IRS explains how FDII rules carve out gains from IP and asset sales
IRS Notice 2025-78 (Dec. 05, 2025)
In IRS Notice 2025-78, the IRS explains how a new statutory change affects deduction eligible income (DEI), which is the base number a domestic corporation uses to calculate its FDII deduction under §250.
DEI is simply the corporation’s gross income after removing specific categories of income that Congress says don’t count for FDII, and after subtracting the deductions tied to what remains.
The new rule adds another category that must be carved out of DEI: income and gains from the sale or disposition of intangibles and depreciable, amortizable, or depletable property.
Treasury plans to issue regulations defining exactly which property qualifies, how sales and deemed sales are treated, and how anti-abuse rules apply. The exclusion applies to transactions after June 16, 2025.
Scope of the Notice
The notice describes how the exclusion applies.
A sale or other disposition includes actual and deemed sales, deemed dispositions, and transactions subject to §367(d). It follows general tax principles. It does not include leases or licenses.
Intangible property has the meaning in §367(d)(4). It does not include copyrighted articles under §1.861-18(c)(3).
Other excluded property includes any property the seller has treated as depreciable under §167, amortizable, or depletable under §611.
The “seller” is the domestic corporation disposing of the property.
A related-party anti-abuse rule applies when property is moved within a modified affiliated group with a principal purpose of avoiding the exclusion. If the basis carries over, the property remains other excluded property in the acquirer's hands.
Examples
The notice provides several illustrations.
Sale of intangible property. An exclusive, irrevocable grant of rights to exploit a copyrighted computer program can be treated as a sale. Income and gain are excluded from DEI. A true license would not qualify.
Sale of fully depreciated property. A machine with zero basis that has been depreciated under §167 counts as other excluded property. Income and gain from its sale are excluded from DEI.
Mixed sales. Airplanes held for use in a trade or business qualify as excluded property. Inventory does not. Only income from the sale of the depreciable planes is excluded.
Consolidated group transactions. When consolidated return rules recharacterize intercompany transactions to achieve single-entity treatment, the group’s gain is treated as gain from the sale of excluded property and is excluded from DEI.
Anti-abuse transfer within related parties. If property moves through related entities in nonrecognition transactions with a principal purpose of avoiding the exclusion, the property remains excluded property. Gain on sale to foreign buyers is excluded from DEI.
Next Steps for Compliance
Taxpayers may rely on these rules before proposed regulations are issued, provided they are applied consistently and in full.
The forthcoming regulations will apply to sales or dispositions after June 16, 2025.
Comments are requested by February 2, 2026.
The Takeaway
The IRS is drawing clear boundaries around when sales of intangibles and depreciable assets are excluded from DEI for FDII purposes.
Corporations selling IP or business assets to foreign buyers should reassess their DEI and FDDEI computations using these rules.