of any overall new program
created by using Program Y.
(ii) Analysis. (A) The transaction
between Corp A and Corp E has
multiple elements. One element is the
transfer of a disk with a copy of Program
Y, which would be described in
paragraph (b)(1)(ii) of this section
(transfer of a copyrighted article) if
considered separately. Another element
is the grant of the right to distribute
copies of the libraries of reusable
software components with any program
developed using Program Y, which
would be described in paragraphs
(b)(1)(i) and (c)(2)(i) of this section
(transfer of a copyright right) if
considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under paragraph (b)(1)
of this section if its predominant
character is described in that paragraph.
Pursuant to paragraph (b)(3)(i) of this
section, the predominant character of a
transaction is generally based on the
primary benefit or value of the
transaction to the customer. If the
primary benefit or value is not
reasonably ascertainable, paragraph
(b)(3)(ii) of this section provides that the
predominant character of a transaction
may be determined based on the
primary benefit or value to a typical
customer of a substantially similar
transaction. This primary benefit or
value to a typical customer can be
identified through actual data about use
or access pursuant to paragraph
(b)(3)(ii)(A) of this section, or if that data
is not available, by other evidence
indicative of the primary benefit or
value to a typical customer pursuant to
paragraph (b)(3)(ii)(B) of this section.
Although there are two benefits in this
type of transaction, Corp A possesses
data indicating that a typical customer
primarily uses Program Y because of its
computer program development
features, rather than the right to

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distribute reusable components. This is
reinforced by the fact that programs
created using Program Y do not contain
libraries of reusable software
components as significant components.
These facts indicate that the primary
benefit or value to a typical customer
arises from the ability to use Program Y,
rather than the right to distribute
reusable components. Therefore, the
predominant character of this
transaction is the transfer of a copy of
Program Y, and this transaction is thus
classified solely as the transfer of a
copyrighted article described in
paragraph (b)(1)(ii) of this section.
(C) Taking into account all the facts
and circumstances, Corp E is properly
treated as the owner of a copyrighted
article. Therefore, under paragraph (f)(2)
of this section, there has been the sale
of a copyrighted article rather than the
grant of a lease.
(18) Example 18: Sale of a computer
program with right to make
modifications—(i) Facts. Corp A
transfers a disk containing Program X to
Corp E. The disk contains both the
object code and the source code to
Program X, and the license agreement
grants Corp E the right to modify the
source code to correct minor errors and
make minor adaptations to Program X so
it will function on Corp E’s computer;
as well as the right to recompile the
modified source code. The license does
not grant Corp E the right to distribute
the modified Program X to the public.
The license is otherwise identical to the
license agreement in paragraph (h)(1) of
this section (Example 1). Corp A has
ascertained that the primary benefit or
value received by Corp E from the
transaction is the core functionality of
Program X rather than the limited rights
to modify the source code.
(ii) Analysis. (A) The transaction
between Corp A and Corp E has
multiple elements. One element is the
transfer of a disk with a copy of Program
X, which would be described in
paragraph (b)(1)(ii) of this section
(transfer of a copyrighted article) if
considered separately. Another element
is the grant of the right to modify the
source code to Program X and recompile
the modified source code to create new
code to correct minor errors, and to
make minor adaptations to Program X,
which would be described in
paragraphs (b)(1)(i) and (c)(2)(ii) of this
section (transfer of a copyright right) if
considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within

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a single category under the categories
described under paragraph (b)(1) of this
section if its predominant character is
described in that paragraph. Pursuant to
paragraph (b)(3) of this section, the
predominant character of the
transaction is based on the primary
benefit or value of the transaction to the
customer, if it is reasonably
ascertainable. Since the primary benefit
or value received by Corp E is the core
functionality of Program X, rather than
the limited rights to modify the source
code, the predominant character of this
transaction is the transfer of a
copyrighted article. Therefore, this
transaction is classified solely as a
transfer of a copyrighted article under
paragraph (b)(1)(ii) of this section.
(C) Taking into account all the facts
and circumstances, Corp E is properly
treated as the owner of a copyrighted
article. Therefore, under paragraph (f)(2)
of this section, there has been the sale
of a copyrighted article rather than the
grant of a lease.
(19) Example 19: License to website
operator to make and sell copies of
electronic books via download—(i)
Facts. Corp A operates a website that
offers electronic books for download
onto customers’ computers or other
electronic devices. The books offered
are protected by copyright law. In a
transaction between Corp A and a
content owner, Corp A receives from the
content owner a digital master copy of
a book, which Corp A downloads onto
its server. Corp A receives the nonexclusive right to reproduce an
unlimited number of copies of the book
for purposes of distribution and sale to
the public. Corp A pays the content
owner a specified amount for each copy
sold to a customer. Corp A may not
transfer any of the rights it receives from
the content owner. The term of the
agreement Corp A has with the content
owner is shorter than the remaining life
of the copyright. The content owner has
ascertained that the primary benefit or
value Corp A receives in the transaction
is the right to reproduce and distribute
an unlimited number of copies of the
book and not the transfer of a copy of
the book. In a separate transaction, Corp
A charges a customer a fixed fee for
each book purchased. When purchasing
a book from Corp A on Corp A’s
website, the customer must
acknowledge the terms of a license
agreement with the content owner that
states that the customer may download
and view the electronic book in
perpetuity but may not reproduce,
distribute, or sell copies of it. Once the
customer downloads the book from
Corp A’s server onto a device, the
customer may access and view the book

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from that device, which does not need
to be connected to the internet for the
customer to view the book. The
customer owes no additional payment
to Corp A for the ability to view the
book in the future.
(ii) Analysis. (A) Notwithstanding the
license agreement between each
customer and the content owner
granting the customer rights to use the
book, the relevant transactions are the
transfer of a master copy of the book
along with the grant from the content
owners to Corp A of the right to
reproduce and sell to the public copies
of the books, and the transfers of copies
of the books by Corp A to customers.
Although the content owner is
identified as a party to the license
agreement memorializing the customer’s
rights with respect to the book, each
customer obtains those rights directly
from Corp A, not from the content
owner. Under paragraph (b)(1) of this
section, the download of a copy of a
book by a customer is a digital content
transaction with one element, which is
the transfer of a digital copy of a book.
Therefore, the transaction is treated
solely as a transfer of a copyrighted
article under paragraph (b)(1)(ii) of this
section. Under the benefits and burdens
test of paragraph (f)(2) of this section,
the transaction is classified as a sale and
not a lease, because the customer
receives the right to view the book in
perpetuity on its device.
(B) The transaction between the
content owner and Corp A has multiple
elements. One element is the transfer of
a master copy of the book, which would
be described in paragraph (b)(1)(ii) of
this section (transfer of a copyrighted
article) if considered separately.
Another element is the grant of the right
to reproduce and sell an unlimited
number of copies to customers, which
would be described in paragraphs
(b)(1)(i) and (c)(2)(i) of this section
(transfer of a copyright right) if
considered separately. Because the
transaction has multiple elements, one
or more of which would be a digital
content transaction if considered
separately, paragraph (b)(2) of this
section provides that the transaction is
classified within a single category under
the categories described under
paragraph (b)(1) of this section if its
predominant character is described in
that paragraph. Pursuant to paragraph
(b)(3) of this section, the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. Since the
primary benefit or value Corp A receives
in the transaction is the right to
reproduce and distribute an unlimited

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number of copies, the predominant
character of this transaction is the
transfer of a copyright right. Therefore,
this transaction is classified solely as a
transfer of copyright rights described in
paragraph (b)(1)(i) of this section.
(C) Taking into account all of the facts
and circumstances, there has been a
license of books to Corp A. Under
paragraph (f)(1) of this section, there has
not been a transfer of all substantial
rights in the copyright rights to the
books because each content owner has
the right to enter into other licenses
with respect to the copyright of their
book. Corp A has acquired no right itself
to license the copyrights in the books.
Finally, the terms of the licenses are for
less than the remaining lives of the
copyrights in the books.
(20) Example 20: internet platform
operator as agent for application
developers—(i) Facts. Corp A operates a
platform on the internet that offers
applications for download onto a
customer’s mobile phone. Under general
tax principles, Corp A and an
application developer establish an
agency relationship whereby Corp A
acts as the agent to offer the application
for sale to customers on behalf of the
application developer. The applications
are protected by copyright law. Under
the agreement between Corp A and the
application developer, Corp A agrees to
provide the application developer with
platform and agency services to
facilitate the sale of the application to
customers. Corp A also provides the
application developer with hosting
services to host the application on Corp
A’s servers for download by the
customers. Corp A receives a digital
master copy of the application along
with a non-exclusive right to make
copies of the application and allow
customers to download copies of the
application from Corp A’s platform.
Corp A has ascertained that the primary
benefit or value from the transaction
received by the application developer is
the platform and agency services that
Corp A provides. Corp A receives the
right to make copies of the application
merely to perform its activities as an
agent on behalf of the application
developer. When purchasing an
application on Corp A’s platform, the
customer must acknowledge the terms
of a license agreement with the
application developer that states that
the customer may use the application
but may not reproduce or distribute
copies of it. In addition, the agreement
provides that the customer may
download the application onto only one
mobile phone at a time. A customer
does not need to be connected to the
internet to access the application. The

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customer owes no additional payment
to Corp A or the application developer
for the ability to use the application in
perpetuity. Corp A retains a fixed
percentage of each purchase price of the
application and remits the remaining
balance to the application developer.
(ii) Analysis. (A) The transaction
between Corp A and the application
developer has multiple elements. One
element is the transfer of a master copy
of an application by the application
developer to Corp A, which would be
described in paragraph (b)(1)(ii) of this
section (transfer of a copyrighted article)
if considered separately. Another
element is the transfer of the right to
make and distribute copies of the
application by the application developer
to Corp A, which would be described in
paragraphs (b)(1)(i) and (c)(2) of this
section (transfer of a copyright right) if
considered separately. A third element
is the platform and agency services
provided by Corp A to the application
developer, which would not be
described in this section if considered
separately. A fourth element is the
hosting services provided by Corp A to
the application developer, which would
be described in § 1.861–19 if considered
separately. Under the facts and
circumstances, although Corp A
receives a copy of the application and
the right to make and distribute copies
of the application, Corp A receives this
copy and right merely to facilitate the
sale of applications on behalf of the
application developer.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under the categories
described under paragraph (b)(1) of this
section if its predominant character is
described in that paragraph. Pursuant to
paragraph (b)(3) of this section, the
predominant character of the
transaction is based on the primary
benefit or value of the transaction to the
customer, if it is reasonably
ascertainable. Since the primary benefit
or value the application developer
receives in the transaction is the
platform and agency services, the
predominant character of this
transaction is the platform and agency
services and not a digital content
transaction nor a cloud transaction.
(C) The transfer of a copy of an
application from the application
developer to a customer is a digital
content transaction with one element,
which is the transfer of a copy of a
digital program. Therefore, the
transaction is treated solely as a transfer

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of a copyrighted article under paragraph
(b)(1)(ii) of this section. Under the
benefits and burdens test of paragraph
(f)(2) of this section, this transaction is
a sale of a copyrighted article because a
customer has the right to use the
application in perpetuity.
(21) Example 21: Movies and TV
shows available for stream, rent, or
purchase—(i) Facts. Corp A offers a
catalog of movies and TV shows, all of
which are subject to copyright
protection. Corp A gives customers
several options for viewing the content,
each of which has a separate price. A
‘‘streaming’’ option allows a customer to
view the video, which is hosted on Corp
A’s servers, while connected to the
internet for as many times as the
customer wants during a limited period.
A ‘‘rent’’ option allows a customer to
download the video to its computer or
other electronic device (which does not
need to be connected to the internet for
viewing) and watch the video as many
times as the customer wants for a
limited period, after which an electronic
lock is activated and the customer may
no longer view the content. A
‘‘purchase’’ option allows a customer to
download the video and view it as many
times as the customer chooses with no
end date. Under all three options, the
customer may view the video but may
not reproduce or distribute copies of it,
prepare derivative works based on it, or
publicly display it.
(ii) Analysis. (A) With respect to the
‘‘rent’’ option, under paragraph (b)(1) of
this section the download of a video by
a customer is a digital content
transaction with one element, which is
the transfer of a copy of the video.
Therefore, the transaction is treated
solely as the transfer of a copyrighted
article under paragraph (b)(1)(ii) of this
section. Although a customer will retain
a copy of the content at the end of the
payment term, the customer cannot
access the content after the electronic
lock is activated. The activation of the
electronic lock is the equivalent of
having to return the copy. Therefore, the
transaction is classified as a lease of a
copyrighted article under paragraph
(f)(2) of this section because the
customer’s right to view the videos is for
a limited period.
(B) With respect to the ‘‘purchase’’
option, under paragraph (b)(1) of this
section the download of a video by a
customer is a digital content transaction
with one element, which is the transfer
of a copy of the video. Therefore, the
transaction is treated solely as the
transfer of a copyrighted article under
paragraph (b)(1)(ii) of this section. The
transaction is classified as a sale of a
copyrighted article under paragraph

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(f)(2) of this section because the
customer receives the right to view the
videos in perpetuity.
(C) With respect to the ‘‘streaming’’
option, the transaction is Corp A’s grant
of the right to its customers to view the
movies or shows while connected to the
internet for a limited period. There is no
transfer of any copyright rights
described in paragraph (c)(2) of this
section. There is also no transfer of a
copyrighted article because the content
is not downloaded by a customer, but
rather, is accessed through an ondemand network. The transaction also
does not constitute the provision of
services for the development of digital
content or the provision of know-how
under paragraph (b)(1) of this section.
Therefore, the transaction is not a digital
content transaction described in
paragraph (b)(1) of this section. Instead,
the transaction is a cloud transaction
that is classified under § 1.861–19. See
§ 1.861–19(b).
(22) Example 22: Website offering
third-party videos via stream—(i) Facts.
Corp A operates a website that allows
customers to stream videos that thirdparty content creators upload to Corp
A’s website. Corp A has advertising
contracts with third-party advertisers
pursuant to which Corp A earns
advertising revenue when a customer
views a video. Customers can either
stream videos for free with
advertisements or can pay a
subscription fee to stream videos
without advertisements. Under the
contract between Corp A and content
creators, content creators retain all
ownership rights in their videos and
must own or have the necessary rights
to publish their videos. The contract
also states that content creators grant
Corp A a non-exclusive license to use,
reproduce, distribute, and display their
videos in connection with Corp A’s
website, and grant customers a nonexclusive license to view the videos.
These licenses terminate within a
commercially reasonable time after a
content creator removes or deletes a
video from Corp A’s website. Content
creators have ascertained that the
primary benefit or value Corp A receives
from transactions with content creators
is the right to use, reproduce, distribute,
and display their videos. Corp A pays
content creators a percentage of
advertising revenue generated from the
videos and a percentage of subscription
fees.
(ii) Analysis. (A) The transaction
between Corp A and the content
creators has multiple elements. One
element is the uploading of a video by
a content creator, which would be
described in paragraph (b)(1)(ii) of this

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section (transfer of a copyrighted article)
if considered separately. Another
element is the grant by content creators
to Corp A of the right to use, reproduce,
distribute, and display their videos,
which would be described in paragraph
(b)(1)(i) of this section (transfer of a
copyright right) if considered separately.
Content creators are not providing
content development services to Corp A
under paragraph (d) of this section
because content creators own the
copyright rights in the videos.
(B) Because the transaction has
multiple elements, one or more of
which would be a digital content
transaction if considered separately,
paragraph (b)(2) of this section provides
that the transaction is classified within
a single category under the categories
described under paragraph (b)(1) of this
section if its predominant character is
described in that paragraph. Pursuant to
paragraph (b)(3) of this section, the
predominant character of the
transaction is based on the primary
benefit or value of the transaction to the
customer. The predominant character of
the transaction is therefore the transfer
of copyright rights because the primary
benefit or value received by Corp A is
the right to use, reproduce, distribute,
and display videos. Accordingly, this
transaction is characterized solely as a
transfer of a copyright right as described
in paragraphs (b)(1)(i) of this section.
(C) Taking into account all of the facts
and circumstances, there has been a
license of videos to Corp A. Under
paragraph (f)(1) of this section, there has
not been a transfer of all substantial
rights in the copyright rights to the
videos because each content owner has
the right to enter into other licenses
with respect to the copyright of their
videos. Corp A has acquired no right
itself to license the copyrights in the
videos. Finally, the terms of the licenses
are for less than the remaining lives of
the copyrights in the videos.
(D) For both the free streaming and
subscription streaming transactions
between Corp A and customers, there is
no transfer of any copyright rights
described in paragraph (c)(2) of this
section. There is also no transfer of a
copyrighted article, because the content
is not downloaded by a customer, but
rather is accessed through an ondemand network. The transactions also
do not constitute the provision of
services for the development of digital
content or the provision of know-how
under paragraph (b)(1) of this section.
Therefore, paragraph (b)(1) of this
section does not apply to such
transactions. Instead, both transactions
are cloud transactions that are classified
under § 1.861–19. See § 1.861–19(b).

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(23) Example 23: Sale of computer
programs electronically through a
reseller—(i) Facts. Corp A owns the
copyright to software (Program S). Corp
A hosts Program S on its servers. Corp
A grants Corp B, a foreign corporation
wholly owned by Corp A, the right to
distribute copies of Program S (without
the right to reproduce copies of Program
S) to Corp B’s customers that are located
in Corp B’s country. Under the
agreement between Corp A and Corp B,
Corp B pays Corp A a fixed fee for each
copy of Program S that Corp A delivers
to a customer. In separate transactions,
customers pay Corp B for the right to
receive digital copies of Program S that
they may then use in perpetuity without
further payment. Corp B is responsible
for managing the purchase/sale
interaction with Corp B’s customers,
including invoicing and collections.
Corp A is responsible for creating and
delivering the digital copies of Program
S to Corp B’s customers from Corp A’s
servers. Corp B does not perform any
functions to provide access to Program
S.
(ii) Analysis. (A) Although there is a
single contract between Corp A and
Corp B that grants a legal right to Corp
B with respect to Program S, that right
(the right to distribute) is not a
copyright right described in paragraphs
(b)(1)(i) and (c)(2) of this section.
Instead, the transactions between Corp
A and Corp B and then Corp B and its
customers are functionally and
economically equivalent to back-to-back
transfers of copyrighted articles. The
transfers are only superficially different
from those described in paragraph
(h)(24) of this section (Example 24)
where the reseller acquires product keys
and sells them on to customers.
Therefore, each sale of a copy of
Program S by Corp B to a customer
should be viewed as a transfer of a
copyrighted article from Corp A to Corp
B and then from Corp B to the customer.
(B) The transaction between Corp A
and Corp B is a digital content
transaction with a single element that is
classified as a transfer of a copyrighted
article described in paragraph (b)(1)(ii)
of this section. There are no additional
elements because Corp B’s receipt of the
right to distribute copies of Program S
(without the right to make copies) is not
a copyright right described in paragraph
(c)(2) of this section. Under the benefits
and burdens test of paragraph (f)(2) of
this section, the transfer is classified as
the sale of a copyrighted article.
(C) The transaction between Corp B
and a customer is a digital content
transaction with a single element that is
classified as a transfer of a copyrighted
article described in paragraph (b)(1)(ii)

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of this section. Under the benefits and
burdens test of paragraph (f)(2) of this
section, this transaction is a sale of a
copyrighted article because the
customer has the right to use the
application in perpetuity.
(24) Example 24: Sale of video games
with online and offline functionality
through retailers using digital keys—(i)
Facts. Corp A owns the copyright in a
computer program (Program Y). Corp A
creates digital keys that allow for the
download of one copy of Program Y
from Corp A’s website. Corp A sells
these digital keys to retailers for a onetime fee per key, and the retailers do not
use Program Y, but instead sell them in
separate transactions to customers for a
one-time fee per key. Corp A ascertains
that the primary benefit or value to
retailers from the purchase of digital
keys from Corp A is the right to further
transfer the digital keys to customers.
The retailers cannot reasonably
ascertain the primary benefit or value
that their specific customers derive from
Program Y, nor is there data available to
the retailers about how their customers
typically use Program Y. Program Y is
a video game that contains online and
offline features, both of which can be
played without paying an additional
game-specific cost after paying the onetime fee to purchase a key. The offline
feature is comprised of a single-player
story that does not require any internet
connection to play. The online feature is
comprised of the ability to play
competitive matches against other
players that are hosted on servers
owned by Corp A. The competitive
matches require an ongoing connection
to the internet to play. Neither the
customers nor the retailer receives any
copyright rights described in paragraph
(c)(2) of this section with respect to
Program Y. Customers can use Program
Y in perpetuity. Program Y is primarily
marketed as a single-player game in
television and online advertising, with
only brief mentions of the multiplayer
mode in print advertising. The
development cost for Program Y was
allocated 40% to developing the singleplayer content, 20% to developing the
multiplayer content, and 40% to
developing content that is used by both
types of content (e.g., cost of developing
the game engine).
(ii) Analysis. (A) The transaction
between Corp A and a retailer has
multiple elements. One element is the
transfer of a key with the right to
download a copy of Program Y for use
to play the offline story, which would
be a digital content transaction
described in paragraph (b)(1)(ii) of this
section (transfer of a copyrighted article)
if considered separately. Another

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element is the transfer of the same key
with a copy of Program Y providing ondemand network access to digital
content in the form of competitive
multiplayer functionality, which would
be a cloud transaction described in
§ 1.861–19(b) if considered separately.
(B) Because the transaction has
multiple elements, one of which would
be a digital content transaction if
considered separately and one of which
would be a cloud transaction if
considered separately, paragraph (b)(2)
of this section provides that the
transaction is classified within a single
category under paragraph (b)(1) of this
section if its predominant character is
described in that paragraph, or the
transaction is classified solely as a cloud
transaction if its predominant character
is a cloud transaction pursuant to
§ 1.861–19(c)(2). Pursuant to paragraph
(b)(3)(i) of this section, the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. The
predominant character of this
transaction is therefore the transfer of
copyrighted articles because the primary
benefit or value received by a retailer is
the right to further transfer the same
copyrighted articles to customers in the
form of digital keys. The retailers do not
have any intent to utilize the cloud
functionality of the digital keys,
although they do have the right to do so.
Therefore, this transaction is classified
solely as a transfer of copyrighted
articles described in paragraph (b)(1)(ii)
of this section.
(C) Under the benefits and burdens
test of paragraph (f)(2) of this section,
the transfer between Corp A and a
retailer is classified as the sale of a
copyrighted article because the retailer
has the right to use, or sell, Program Y
in perpetuity without further payment.
(D) The transfer of a key (with the
right to download a copy of Program Y)
by a retailer to a customer also contains
the same two elements as each
transaction between Corp A and a
retailer. However, a retailer cannot
reasonably ascertain the primary benefit
or value derived by a specific customer
from Program Y. In such situations,
paragraph (b)(3)(ii) of this section
provides that the predominant character
of a transaction may be determined
based on the primary benefit or value to
a typical customer of a substantially
similar transaction. This primary benefit
or value to a typical customer can be
identified through actual data about use
or access pursuant to paragraph
(b)(3)(ii)(A) of this section, or if that data
is not available, by using other evidence
indicative of the primary benefit or

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value to a typical customer pursuant to
paragraph (b)(3)(ii)(B) of this section.
Because the retailers do not have
available data about how customers use
Program Y, they may use the marketing
with respect to Program Y to determine
that its predominant character is that of
a transfer of a copyrighted article
described in paragraph (b)(1)(ii) of this
section. The relative development costs
of the offline and online components of
the game could also be used if they are
known to a retailer. Therefore, the
transfer between a retailer and a
customer of a digital key containing the
right to download a copy of Program Y
is classified solely as a transfer of a
copyrighted article.
(E) Under the benefits and burdens
test of paragraph (f)(2) of this section,
the transfer between a retailer and a
customer is classified as the sale of a
copyrighted article because the
customer has the right to use Program Y
in perpetuity without further payment.
(25) Example 25: Source of income
from the sale of a copyrighted article
transferred through an electronic
medium—(i) Facts. Corp A is the parent
company of a world-wide group of
affiliated companies. Corp B is a foreign
corporation wholly owned by Corp A. In
the ordinary course of business, Corp B
acts as a procurement hub for Corp A’s
affiliated companies. In this role, Corp
B regularly purchases products that will
be distributed amongst Corp A’s
affiliated companies to be used by them
in their respective businesses. Corp B
purchases digital copies of a computer
program (Program Y) from Corp C, an
unrelated company. Corp B may use
Program Y in perpetuity without further
payment. Corp B receives no copyright
rights in Program Y. Corp B does not use
Program Y, and instead distributes all of
its copies of Program Y to various
affiliates. Corp C sources income from
the sale of Program Y using sections
861(a)(6) and 862(a)(6).
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the transfer of
Program Y from Corp C to Corp B is a
digital content transaction with one
element, which is the transfer of a copy
of Program Y. Therefore, the transaction
is treated solely as transfers of a
copyrighted articles under paragraph
(b)(1)(ii) of this section. Taking into
account all of the facts and
circumstances, there have been sales of
copies of Program Y to Corp B under
paragraph (f)(2) of this section.
(B) Income from the sale of Program
Y by Corp C is sourced pursuant to
sections 861(a)(6) and 862(a)(6) to the
place where the sale occurred. Pursuant
to paragraph (f)(2)(ii) of this section, a
transfer of a copyrighted article through

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an electronic medium is treated as
occurring at the billing address of the
purchaser, in this case Corp B, unless
the sales transaction is arranged for a
principal purpose of tax avoidance. In
this case, the sale is treated as occurring
at the billing address of Corp B, and
Corp C’s income is foreign source, even
though Corp B will not use Program Y,
because Corp B regularly purchases
products that will be distributed
amongst its affiliates to be used in their
respective businesses, and therefore
there is no evidence that Corp B was
used by Corp A to purchase Program Y
with a principal purpose of tax
avoidance.
(26) Example 26: Application of antiabuse rule for sale of a copyrighted
article transferred through an electronic
medium—(i) Facts. Corp A is the parent
company of a world-wide group of
affiliated companies. Corp B is a foreign
affiliate of Corp A. In the ordinary
course of business, Corp B does not act
as a procurement hub regularly
purchasing products for use by Corp A’s
affiliated companies. Corp A negotiates
an agreement with Corp C, an unrelated
company, to purchase digital copies of
a computer program (Program Y) for use
in Corp A’s business. The agreement
grants Corp A the right to use Program
Y in perpetuity for a one-time payment.
Corp C requests that Corp B be the
purchaser of the copies of Program Y
even though Corp B will not use
Program Y and is not otherwise
involved in the transaction between
Corp A and Corp C for a principal
purpose of tax avoidance. Corp A
agrees, and Corp B purchases the copies
of Program Y and subsequently
distributes them to Corp A. Corp C
sources income from the sale of Program
Y using sections 861(a)(6) and 862(a)(6).
(ii) Analysis. (A) Under paragraph
(b)(1) of this section, the transfer of
Program Y from Corp C to Corp B is a
digital content transaction with one
element, which is the transfer of a copy
of Program Y. Therefore, the transaction
is classified solely as a transfer of a
copyrighted article under paragraph
(b)(1)(ii) of this section. Taking into
account all of the facts and
circumstances, there have been sales of
copies of Program Y to Corp B under
paragraph (f)(2) of this section.
(B) Income from the sale of Program
Y by Corp C is sourced pursuant to
sections 861(a)(6) and 862(a)(6) to the
place where the sale occurred. Pursuant
to paragraph (f)(2)(ii) of this section, a
transfer of a copyrighted article through
an electronic medium is treated as
occurring at the billing address of the
purchaser, in this case Corp B, unless
the sales transaction is arranged for a

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principal purpose of tax avoidance. In
this case, Corp B does not regularly
purchase products that will be used by
other companies within Corp A’s group
of affiliated companies, and Corp B was
instead used as the purchaser of
Program Y on behalf of Corp A with a
principal purpose of tax avoidance.
Therefore, the place where the sale
occurred must be determined based on
all relevant facts and circumstances.
Corp A negotiated the purchase, and the
software will be used by Corp A in its
business. As a result, under paragraph
(f)(2)(ii) of this section, the sale is
treated as occurring at the location of
Corp A and the income derived by Corp
C from the sale is U.S. source.
(C) The same result would apply if,
instead of using Corp B for the
purchase, Corp A made the purchase
but rented a P.O. Box outside the United
States to serve as the billing address for
the transaction with a principal purpose
of tax avoidance.
(i) Applicability date—(1) In general.
This section applies to taxable years
beginning on or after January 14, 2025.
(2) Early application. A taxpayer can
apply this section to taxable years
beginning on or after August 14, 2019
and all subsequent taxable years not
described in paragraph (i)(1) of this
section (early application years) if—
(i) The taxpayer also applies § 1.861–
19 to the early application years;
(ii) This section and § 1.861–19 are
applied to the early application years by
all persons related to the taxpayer
(within the meaning of sections 267(b)
and 707(b));
(iii) The period of limitations on
assessment for each early application
year of the taxpayer and all related
parties (within the meaning of sections
267(b) and 707(b)) is open under section
6501; and
(iv) The taxpayer would not be
required under this section to change its
method of accounting as a result of such
election.
(j) Change in method of accounting
required by this section. In order to
comply with this section, a taxpayer
may be required to change its method of
accounting. If so required, the taxpayer
must secure the consent of the
Commissioner in accordance with the
requirements of § 1.446–1(e) and the
applicable administrative procedures for
obtaining the Commissioner’s consent
under section 446(e) for voluntary
changes in methods of accounting.
Par. 4 Section 1.861–19 is added to
read as follows:

■

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§ 1.861–19 Classification of cloud
transactions.

(a) In general. This section provides
rules for classifying cloud transactions
(as defined in paragraph (b) of this
section). The rules of this section apply
for purposes of Internal Revenue Code
sections 59A, 245A, 250, 267A, 367,
404A, 482, 679, and 1059A; subchapter
N of chapter 1; chapters 3 and 4; and
sections 842 and 845 (to the extent
involving a foreign person), and apply
with respect to transfers to foreign trusts
not covered by section 679.
(b) Cloud transaction defined. A
cloud transaction is a transaction
through which a person obtains ondemand network access to computer
hardware, digital content (as defined in
§ 1.861–18(a)(2)), or other similar
resources. A cloud transaction does not
include network access to download
digital content for storage and use on a
person’s computer or other electronic
device.
(c) Classification of cloud
transactions—(1) In general. A cloud
transaction is classified as the provision
of services.
(2) Transaction with multiple
elements. Taking into account the
overall transaction and the surrounding
facts and circumstances, a transaction
that has multiple elements, one or more
of which would be a cloud transaction
if considered separately, is classified in
its entirety as a cloud transaction if the
predominant character of the
transaction as determined under
§ 1.861–18(b)(3) is a cloud transaction.
(d) Examples. The examples in this
paragraph (d) illustrate the provisions of
this section. Unless otherwise specified,
assume that Corp A is a domestic
corporation, no rights described in
§ 1.861–18(c)(2) (copyright rights) are
transferred as part of the transactions
described, and all facts in each example
occur as part of a single transaction.
(1) Example 1: Computing capacity—
(i) Facts. Corp A operates data centers
on its premises in various locations.
Corp A provides Corp B computing
capacity on Corp A’s servers in
exchange for a monthly fee based on the
amount of computing power made
available to Corp B. Corp B provides its
own software to run on Corp A’s
servers.
(ii) Analysis. The provision of ondemand network computing capacity by
Corp A to Corp B is a cloud transaction
with one element. Therefore, the
transaction is treated solely as a cloud
transaction under paragraph (b) of this
section and is classified as the provision
of services under paragraph (c)(1) of this
section.

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(2) Example 2: Computing capacity on
dedicated on-premises servers—(i)
Facts. The facts are the same as in
paragraph (d)(1)(i) of this section (the
facts in Example 1), except that, in order
to offer more security to Corp B, Corp
A provides Corp B computing capacity
exclusively through designated servers,
which are owned and operated by Corp
A and located at Corp B’s facilities. Corp
A agrees not to use the designated server
for any other customer for the duration
of its arrangement with Corp B.
Although the server is located at Corp
B’s facilities, Corp B accesses the server
through Corp A’s network and the
monthly fee is based on the amount of
computing power made available to
Corp B.
(ii) Analysis. As in paragraph (d)(1) of
this section (Example 1), the transaction
between Corp A and Corp B is the
provision of on-demand network
computing capacity and is therefore a
cloud transaction with one element.
Therefore, the transaction is treated
solely as a cloud transaction under
paragraph (b) of this section and is
classified as the provision of services
under paragraph (c)(1) of this section. If
the transaction between Corp A and
Corp B involved only the provision of
a server by Corp A for use by Corp B,
and not on-demand network access to
computing capacity, the transaction
would not be a cloud transaction and
this section would not apply.
(3) Example 3: Access to software
development platform and website
hosting—(i) Facts. Corp A provides Corp
B a software platform that Corp B uses
to develop and deploy websites with a
range of features, including blogs,
message boards, and other collaborative
knowledge bases. The software
development platform consists of an
operating system, web server software,
scripting languages, libraries, tools, and
back-end relational database software
and allows Corp B to use in its websites
certain visual elements subject to
copyrights held by Corp A. The software
development platform is hosted on
servers owned by Corp A and located at
Corp A’s facilities. Corp B’s finished
websites are also hosted on Corp A’s
servers. Corp B accesses the software
development platform via a standard
web browser. Corp B has no ability to
alter the software code. A small amount
of copyrighted scripting code is
downloaded onto Corp B’s computers to
facilitate secure logins and access to the
software development platform. All
other functions of the software
development platform execute on Corp
A’s servers, and no portion of the core
software code is ever downloaded by
Corp B or Corp B’s customers. Corp A

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has ascertained that the primary benefit
or value to Corp B from the transaction
is the right to use the software
development platform. Corp B pays
Corp A a monthly fee for the platform
and website hosting.
(ii) Analysis. (A) There is one
transaction with multiple elements
between Corp A and Corp B. One
element is Corp A’s provision to Corp B
of on-demand network access to the
software platform, which would be a
cloud transaction described in
paragraph (b) of this section if
considered separately. Another element
is Corp A’s hosting of Corp B’s finished
websites, which would be a cloud
transaction described in paragraph (b) of
this section if considered separately. A
third element is the grant by Corp A to
Corp B of the right to use in Corp B’s
websites certain visual elements subject
to copyrights held by Corp A, which
would be a transfer of copyright rights
under § 1.861–18(b)(1)(i) if considered
separately. A fourth element is the
download of scripting code by Corp B,
which would be a transfer of a
copyrighted article under § 1.861–
18(b)(1)(ii) if considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a cloud transaction if
considered separately, paragraph (c)(2)
of this section provides that the
transaction is classified as a cloud
transaction if its predominant character
is a cloud transaction. Pursuant to
§ 1.861–18(b)(3), the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. The
predominant character of this
transaction is therefore a cloud
transaction because the primary benefit
or value received by Corp B is the right
to use the software development
platform. Accordingly, this transaction
is classified solely as a cloud transaction
described in paragraph (b) of this
section and is classified as the provision
of services under paragraph (c)(1) of this
section.
(4) Example 4: Access to online
software via an application—(i) Facts.
Corp A provides Corp B word
processing, spreadsheet, and
presentation software and allows
employees of Corp B to access the
software over the internet through a web
browser or an application (‘‘app’’) that
can be downloaded from Corp A’s
servers onto a computer or mobile
device. Corp B’s employees usually
download Corp A’s app onto their
mobile devices. To access the full
functionality of the app, the device must
be connected to the internet. Only a

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limited number of features on the app
are available without an internet
connection. Corp B has no ability to
alter the software code. The software is
hosted on servers owned by Corp A and
located at Corp A’s facilities and is used
concurrently by other Corp A customers
in addition to Corp B. Corp B pays a
monthly fee based on the number of
employees with access to the software.
Users have the option to save files either
online using the storage provided by
Corp B, or offline on their own hard
drives. Corp B’s employees can also
download updates to the app as part of
the monthly fee arrangement. Upon
termination of the arrangement, Corp A
activates an electronic lock preventing
Corp B’s employees from further
utilizing the app, and Corp B’s
employees are no longer able to access
the software via a web browser. Corp A
has ascertained that the primary benefit
or value to Corp B from the transaction
is the right to access Corp A’s software
over the internet, whether via web
browser or after downloading the app.
(ii) Analysis. (A) There is one
transaction with multiple elements
between Corp A and Corp B. One
element is Corp A’s provision to Corp B
of on-demand network access to Corp
A’s computer hardware and software
resources for the purpose of fully
utilizing Corp A’s software, which
would be a cloud transaction described
in paragraph (b) of this section if
considered separately. Another element
is the download of Corp A’s app by
Corp B employees, which would be a
transfer of a copyrighted article under
§ 1.861–18(b)(1)(ii) if considered
separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a cloud transaction if
considered separately, paragraph (c)(2)
of this section provides that the
transaction is classified as a cloud
transaction if its predominant character
is a cloud transaction. Pursuant to
§ 1.861–18(b)(3), the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. The
predominant character of this
transaction is therefore a cloud
transaction because the primary benefit
or value received by Corp B is the right
to access Corp A’s software over the
internet. Accordingly, this transaction is
classified solely as a cloud transaction
described in paragraph (b) of this
section and is classified as the provision
of services under paragraph (c)(1) of this
section.
(5) Example 5: Access to offline
software with limited online functions—

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(i) Facts. Corp A provides Corp B word
processing, spreadsheet, and
presentation software that is
functionally similar to the software in
paragraph (d)(4) of this section
(Example 4). The software is made
available for access over the internet but
only to download the software from
servers owned by Corp A onto a
computer or mobile device in the form
of an app. The downloaded software
contains all the core functions of the
software. Employees of Corp B can use
the software on their computers or
mobile devices regardless of whether
their computer or mobile device is
online. When online, the software
provides a few ancillary functions that
are not available offline, such as access
to document templates and data
collection for diagnosing problems with
the software. Whether working online or
offline, Corp B employees can store
their files only on their own computer
or mobile device, and not on Corp A’s
data storage servers. Corp B’s employees
can also download updates to the
software as part of the monthly fee
arrangement. Upon termination of the
arrangement, an electronic lock is
activated so that the software can no
longer be accessed. Corp A has
ascertained that the primary benefit or
value to Corp B from the transaction is
the right to download and use Corp A’s
software offline.
(ii) Analysis. (A) The transaction
between Corp A and Corp B contains
multiple elements. One element is the
transfer of a copy of Corp A’s software
via download, which would be a
transfer of a copyrighted article
described under § 1.861–18(b)(1)(ii) if
considered separately. Another element
is the provision of online ancillary
functionality of the software, which
would be a cloud transaction described
in paragraph (b) of this section if
considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a cloud transaction if
considered separately, paragraph (c)(2)
of this section provides that the
transaction is classified as a cloud
transaction if its predominant character
is a cloud transaction. Pursuant to
§ 1.861–18(b)(3), the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. The
predominant character of this
transaction is therefore the transfer of a
copyrighted article because the primary
benefit or value received by Corp B is
the right to download and use Corp A’s
software offline. Accordingly, this
transaction is classified solely as a

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transfer of a copyrighted article
described in § 1.861–18(b)(1)(ii). The
provision of the software constitutes a
lease of a copyrighted article under
§ 1.861–18 because access to the app is
terminated when the monthly fee is no
longer paid, even though Corp B
employees retain the locked files on
their devices. See § 1.861–18(h)(4).
(6) Example 6: Data storage, separate
from access to offline software—(i)
Facts. The facts are the same as in
paragraph (d)(5)(i) of this section (the
facts in Example 5), except that Corp A
also provides on-demand network data
storage to Corp B on Corp A’s servers in
exchange for a monthly fee based on the
amount of data storage used by Corp B.
Under the data storage terms, Corp B
employees may store files created by
Corp B employees using Corp A’s
software or other software. Although
Corp A’s word processing software is
compatible with Corp A’s data storage
systems, the core functionality of Corp
A’s software is not dependent on Corp
B’s purchase of the storage plan. Corp
A’s provision of software and data
storage capacity constitute separate
transactions.
(ii) Analysis. (A) As explained in
paragraph (d)(5)(ii) of this section, Corp
B’s download of fully functional
software, along with on-demand
network access to certain limited online
features, does not constitute a cloud
transaction, but rather constitutes a
lease of a copyrighted article under
§ 1.861–18.
(B) The provision of on-demand
network data storage by Corp A to Corp
B is a cloud transaction with one
element. Therefore, the transaction is
treated solely as a cloud transaction
under paragraph (b) of this section and
is classified as the provision of services
under paragraph (c)(1) of this section.
(7) Example 7: Streaming and
temporary download of digital content
using third-party servers—(i) Facts.
Corp A offers via stream or temporary
download digital content in the form of
videos and music to customers from
servers located in data centers owned
and operated by Data Center Operator.
Each customer uses a computer or other
electronic device to access unlimited
streaming or temporary downloads of
video and music in exchange for
payment of a flat monthly fee to Corp
A. The customer may select from among
the available content the particular
video or song to be streamed or
downloaded. Corp A continually
updates its content catalog, replacing
content with higher quality versions and
adding new content at no additional
charge to the customer. It also provides
additional functionality such as various

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methods of filtering and sorting the
library, a watchlist, and
recommendations based on a customer’s
preferences. Content that is streamed to
the customer is not stored locally on the
customer’s computer or other electronic
device and therefore can be played only
while the customer’s computer or other
electronic device is connected to the
internet. Content that is temporarily
downloaded is stored on the customer’s
computer or other electronic device for
1 week and therefore can be played
while the customer’s computer or other
electronic device is not connected to the
internet. Corp A cannot reasonably
ascertain the primary benefit or value
that its specific customers derive from
accessing Corp A’s catalog of digital
content. Data collected by Corp A
indicates that the vast majority of
customers stream digital content rather
than temporarily download the content.
Corp A pays Data Center Operator a fee
based on the amount of data storage
used and computing power made
available in connection with Corp A’s
content offerings.
(ii) Analysis. (A) The provision of data
storage and computing power by Data
Center Operator to Corp A is a cloud
transaction with one element. Therefore,
the transaction is treated solely as a
cloud transaction under paragraph (b) of
this section, and is classified as the
provision of services under paragraph
(c)(1) of this section.
(B) A transaction between Corp A and
a customer has two elements. One
element is streaming access to a curated
and routinely updated library of digital
content, which would be a cloud
transaction described in paragraph (b) of
this section if considered separately.
Another element is the transfer of a
copy of digital content via temporary
download, which would be a transfer of
a copyrighted article under § 1.861–
18(b)(1)(ii) if considered separately.
(C) Because the transaction has
multiple elements, one or more of
which would be a cloud transaction if
considered separately, paragraph (c)(2)
of this section provides that the
transaction is classified as a cloud
transaction if its predominant character
is a cloud transaction. Pursuant to
§ 1.861–18(b)(3), the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer if it is
reasonably ascertainable. However, Corp
A cannot reasonably ascertain the
primary benefit or value derived by a
specific customer from Corp A’s
offering. In such situations, § 1.861–
18(b)(3)(ii) provides that the
predominant character of a transaction
may be determined based on the

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primary benefit or value to a typical
customer of a substantially similar
transaction. This primary benefit or
value to a typical customer can be
identified through actual data about use
or access pursuant to § 1.861–
18(b)(3)(ii)(A), or if that data is not
available, by using other evidence
indicative of the primary benefit or
value to a typical customer pursuant to
§ 1.861–18(b)(3)(ii)(B). Because Corp A
has data that shows the typical customer
streams digital content rather than
temporarily downloading it, the primary
benefit or value received by a typical
customer is streaming access to digital
content. Therefore, the predominant
character of the transaction is a cloud
transaction. Under paragraph (c)(1) of
this section, the cloud transaction is
classified as the provision of services.
(8) Example 8: Access to online
database—(i) Facts. Corp A offers an
online database of industry-specific
materials. Customers access the
materials through Corp A’s website,
which aggregates and organizes
information topically and hosts a
proprietary search engine. Corp A hosts
the website and database on its own
servers and provides multiple customers
access to the website and database
concurrently. Most materials in Corp
A’s database are publicly available by
other means, but Corp A’s website offers
an efficient way to locate and obtain the
information on demand. Certain
materials in Corp A’s database
constitute digital content within the
meaning of § 1.861–18(a)(2), and Corp A
pays the copyright owners a license fee
for using them. Each customer may
download any of the materials to its
own computer and keep such materials
without further payment. The customer
pays Corp A a fee based on the number
of searches or the amount of time spent
on the website, and such fee is not
dependent on the amount of materials
the customer downloads. The fee that
the customer pays is substantially
higher than the stand-alone charge for
accessing the same digital content
outside of Corp A’s system. Corp A
cannot reasonably ascertain the primary
benefit or value that a specific customer
derives from accessing Corp A’s
database. Corp A does not have data
indicating whether the typical customer
downloads materials from the database.
Corp A markets its website and online
database as user-friendly and an
efficient way to find relevant materials
because of its proprietary search engine.
Developing the proprietary search
engine was the largest cost Corp A
incurred in creating its website and
online database.

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(ii) Analysis. (A) The transaction
between Corp A and a customer has
multiple elements. One element is Corp
A’s provision to a customer of access to
Corp A’s website and online database,
which is a cloud transaction described
in paragraph (b) of this section if
considered separately. Another element
is the transfer of digital content via
download, which is the transfer of a
copyrighted article under § 1.861–18 if
considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a cloud transaction if
considered separately, paragraph (c)(2)
of this section provides that the
transaction is classified as a cloud
transaction if its predominant character
is a cloud transaction. Pursuant to
§ 1.861–18(b)(3), the predominant
character of the transaction is based on
the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. However, Corp
A cannot reasonably ascertain the
primary benefit or value derived by a
specific customer from access to Corp
A’s database. In such situations,
§ 1.861–18(b)(3)(ii) provides that the
predominant character of a transaction
may be determined based on the
primary benefit or value to a typical
customer of a substantially similar
transaction. This primary benefit or
value to a typical customer can be
identified through actual data about use
or access pursuant to § 1.861–
18(b)(3)(ii)(A), or if that data is not
available, by using other evidence
indicative of the primary benefit or
value to a typical customer pursuant to
§ 1.861–18(b)(3)(ii)(B). That Corp A
focuses on its proprietary search engine
when marketing its website and
database, as well as the facts that the
search engine was the most expensive
cost incurred by Corp A in creating its
website and database, and that
customers pay a substantially higher fee
to access Corp A’s system than they
would otherwise pay to access the
content outside of Corp A’s system,
indicates that the primary benefit or
value received by a typical customer is
the right to use the search engine.
Therefore, under paragraph (c)(2) of this
section, the predominant character of
the transaction between Corp A and a
customer is a cloud transaction. Under
paragraph (c)(1) of this section the cloud
transaction is classified as the provision
of services.
(9) Example 9: Temporary or
perpetual access to a single movie via
stream or download—(i) Facts. Corp A
hosts movies on its website and allows
customers to view a single movie for a
limited period or perpetually for a one-

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time fee, with perpetual viewing rights
costing a higher fee. Corp A does not
charge customers a separate fee for
access to the website. In addition, Corp
A’s website provides recommendations
for movies based on a customer’s search
for a particular title and/or the
customer’s purchase history. Customers
have no ability to alter the servers,
website, or movies available on the
website. The movies in Corp A’s
database constitute digital content
within the meaning of § 1.861–18(a)(2),
and Corp A pays the copyright owners
a license fee for using them. Corp A
allows customers to view the movies by
either streaming the movies from Corp
A’s servers, or by downloading the
movies onto the customer’s computer or
other electronic device. The file size of
movies offered by Corp A is generally
large and so customers may be expected
to download movies only in certain
situations such as when traveling
without internet access. Upon the
expiration of the rental period,
customers will no longer have access to
stream the movies, and any movie that
was downloaded onto a customer’s
computer or other electronic device will
auto-delete from the customer’s
computer or other electronic device.
Whether a customer chooses to view the
movie via stream or download, Corp A
charges the same one-time fee. Corp A
cannot reasonably ascertain the primary
benefit or value that a specific customer
derives from accessing Corp A’s
website. Corp A maintains aggregate
data on whether a given movie is
viewed via stream or download, and
this data shows that most movies are
viewed by streaming, even in the case
where a customer pays for the right to
view a movie in perpetuity.
(ii) Analysis. (A) A transaction
between Corp A and a customer
contains multiple elements. One
element is Corp A’s provision to a
customer of access to Corp A’s website
in order to view a movie via stream,
which is a cloud transaction described
in paragraph (b) of this section if
considered separately. Another element
is Corp A’s provision to a customer of
access to Corp A’s website in order to
download a movie, which is the transfer
of a copyrighted article under § 1.861–
18 if considered separately.
(B) Because the transaction has
multiple elements, one or more of
which would be a cloud transaction if
considered separately, paragraph (c)(2)
of this section provides that the
transaction is classified as a cloud
transaction if its predominant character
is a cloud transaction. Pursuant to
§ 1.861–18(b)(3), the predominant
character of the transaction is based on

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the primary benefit or value of the
transaction to the customer, if it is
reasonably ascertainable. However, Corp
A cannot reasonably ascertain the
primary benefit or value derived by a
specific customer from access to Corp
A’s database. In such situations,
§ 1.861–18(b)(3)(ii) provides that the
predominant character of a transaction
may be determined based on the
primary benefit or value to a typical
customer of a substantially similar
transaction. This primary benefit or
value to a typical customer can be
identified through actual data about use
or access pursuant to § 1.861–
18(b)(3)(ii)(A), or if that data is not
available, by using other evidence
indicative of the primary benefit or
value to a typical customer pursuant to
§ 1.861–18(b)(3)(ii)(B). Corp A has data
that shows that the typical customer
views movies by streaming rather than
download. Accordingly, under
paragraph (c)(2) of this section, the
predominant character of the
transaction is a cloud transaction
because the primary benefit or value a
typical customer receives is access to
stream movies on Corp A’s website.
Under paragraph (c)(1) of this section,
the cloud transaction is classified as the
provision of services.
(10) Example 10: Reseller of software
as a service—(i) Facts. Corp A owns the
copyright to software (Program S). Corp
A hosts Program S on its servers.
Customers access Program S only
through an internet connection. Corp A
grants Corp B, a foreign corporation
wholly owned by Corp A, the right to
sell access to Program S to Corp B’s
customers that are located in Corp B’s
country. Corp B is responsible for
managing the purchase/sale interaction
with Corp B’s customers, including
invoicing and collections. Corp A is
responsible for providing customers
with access to Program S. Corp B does
not perform any functions to provide
access to Program S.
(ii) Analysis. (A) The transaction
between Corp A and Corp B is treated
as Corp A providing on-demand access
to Program S to Corp B even though
Corp B resells that access. This
transaction is a cloud transaction with
one element. Under paragraph (c)(1) of
this section, the cloud transaction is
classified as the provision of services.
The transaction does not involve the
transfer of any copyright rights
described in § 1.861–18(c)(2), and
therefore is governed solely by this
section.
(B) The transaction between Corp B
and its customers is the provision of ondemand access to Program S by Corp B,
which is a cloud transaction with one

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element. Under paragraph (c)(1) of this
section, the cloud transaction is
classified as the provision of services.
The transaction does not involve the
transfer of any copyright rights
described in § 1.861–18(c)(2), and
therefore is governed solely by this
section.
(11) Example 11: Computer game with
online functionality and in-game
purchases—(i) Facts. Corp A owns the
copyright to a computer game (Game X).
Customers can purchase Game X for a
one-time fee and download it onto their
computers. A customer may play certain
aspects of Game X while not connected
to the internet, but most of the core
functionality of Game X is available
only when the customer is connected to
the internet, including the ability to
play with other customers. In order to
access the additional online
functionality specific to Game X,
customers must pay a monthly fee to
Corp A. The additional functionality of
Game X is hosted on servers owned by
Corp A. Customers may also pay a onetime fee to access an in-game item that
can be utilized only when playing Game
X online.
(ii) Analysis. (A) There are three
transactions between Corp A and a
customer. The first transaction is the
transfer of a copy of Game X, which is
a digital content transaction with one
element because a customer receives
from Corp A access only to offline
content in exchange for purchasing a
copy of the game. Therefore, this
transaction is treated solely as a transfer
of a copyrighted article under § 1.861–
18.
(B) The second transaction between
Corp A and a customer is the payment
of a monthly fee to play Game X online
on Corp A’s servers, which is a cloud
transaction with one element. Therefore,
this transaction is treated solely as a
cloud transaction, and is classified as
the provision of services under
paragraph (c)(1) of this section.
(C) The third transaction between
Corp A and a customer is the payment
of a one-time fee in exchange for an ingame item. Because a customer can
utilize the item only when playing
Game X through an internet connection,
the transaction is a cloud transaction
with one element. Therefore, this
transaction is treated solely as a cloud
transaction, and is classified as the
provision of services under paragraph
(c)(1) of this section.
(e) Applicability date—(1) In general.
This section applies to taxable years
beginning on or after January 14, 2025.
(2) Early application. A taxpayer can
apply this section to taxable years
beginning on or after August 14, 2019

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and all subsequent taxable years not
described in paragraph (e)(1) (early
application years) if—
(i) The taxpayer also applies § 1.861–
18 to the early application years;
(ii) This section and § 1.861–18 are
applied to the early application years by
all persons related to the taxpayer
(within the meaning of sections 267(b)
and 707(b));
(iii) The period of limitations on
assessment for each early application
year of the taxpayer and all related
parties (within the meaning of sections
267(b) and 707(b)) is open under section
6501; and
(iv) The taxpayer would not be
required under this section to change its
method of accounting as a result of such
election.
(f) Change in method of accounting
required by this section. In order to
comply with this section, a taxpayer
may be required to change its method of
accounting. If so required, the taxpayer
must secure the consent of the
Commissioner in accordance with the
requirements of § 1.446–1(e) and the
applicable administrative procedures for
obtaining the Commissioner’s consent
under section 446(e) for voluntary
changes in methods of accounting.
§ 1.937–3

[Amended]

Par. 5. Section 1.937–3 is amended by
removing Examples 4 and 5 from
paragraph (e).

■

Douglas W. O’Donnell,
Deputy Commissioner.
Approved: December 18, 2024.
Aviva R. Aron-Dine,
Deputy Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 2024–31372 Filed 1–10–25; 8:45 am]
BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 10026]
RIN 1545–BQ72

Rules Regarding Certain Disregarded
Payments and Dual Consolidated
Losses
Internal Revenue Service (IRS),
Treasury.
ACTION: Final rule.
AGENCY:

This document contains final
regulations regarding certain
disregarded payments that give rise to
deductions for foreign tax purposes and

SUMMARY:

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