Today, Treasury and the IRS proposed regulations under IRC Section 250 on "excluded property sales income," a new category of income excluded from foreign-derived deduction eligible income (FDDEI) under the One Big Beautiful Bill Act. "Excluded property sales income" includes income from the sale of certain IP and other property of a type subject to depreciation, amortization or depletion by the seller.

Consistent with the approach signaled in Notice 2025-78 (see Tax Alert 2026-0178), the proposed regulations would treat property that is or has been of a character subject to depreciation as retaining that character in the seller's hands, even if later repurposed, remanufactured, or refurbished into inventory and even if fully depreciated. Also consistent with Notice 2025-78, income and gain from property that has always been held as inventory by the seller would not be treated as "excluded property sales income." However, the rules include an anti-abuse rule under which property would retain its character for purposes of "excluded property sales income" in certain related-party transactions undertaken with a principal purpose of avoiding the "excluded property sales income" rules.

The proposed regulations would also clarify that FDDEI continues to be a subset of deduction eligible income (DEI) and thus continues to be limited by the amount of DEI. In other words, a taxpayer's FDDEI could not exceed its DEI. Notice 2025-78 did not address this issue.

Taxpayers may rely on the proposed regulations if they and their related parties apply them in their entirety and consistently.

A Tax Alert is forthcoming.