Final Regulation_TD 8785

Federal Register / Vol. 63, No. 191 / Friday, October 2, 1998 / Rules and Regulations
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 8785]
RIN 1545–AU70

Classification of Certain Transactions
Involving Computer Programs
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

SUMMARY: This document contains
regulations relating to the tax treatment
of certain transactions involving the
transfer of computer programs. The
regulations provide rules for classifying
such transactions as sales or licenses of
copyright rights, sales or leases of
copyrighted articles, or the provision of
services, or of know-how, under certain
provisions of the Internal Revenue Code
and tax treaties. These regulations are
necessary to give taxpayers guidance on
the taxation of computer program
transactions. These regulations affect
taxpayers engaging in certain
transactions involving computer
programs.
DATES: Effective date. These regulations
are effective October 2, 1998.
Applicability date. These regulations
apply to transactions occurring pursuant
to contracts entered into on or after
December 1, 1998. Taxpayers may elect
to apply this section to transactions
occurring pursuant to contracts entered
into in taxable years ending on or after
October 2, 1998. Taxpayers may also
elect to apply this section to
transactions occurring in taxable years
ending on or after October 2, 1998
pursuant to contracts entered into before
October 2, 1998, provided the taxpayer
would not be required under this
section to change its method of
accounting, or the taxpayer would be
required to change its method of
accounting but the resulting section 481
adjustment would be zero.
FOR FURTHER INFORMATION CONTACT:
Anne Shelburne, (202) 622–3880 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information in this
final rule has been reviewed and,
pending receipt and evaluation of
public comments, approved by the
Office of Management and Budget
(OMB) under the Paperwork Reduction
Act (44 U.S.C. 3507) and assigned
control number 1545–1594. An agency
may not conduct or sponsor, and a

person is not required to respond to, a
collection of information unless the
collection of information displays a
valid control number assigned by OMB.
The collection of information in this
regulation is in § 1.861–18(k) of the
regulations. This information is required
to permit taxpayers to obtain an
automatic change in method of
accounting. This information will be
used to enable the IRS to determine if
taxpayers were entitled to an automatic
change in method of accounting. The
likely respondents are organizations.
Comments concerning the collection
of information should be directed to
OMB, Attention: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224. Any such
comments should be submitted not later
than December 1, 1998. Comments are
specifically requested concerning:
Whether the collection of information
is necessary for the proper performance
of the functions of the IRS, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the collection of
information (see below);
How to enhance the quality, utility,
and clarity of the information collected;
How to minimize the burden of
complying with the collection of
information, including the application
of automated collection techniques or
other forms of information technology;
and estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The burden per respondent is
reflected in the burden of Form 3115.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
This document contains final
regulations to be added to the Income
Tax Regulations (26 CFR part 1) under
section 861 of the Internal Revenue
Code (Code). These regulations clarify
the treatment under certain provisions
of the Code and tax treaties of income
from transactions involving computer
programs.
On November 13, 1996, proposed
regulations [REG–251520–96] were
published in the Federal Register (61

52971

FR 58152). The IRS received written
comments on the proposed regulations
and held a public hearing on March 19,
1997. Having considered the comments
and the statements made at the hearing,
the IRS and Treasury Department adopt
the proposed regulations as modified by
thisTreasury decision. The comments
and revisions are discussed below.
I. The Proposed Regulations
The proposed regulations clarify
certain rules for classifying transactions
involving computer programs. The
regulations generally require that a
transaction involving a computer
program be treated as being within one
of four possible categories: (1) Transfer
of copyright rights, (2) Transfer of a
copyrighted article, (3) Provision of
services relating to development or
modification of a computer program, or
(4) provision of know-how relating to
computer programming techniques.
The regulations distinguish between
transfers of copyright rights and
transfers of copyrighted articles based
on the type of rights transferred to the
transferee. They recognize that
computer programs are subject to
copyright protection under bothU.S. and
foreign copyright law. See the Copyright
Act of 1976, as amended (17 U.S.C. 101
et. seq.); see also, EC Directive on Legal
Protection of Computer Programs,
Council Directive 91–250,1991 J.O. (L
122), and the Berne Convention for the
CapitalProtection of Literary and
Artistic Works, 25 U.S.T. 1341
(ParisText, July 24, 1971). Copyright law
grants certain exclusive rights to a
copyright owner. The regulations
classify a transaction as the transfer of
a copyright right if the transferee
acquires one or more of the copyright
rights identified in § 1.861–18(c)(2) of
the proposed regulations. If the
transferee acquires a copy of a computer
program but does not acquire any of the
rights identified in § 1.861–18(c)(2), the
regulations classify the transaction as
the transfer of a copyrighted article.
The proposed regulations further
classify transfers of copyright rights as
either a sale or a license of copyright
rights. The proposed regulations require
that this classification be made by
examining whether, taking into account
all facts and circumstances, all
substantial rights in the copyright have
passed to the transferee. The proposed
regulations also require that transfers of
copyrighted articles be further classified
as either a sale or a lease of a
copyrighted article. This classification is
made by examining whether the benefits
and burdens of ownership of the
copyrighted article have passed to the
transferee.

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Federal Register / Vol. 63, No. 191 / Friday, October 2, 1998 / Rules and Regulations

The specific rules of the proposed
regulations are based on certain key
principles: that the special features of
computer programs should be
recognized and that functionally
equivalent transactions should be
treated similarly. The regulations are
also based on the principle that
copyright law should be a factor in
classifying transactions for tax purposes,
but should not be determinative.
Finally, the proposed regulations
contain 18 examples illustrating the
rules.
II. Comments and Final Regulations
1. Scope and Application of the
Regulations
a. General Scope
The proposed regulations classify
transactions in computer programs for
certain international provisions of the
Code. A number of comments addressed
two types of issues involving the scope
of the regulations: the treatment of
computer programs under other tax
provisions of the Code and the
application of the principles of the
proposed regulations to products other
than computer programs.
As to the treatment of computer
programs under other Code sections,
comments were mixed. Several
commentators requested that Treasury
expand the scope of the final regulations
to apply the regulations’ principles for
all U.S. tax purposes. Other
commentators, however, urged caution,
stating that issues raised under other
Code sections should be resolved only
by legislation or by revising the
regulations under those other sections.
Most commentators recommended
applying the regulations for tax
accounting purposes.
Some commentators requested that
Treasury specifically address the
relevance of the regulations in a specific
context. For example, some
commentators requested that the
regulations clarify how the principles
apply in determining the consequences
of computer program transactions under
tax treaties.
After consideration of these
comments, the final regulations retain
the scope of the proposed regulations.
However, Treasury and the IRS are
considering whether the principles of
these regulations should apply to other
tax provisions of the Code.
These regulations are intended to
apply for purposes of applying and
interpreting U.S. tax treaties. United
States tax treaties provide that terms not
defined in the treaty are defined by
reference to domestic law. See e.g., U.S.

Model Income Tax Convention of
September 20, 1996, Article 3(2).
The second group of comments
generally addressed expanding the
scope of the regulations to apply to
transactions in other types of digitized
information. The proposed regulations
are limited to classifying transactions in
computer programs. Section 1.861–
18(a)(3) of the proposed regulations
defines a computer program as ‘‘* * *
a set of statements or instructions to be
used directly or indirectly in a computer
in order to bring about a certain result.’’
The definition includes any data base or
similar item only ‘‘* * * if the data base
or similar item is incidental to the
operation of the computer program.’’
Commentators expressed differing views
as to how to define computer programs.
Several commentators recommended
that the definition be expanded to
include data bases and content provided
as part of the transaction. They note that
advances in technology now permit
significant amounts of content, that are
not merely incidental, to be included in
even inexpensive mass-marketed
programs. Some commentators
recommended that the definition be
expanded to include data bases or
similar items even if not incidental,
while some stated that data base
products containing only a de minimis
amount of software programming to
facilitate access to the data should be
excluded from the definition.
Several commentators requested that
Treasury expand the regulations more
generally, by applying the same or
analogous principles in determining the
tax consequences of transactions
involving copyright rights and
copyrighted articles to entertainment
products, or to other digitized
information.
The suggestions to expand the scope
of the regulations, either by expanding
the definition of computer programs or
by applying the regulations to other
types of digitized information, were not
adopted. Instead, the final regulations
generally retain the definition of
computer programs found in the
proposed regulations. It is intended that
a computer program includes any
media, user manuals or documentation,
or similar items (in addition to data
bases) if incidental to and routinely
transferred along with the computer
program. Treasury and the IRS are not
aware of specific instances where the
failure to expand the definition of
computer program would result in
inappropriate consequences to
taxpayers for the portion of the
transaction not governed by these
regulations. Treasury and the IRS invite
comments on this point.

The regulations also continue to apply
only to cross-border transactions
involving computer programs because
Treasury and the IRS believe that such
transactions raise the most pressing
need for guidance. Treasury and the IRS
may consider whether to apply the
principles of these regulations to all
transactions in digitized information as
part of a separate guidance project.
b. Relationship with Section 482
Numerous commentators requested
clarification regarding the application of
the regulations for purposes of section
482, requesting that transactions in
copyright rights be treated as
transactions in intangibles and
transactions in copyrighted articles be
treated as transactions in tangible
property, even if delivered
electronically.
This suggestion has not been adopted.
Treasury and the IRS intend to further
consider this issue and may provide
additional guidance in the future. See
generally, § 1.482–3(f).
c. Source of Income
Several commentators requested that
Treasury provide explicit guidance in
final regulations on how to source
income arising from transactions in
computer programs. Generally, under
the current rules, the source of income
from sales of property depends to
varying extents upon both the type of
property and, for inventory property,
the place of sale, with the place of sale
generally determined by the place
where title to the property passes. See
§ 1.861–7(c). Several commentators
requested clarification of which source
rule applies to various transactions in
computer programs. The commentators
also pointed out that the place of sale
can be problematic when dealing with
sales of computer programs, in part
because typical license agreements do
not refer to a transfer of property, and
in part because an electronic transfer is
generally not accompanied by the usual
indicia of the transfer of title. Several
commentators suggested that the place
of sale should be deemed to be the
location of the customer, or the place
where the customer first obtains the
opportunity to install the program onto
its computer.
In response to comments, the final
regulations provide specific source
rules. The regulations provide that
income from transactions that are
classified as sales or exchanges of
copyrighted articles will be sourced
under sections 861(a)(6), 862(a)(6), 863,
865(a), 865(b), 865(c), or 865(e), as
appropriate. Income derived from the
sale or exchange of a copyright right

Federal Register / Vol. 63, No. 191 / Friday, October 2, 1998 / Rules and Regulations
will be sourced under sections 865(a),
865(c), 865(d), 865(e), or 865(h), as
appropriate. Income derived from either
the leasing of a computer program or the
licensing of copyright rights in a
computer program will be sourced
under section 861(a)(4) or section
862(a)(4), as appropriate. As to the issue
of determining the place of sale under
the title passage rule of § 1.861–7(c), the
parties in many cases can agree on
where title passes for sales of inventory
property generally. Consistent with the
overall policy of the regulations, income
from electronic transfers of computer
programs that constitute inventory
property, classified as sales of
copyrighted articles, will be sourced
under similar principles.
2. Relevance of Foreign Law
Several commentators requested that
Treasury clarify that classification of a
transaction involving computer
programs for U.S. tax purposes does not
depend on foreign copyright law. In
addition, one commentator requested
that the regulations explicitly state that
the terms used in the regulations,
although taken from copyright law, will
be interpreted in a manner consistent
with the purposes of the regulations and
Internal Revenue Code. In certain cases,
terms taken from copyright law are
specifically defined in the regulations so
as to properly implement the
regulations’ underlying policy. Unless
specifically defined in the regulations,
legal standards taken from copyright
law are intended to be given the same
interpretation as under U.S. copyright
law. Factual predicates for application
of those standards, however, may be
provided by referring to foreign
copyright law. For example, if it were
necessary to determine whether the
transferee had acquired the right to
create a derivative work based on a
computer program protected under
French copyright law, the facts of the
case, i.e. the rights that the transferee
may exercise, are determined under
French law and the agreement between
the parties. However, whether or not the
transferee’s rights constitute the right to
create a derivative work for purposes of
this regulation is determined by
comparing those rights created under
French law and the agreement between
the parties to the U.S. law definition of
the right to create a derivative work.
In addition, commentators requested
clarification that the determination of
whether a foreign tax imposed on
transactions in computer programs is a
compulsory payment, eligible for a
foreign tax credit, is not affected by
these regulations. Treasury believes
clarification is unnecessary. These

regulations do not in any way modify
the requirement of § 1.901–2(e)(5) that
substantive and procedural provisions
of foreign law (including applicable tax
treaties) determine the taxpayer’s
liability under foreign law for tax and
thus whether an amount paid is a
compulsory payment. Moreover, the
regulations under section 904 recognize
that a creditable foreign tax may be
imposed on an item of income that is
taxed at a different time or in a different
manner in a foreign country than in the
United States. See § 1.904–6(a)(1).
3. Copyright Rights
The proposed regulations, in § 1.861–
18(c)(2), describe four copyright rights:
(i) the right to make copies for
distribution to the public, (ii) the right
to prepare derivative programs, (iii) the
right to make a public performance of
the program, and (iv) the right to
publicly display the program. If a
transfer of a computer program results
in a transferee acquiring any one or
more of the four listed rights, the
regulations classify the transaction as a
transfer of a copyright right. Although
the commentators agreed that the right
to make copies for distribution to the
public is properly included, they made
a number of comments regarding the
three other copyright rights.
a. Derivative Programs
Commentators stated that final
regulations should clarify the right to
prepare derivative programs. They
recommended that the regulations more
specifically describe the circumstances
resulting in the transfer of such a
copyright right.
Some commentators recommended
that a transfer of the right to prepare a
derivative program should not be
treated as the transfer of a copyright
right unless it is coupled with the right
to distribute the derivative program to
the public. That change, they say, would
make the right more consistent with the
right to reproduce copies, which results
in the transfer of a copyright right only
if it is coupled with the right to
distribute to the public.
The final regulations do not adopt this
recommendation. Although the final
regulations disregard the de minimis
right to make a derivative work, a
substantial right to make a derivative
work is appropriately treated as the
transfer of a copyright right, regardless
of whether it is coupled with the right
to distribute to the public. The
regulations generally follow copyright
law in this respect. Although the right
to make copies constitutes the transfer
of a copyright right only if coupled with
the right to distribute to the public, the

52973

regulations treat the right to make
copies differently from the other
copyright rights because of the unique
characteristics of computer programs,
including the ease by which computer
programs can be copied.
Another set of comments requests
clarification of the effect of the transfer
of programs that permit the user to
distribute certain ancillary programs in
conjunction with works created using
the underlying program, or to
incorporate certain program elements
into new programs created using the
underlying program. For example,
certain programs, such as software
development tools, permit the transferee
to distribute certain ancillary programs
or include certain segments of computer
code in new programs created by the
transferee using the development
program. Similarly, transferees of
computer programs are sometimes
granted access to the program’s source
code in order to permit the transferee to
correct minor errors or incompatibilities
in the program.
Under the proposed regulations, the
transfer of a software development tool
or the grant of the right to correct minor
errors by modifying the source code
might constitute the right to create a
derivative computer program, resulting
in the transfer of a copyright right.
Commentators argued, however, that in
both cases, the overall character of the
transaction was analogous to the
transfer of a copyrighted article. Several
commentators recommended that where
limited portions of a development tool
are included in an application program,
the inclusion should be considered de
minimis, and the resulting application
program not treated as a derivative
program of the program development
tool.
In addition, several commentators
recommended that where no
independent value attaches to
exploitation of the right to prepare
derivative computer programs, such
right should be treated as de minimis,
and not considered in classifying the
transaction.
In response to these comments, the
final regulations provide in paragraph
(c)(1)(ii) that the de minimis transfer of
a copyright right will not be taken into
account in determining whether a
transaction is considered the transfer
solely of a copyrighted article. Example
17 clarifies that the right to use software
development tools to create an
insubstantial component of a new
program constitutes such a de minimis
copyright right. Example 18 clarifies
that the right to modify the source code
to correct minor errors and make minor

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adaptations to a computer program also
constitutes a de minimis copyright right.
However, the final regulations do not
provide that where no independent
value attaches to the exploitation of the
right to prepare derivative computer
programs, such right must be treated as
de minimis. Treasury and the IRS
believe that in most cases where no
independent value attaches to the grant
of the right to prepare derivative
computer programs, the right is de
minimis. However, this may not be true
in all cases and, therefore, this comment
has not been adopted.
b. Public Performance and Display
Several commentators urged Treasury
to reserve in final regulations on two of
the copyright rights, the right to make a
public performance and the right to
public display of the copyrighted work.
Several commentators recommended
that, if Treasury elects not to reserve, a
transaction involving either right should
result in treatment as a transfer of a
copyright right only if the transfer is for
commercial exploitation rather than for
internal use.
Commentators also requested
clarification of these rights in the
entertainment area. They recommended
the regulations state that the right to
publicly perform or display the
computer program should not be
considered the transfer of a copyright
right if the performance or display is
limited to the advertisement of a
copyrighted article, and does not permit
the public display of the entire article.
These suggestions have not been
adopted. However, Treasury and the IRS
recognize that the definition of these
rights in the context of computer
programs is still developing, and in the
future it may be necessary to revisit this
issue. At the present time, Treasury and
the IRS believe it is appropriate to
continue to follow copyright law as to
these rights. In many cases, however,
the transfer of a right for public display
or performance of a computer program,
such as marketing or advertising the
program, to the extent it constitutes the
transfer of a copyright right, would be
considered a de minimis grant of a
copyright right under § 1.861–
18(c)(1)(ii) of the final regulations, so
that the transaction would not result in
the transfer of a copyright right.
c. Definition of to the Public
The proposed regulations list the right
to make copies for distribution to the
public as one of the four copyright
rights. Commentators recommended
that the regulations clarify the meaning
of ‘‘to the public.’’ They recommended
the definition exclude distribution to a

related party, with related party defined
to ensure that transfers to a noncontrolled joint venture would not be
considered distribution to the public.
They also recommended that
distribution to identified distributees
not be considered distribution to the
public.
Commentators also recommended the
regulations state that distribution to the
public does not mean distribution to
employees. In addition, they urge
Treasury to make explicit that internal
distribution includes distribution to
many employees, including employees
of affiliates, at multiple locations.
In light of these comments, the final
regulations provide in new paragraph
(g)(3) that distribution to the public does
not include distribution to a related
person, which is defined for purposes of
the regulation as 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), with ‘‘10
percent’’ substituted for ‘‘50 percent.’’
The term also excludes distribution to
certain identified persons or to those
with a legal relationship to the original
transferee. The number of employees or
independent contractors who are
permitted to use the program in
performance of services for the
transferee is not relevant. The examples
have also been amended to clarify that
the number of permitted users, which
includes employees of the transferee,
within the group of related persons is
not taken into account in determining
whether the transferee has the right to
distribute copies of the program to the
public. See e.g., paragraph (h), Example
11.
4. Definition of Copyrighted Article
The comments on this issue fell into
two categories. One group of comments
recommended that final regulations
clarify the consequences of transferring
a de minimis copyright right along with
the transfer of a copyrighted article. The
proposed regulations state in § 1.861–
18(c)(1)(ii) that if a person acquires a
copy of a computer program but does
not acquire any of the four copyright
rights, the transfer is classified as a
transfer of a copyrighted article. Several
commentators requested that the
regulations clarify the statement to say
that if the transfer includes only a de
minimis copyright right, the transfer is
classified as a transfer of a copyrighted
article. As discussed above, in response,
the final regulations provide that if the
transfer includes only a de minimis
copyright right, the transfer is classified
as a transfer of a copyrighted article.
The second category of comments
concerned the definition of a

copyrighted article. Section 1.861–
18(c)(3) defines a copyrighted article as
a copy of a computer program from
which the work can be perceived,
reproduced, or otherwise
communicated, either directly or with
the aid of a machine or device. Several
commentators recommended the
regulations be modified to say that the
copy of the program need not be fixed
in a tangible medium, and thus
electronically transferred copies also
constitute copyrighted articles.
Treasury and the IRS believe that the
regulations clearly indicate that
electronically transferred copies also
constitute the transfer of a copyrighted
article. Section 1.861–18(g)(2) of the
final regulations continues to provide
that the physical or electronic medium
used to effectuate a transfer of a
computer program shall not be taken
into account. Also, the examples
contained in the regulations, including
paragraph (h), Examples 2, 3, and 4,
specifically conclude that the electronic
transfer of software can constitute the
transfer of copyrighted articles.
One commentator suggested that the
words ‘‘carrier medium’’ should be
substituted for the words ‘‘the magnetic
medium of a floppy disk’’ because
computer programs may be distributed
on a non-magnetic medium, such as a
CD–ROM. This comment has been
adopted in § 1.861–18(c)(3) of the final
regulations.
5. Further classification of a copyright
right as a sale or license
In classifying a copyright right as a
sale or license, the proposed regulations
look to whether, considering all the
facts and circumstances, all substantial
rights in a copyright right are
transferred. Commentators raised a
number of issues regarding the all
substantial rights test, commenting on
the effect of exclusivity, term of transfer,
geographic area, and time and manner
of payment.
Several commentators stated that
exclusivity is the most important factor
in determining whether all substantial
rights have been transferred. They
pointed out that two examples,
Examples 5 and 6, discuss other factors,
the term of the transfer and a transfer in
a limited geographic area, in addition to
exclusivity, and requested that the
regulations explicitly state that
exclusivity is the most important factor.
One commentator suggested that the
term of the transfer may not be relevant
since the useful life of the program may
be shorter than originally believed due
to technological advances.
The final regulations do not
incorporate these comments. The

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regulations were not intended to change
the generally applicable ‘‘all substantial
rights’’ test used in determining whether
a transfer of an intangible, including
copyright rights, is a sale of the
intangible or a license of the intangible.
Another fact mentioned in the
examples is the manner of payment.
Several commentators stated that the
term over which payments are made
should be irrelevant in characterizing
the transaction, and requested that this
be made explicit. Although the
regulations are not intended to depart
from what is the generally applicable
rule on this issue, this comment has
been reflected in paragraph (h),
Example 5 of the final regulations, thus
clarifying that the payment term is
irrelevant on the facts of this example.
Several commentators pointed out
that, in determining whether all
substantial rights are transferred, the
regulations state the principles of
section 1222 and section 1235 shall
apply. They seek clarification that
section 1222, not section 1235, applies
to transfers of copyrights, with section
1235 only applying to qualifying
transfers of patents.
Although section 1235 by its terms
only applies to patent transfers, the
proposed regulations state that ‘‘the
principles of sections 1222 and 1235’’
(emphasis added) shall apply. Treasury
and the IRS believe that the all
substantial rights test in the regulations
under section 1235, although a safe
harbor under that section, nevertheless
reflects the all substantial rights test
arising from case law generally, and is,
therefore, an appropriate standard that
may be applied. However, in applying
the all substantial rights test to
transactions in computer programs
under these regulations, relevant case
law, other than that specifically
addressing section 1235 or section 1222,
may also be applied, and the final
regulations clarify this point.
6. Further Classification of a
Copyrighted Article as a Sale or Lease
a. Lease Character for Copyrighted
Articles
The proposed regulations treat a nonsale transfer of a copy of a computer
program as a lease. Some commentators
urged Treasury to reconsider its
decision to adopt lease characterization
for transactions that traditionally have
been characterized as licenses. They
submitted that the change creates
confusion, is inconsistent with
established commercial practice, and
implies that all lease transactions
involve tangible property. One
commentator asked the IRS to clarify

that the regulation is not intended to
produce any differences in income tax
consequences by treating a transfer of a
program as a lease instead of a license.
These comments have not been
adopted. Treasury and the IRS continue
to believe that lease characterization is
correct for non-sale transfers of copies of
computer programs. Any income tax
consequences from such
characterization under these regulations
will result from application of generally
applicable tax law to the leasing
transaction.
b. Benefits and Burdens Test
In determining whether the transfer of
a copyrighted article results in a sale, or
instead as a lease generating rental
income, the proposed regulations look
to whether, based on the facts and
circumstances, the benefits and burdens
of ownership are transferred. One
commentator stated that this test is not
helpful here, and proposed an economic
substance test instead, focusing on the
right to use a computer program as the
economically valuable right. Under that
standard, a copyrighted article would be
considered sold if transferred with the
right to use it indefinitely.
Other commentators, however,
believed that the existing authorities
applying the benefits and burdens test
provide the correct analytical approach
for distinguishing a sale from a lease of
a copyrighted article.
The final regulations preserve the
benefits and burdens test, and are not
intended to change the generally
applicable benefits and burdens test.
7. Related Parties
The examples to the proposed
regulations state that they assume the
parties are unrelated. Several
commentators requested that final
regulations clarify the treatment of
related parties under the regulations.
They state that the regulations should
apply to related and unrelated parties in
the same way, and that Treasury should
specify any particular concerns.
In response to these comments, the
examples to the final regulations do not
contain an assumption that the parties
are unrelated. The regulations are
intended to apply to related and
unrelated parties in the same manner.
The relationship between the parties
does not affect the character of the
transaction, with the exception of
special rules regarding definition of the
term ‘‘distribution to the public.’’ Of
course, if the parties are related for
purposes of section 482, that section
may apply to determine the proper
amount of consideration for the transfer.

52975

8. Services and Know-How
Some commentators suggested that
final regulations clarify the relevancy of
the distinction between the provision of
services and the provision of know-how.
This suggestion has not been
incorporated in the final regulations.
The purpose of the regulations is only
to characterize transactions involving
computer programs. Once the character
of the transaction is determined under
the regulations, the taxation of the
income arising from the transaction is
determined under other Code sections.
Thus, the relevance of the distinction
between services and know-how must
be determined under other Code
sections. Compare sections 861(a)(3)
and 862(a)(3), looking to place of
performance in sourcing income from
services, with sections 861(a)(4) and
862(a)(4), sourcing income derived from
the transfer of certain know-how based
on where the know-how is used. The
distinction between services and knowhow may also be relevant under income
tax treaties. Compare Convention
Between the United States of America
and Japan for the Avoidance of Double
Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on
Income, Article 8 (Business Profits) and
Article 14 (Royalties).
Some commentators suggested the
final regulations eliminate the
requirement in paragraph (e) of the
proposed regulations, requiring that
know-how not be copyrightable as a
prerequisite to being treated as knowhow for purposes of this section. This
comment has been adopted to eliminate
any inference that only orally
transmitted information could be
classified as know-how. The final
regulations, however, add two other
requirements. Know-how is of the type
covered by these regulations only if the
information is information relating to
computer programming techniques, is
furnished under conditions preventing
unauthorized disclosure, specifically
contracted for between the parties, and
is considered property subject to trade
secret protection. Know-how is
considered a property interest under
applicable law, and only if the knowhow is specifically contracted for
between the parties. These additional
requirements should help clarify the
definition of know-how described in
these regulations.
9. Mixed Transactions
The proposed regulations state that if
a transaction in a computer program
consists of transactions in more than
one category listed in § 1.861–18(b)(1),
the transactions, unless de minimis, will

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be treated as separate transactions, with
the rules applied separately to each.
Several commentators requested further
guidance on how to treat transactions
that include payments for updates,
support, consulting, education, and
training. They pointed out that in many
cases, the extent to which such
transactions or services will be required
by the transferee are unknown at the
time of the initial contract. They asked
that regulations clarify the factors that
will sustain an allocation where these
various options are made available, or
that Treasury consider bundling rules.
These comments have not been
adopted. These regulations are limited
to characterizing transactions relating to
computer programs, and are not
intended to provide rules for allocating
income arising from mixed transactions.
Mixed transactions occur in many
circumstances outside of transactions
involving computer programs. Whether
income arising from a mixed
transaction, involving computer
programs or otherwise, must be
allocated to its separate components
under generally applicable principles of
taxation, and the method by which such
income is allocated to the transaction’s
components, must be determined under
other Code sections.
10. Shrink Wrap License
Several commentators stated that the
reference to the term shrink wrap
license in the proposed regulations
should be deleted, because the reference
can be misinterpreted as ascribing some
legal significance to the term. They
suggested a more general reference to a
user agreement or a user license. In
response to these comments, the final
regulations now indicate in Example 1
that the term shrink-wrap license is
merely illustrative. The regulations’
analysis is based on the terms of the
agreement between the parties, and on
the nature and extent of the rights
transferred, not the means of packaging
or distributing the computer program. In
particular, the use of the term shrinkwrap license in the proposed regulations
was not intended to create an inference
that the regulations apply only to massmarketed software.
11. Pre-Effective Date Transactions
The proposed regulations draw no
inference for transactions prior to the
regulations’ effective date. One
commentator recommended that the
regulations permit taxpayers to elect
retroactive application of the
regulations. Another commentator
requested a statement that a taxpayer’s
prior treatment of a transaction would
be respected as long as it is reasonably

supportable. Another commentator
recommended the IRS remedy double
tax problems for transactions prior to
the effective date.
The final regulations apply to
transactions occurring pursuant to
contracts entered into on or after the
effective date of the regulations. A
special transition rule permits taxpayers
to elect to apply the regulations to
transactions occurring pursuant to
contracts entered into in taxable years
ending on or after the date of
publication of this document in the
Federal Register. Taxpayers may also
elect to apply this section to
transactions occurring in taxable years
ending on or after the date of
publication of this document in the
Federal Register, for contracts entered
into before the date of publication of
this document in the Federal Register,
provided the taxpayer would not be
required under this section to change its
method of accounting, or the taxpayer
would be required to change its method
of accounting but the resulting section
481 adjustment would be zero.
With regard to double taxation,
taxpayers who believe they are subject
to double taxation may pursue
competent authority relief.
12. Accounting Method Changes
Commentators suggested that the IRS
issue, simultaneously with the issuance
of the final regulations, a revenue
procedure permitting an automatic
change of accounting to allow taxpayers
to apply the principles of these
regulations for purposes of accounting
for prepaid income under software
maintenance agreements. Different rules
apply depending on whether the income
from such agreements is considered to
be derived from the sale of goods or the
performance of services. Compare,
§ 1.451–5 (sale of goods) and Rev. Proc.
71–21 (1971–2 CB 549) (performance of
services).
In response to comments, the final
regulations grant taxpayers consent to
change their method of accounting if
necessary to conform the classification
of transactions with these regulations,
where the taxpayer elects one of the
transtion rules in paragraph (i)(2) of the
regulations. To obtain automatic
consent to change a method of
accounting, the regulations direct
taxpayers to file Form 3115 with their
returns and send a copy to the national
office.
13. Reverse Engineering and
Decompilation
One commentator stated that the right
to reverse engineer (or decompile) a
computer program (i.e., the right to

reconstruct the source code from the
object code) should be irrelevant in
classifying transactions in computer
programs, and that references to that
right should be eliminated from the
examples.
This comment has not been adopted.
The decompilation of a computer
program can result in the creation of a
derivative work. Under the regulations,
the right to create a derivative work is
a copyright right. Therefore, whether the
transferee is prohibited from reverse
engineering a computer program could
be relevant in determining if a
copyrighted article has been transferred.
14. Effect of Practices Used to Control
Piracy
One commentator suggested that
certain practices used to control
software piracy, such as a requirement
that the transferee annually contact the
transferor and pay an annual fee, be
disregarded in determining whether a
transaction results in a sale or lease of
a computer program.
This comment has not been adopted.
Such a transaction must be analyzed
under the benefits and burdens test,
taking into account all the facts and
circumstances. Under that test, the
requirement that the transferee contact
the transferor and pay an annual fee
might not result in lease
characterization, if other significant
benefits and burdens of ownership pass
to the transferee.
15. Definition of Computer
One commentator urged Treasury to
adopt a flexible definition of the term
computer. However, the final
regulations do not define computer. The
definition of software used in the
regulations is based on the definition in
the Copyright Act. The Copyright Act
does not define the term computer.
16. Comments (not otherwise addressed
above) Regarding Specific Examples
a. Paragraph (h), Examples 6 and 7
Commentators requested that, given
the ease of reproduction, the distinction
between paragraph (h), Examples 6 and
7 should be removed. This comment has
not been adopted. Although computer
programs can be easily reproduced, a
fact which the regulations recognize,
there is still an important commercial
and legal distinction between persons
who are granted the right to make copies
of a program for distribution and
persons who do not have that right.
b. Example 6
In response to comments, the final
regulations make clear that the party
exercising reproduction rights can

Federal Register / Vol. 63, No. 191 / Friday, October 2, 1998 / Rules and Regulations
exercise that right indirectly by
contracting out the reproduction
function.
c. Example 8
In response to a comment, Example 8
has been clarified to indicate that the
right to make back-up copies of the
program, or the fact that a back-up copy
of the program is transferred on a disk,
is irrelevant to classification.
d. Example 9
In response to a comment, paragraph
(h), Example 9 is clarified to indicate
that the mechanics of copying a
computer program are irrelevant.
e. Example 10
Some commentators suggested that in
the case of so-called enterprise licenses,
the fact the transferee can use the
program at multiple locations should
not affect the character of the
transaction as the sale of copyrighted
articles. This comment has been
adopted, and paragraph (h), Example
10(ii)(C) of the final regulations has
been amended accordingly.
f. Examples 12 and 13
Some commentators suggested adding
examples to illustrate so-called software
maintenance or subscription
agreements. Paragraph (h), Examples 12
and 13 of the proposed regulations,
however, were intended to illustrate
such agreements, and, in response to
comments, these examples have been
modified in the final regulations.
Generally, the provision of an updated
program pursuant to a maintenance
agreement is intended to be treated as
the transfer of a copyrighted article.
However, this may not always be the
case, and maintenance agreements must
be analyzed in the same way as other
transactions under the regulations.
g. Example 15
A commentator suggested that the
example’s use of a derivative computer
program adds complexity, and
recommends the example be redrafted
to purely illustrate services. This
comment has been adopted and the
example has been revised accordingly.

It is hereby certified that the
collection of information contained in
these regulations will not have a
significant economic impact on a
substantial number of small entities.
This certification is based on the fact
that the rules of this section impact
taxpayers who engage in international
transactions in computer programs, and
therefore the rules will impact very few
small entities. Moreover, in those few
instances where the rules of this section
impact small entities, the economic
impact of the collection of information
on such small entities is not likely to be
significant because it merely requires a
copy of the Form 3115 to be filed with
the National Office. Accordingly, a
regulatory flexibility analysis is not
required under the Regulatory
Flexibility Act (5 U.S.C. chapter 6).
Pursuant to section 7805(f) of the
Internal Revenue Code, the notice of
proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting information
The principal author of these
regulations is Anne Shelburne, of the
Office of Associate Chief Counsel
(International), IRS. However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as
follows:

h. Additional Examples.
Commentators suggested additional
examples. The final regulations add
additional examples where clarification
was believed necessary.

Par. 2. Section 1.861–18 is added to
read as follows:

Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory
assessment is not required.

(a) General—(1) Scope. This section
provides rules for classifying
transactions relating to computer
programs for purposes of subchapter N
of chapter 1 of the Internal Revenue
Code, sections 367, 404A, 482, 551, 679,

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

§ 1.861–18 Classification of transactions
involving computer programs.

52977

1059A, chapter 3, chapter 5, sections
842 and 845 (to the extent involving a
foreign person), and transfers to foreign
trusts not covered by section 679.
(2) Categories of transactions. This
section generally requires that such
transactions be treated as being solely
within one of four categories (described
in paragraph (b)(1) of this section) and
provides certain rules for categorizing
such transactions. In the case of a
transfer of a copyright right, this section
provides rules for determining whether
the transaction should be classified as
either a sale or exchange, or a license
generating royalty income. In the case of
a transfer of a copyrighted article, this
section provides rules for determining
whether the transaction should be
classified as either a sale or exchange,
or a lease generating rental income.
(3) Computer program. 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.
For purposes of this paragraph (a)(3), a
computer program includes any media,
user manuals, documentation, data base
or similar item if the media, user
manuals, documentation, data base or
similar item is incidental to the
operation of the computer program.
(b) Categories of transactions—(1)
General. Except as provided in
paragraph (b)(2) of this section, a
transaction involving the transfer of a
computer program, or the provision of
services or of know-how with respect to
a computer program (collectively, a
transfer of a computer program) is
treated as being solely one of the
following—
(i) A transfer of a copyright right in
the computer program;
(ii) A transfer of a copy of the
computer program (a copyrighted
article);
(iii) The provision of services for the
development or modification of the
computer program; or
(iv) The provision of know-how
relating to computer programming
techniques.
(2) Transactions consisting of more
than one category. Any transaction
involving computer programs which
consists of more than one of the
transactions described in paragraph
(b)(1) of this section shall be treated as
separate transactions, with the
appropriate provisions of this section
being applied to each such transaction.
However, any transaction that is de
minimis, taking into account the overall
transaction and the surrounding facts
and circumstances, shall not be treated
as a separate transaction, but as part of
another transaction.

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(c) Transfers involving copyright
rights and copyrighted articles—(1)
Classification—(i) Transfers treated as
transfers of copyright rights. A transfer
of a computer program is classified as a
transfer of a copyright right if, as a result
of the transaction, a person acquires any
one or more of the rights described in
paragraphs (c)(2)(i) through (iv) of this
section. Whether the transaction is
treated as being solely the transfer of a
copyright right or is treated as separate
transactions is determined pursuant to
paragraph (b)(1) and (b)(2) of this
section. For example, if a person
receives a disk containing a copy of a
computer program which enables it to
exercise, in relation to that program, a
non-de minimis right described in
paragraphs (c)(2)(i) through (iv) of this
section (and the transaction does not
involve, or involves only a de minimis
provision of services as described in
paragraph (d) of this section or of knowhow as described in paragraph (e) of this
section), then, under paragraph (b)(2) of
this section, the transfer is classified
solely as a transfer of a copyright right.
(ii) Transfers treated solely as
transfers of copyrighted articles. If a
person acquires a copy of a computer
program but does not acquire any of the
rights described in paragraphs (c)(2)(i)
through (iv) of this section (or only
acquires a de minimis grant of such
rights), and the transaction does not
involve, or involves only a de minimis,
provision of services as described in
paragraph (d) of this section or of knowhow as described in paragraph (e) of this
section, the transfer of the copy of the
computer program is classified solely as
a transfer of a copyrighted article.
(2) Copyright rights. The copyright
rights referred to in paragraph (c)(1) of
this section are as follows—
(i) The right to make copies of the
computer program 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
computer programs based upon the
copyrighted computer program;
(iii) The right to make a public
performance of the computer program;
or
(iv) The right to publicly display the
computer program.
(3) Copyrighted article. A copyrighted
article includes a copy of a computer
program 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 program may be fixed in the
magnetic medium of a floppy disk, or in
the main memory or hard drive of a
computer, or in any other medium.

(d) Provision of services. The
determination of whether a transaction
involving a newly developed or
modified computer program is treated as
either the provision of services or
another transaction 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 computer program and how
the risks of loss are allocated between
the parties.
(e) Provision of know-how. The
provision of information with respect to
a computer program will be treated as
the provision of know-how for purposes
of this section only if the information
is—
(1) Information relating to computer
programming techniques;
(2) Furnished under conditions
preventing unauthorized disclosure,
specifically contracted for between the
parties; and
(3) Considered property subject to
trade secret protection.
(f) Further classification of transfers
involving copyright rights and
copyrighted articles—(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 whether, taking into
account all facts and circumstances,
there has been a transfer of all
substantial rights in the copyright. A
transaction that does not constitute a
sale or exchange because not all
substantial rights have been transferred
will be classified as a license generating
royalty income. For this purpose, the
principles of sections 1222 and 1235
may be applied. 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.
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 transaction 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 generating rental income. Income

from transactions that are classified as
sales or exchanges of copyrighted
articles will be sourced under sections
861(a)(6), 862(a)(6), 863, 865(a), (b), (c),
or (e), as appropriate. Income derived
from the leasing of a copyrighted article
will be sourced under section 861(a)(4)
or section 862(a)(4), as appropriate.
(3) Special circumstances of computer
programs. In connection with
determinations under this paragraph (f),
consideration must be given as
appropriate to the special characteristics
of computer programs in transactions
that take advantage of these
characteristics (such as the ability to
make perfect copies at minimal cost).
For example, a transaction in which a
person acquires a copy of a computer
program on 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 program
deactivates itself after a specified period
is generally the equivalent of returning
the copy.
(g) Rules of operation—(1) Term
applied to transaction by parties.
Neither the form adopted by the parties
to a transaction, nor the classification of
the transaction under copyright law,
shall be determinative. Therefore, for
example, if there is a transfer of a
computer program on a single disk for
a one-time payment with restrictions on
transfer and reverse engineering, which
the parties characterize as a license
(including, but not limited to,
agreements commonly referred to as
shrink-wrap licenses), application of the
rules of paragraphs (c) and (f) of this
section may nevertheless result in the
transaction being classified as the sale of
a copyrighted article.
(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 transfer of a
computer program.
(3) To the public—(i) In general. For
purposes of paragraph (c)(2)(i) of this
section, a transferee of a computer
program shall not be considered to have
the right to distribute copies of the
program to the public if it is permitted
to distribute copies of the software 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

Federal Register / Vol. 63, No. 191 / Friday, October 2, 1998 / Rules and Regulations
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 a computer
program who are permitted to use the
program 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 a computer
program who are permitted to use the
program in connection with the
performance of those services is not
relevant for purposes of this paragraph
(g)(3).
(h) Examples. The provisions of this
section may be illustrated by the
following examples:
Example 1. (i) Facts. Corp A, a U.S.
corporation, owns the copyright in a
computer program, Program X. It copies
Program X onto disks. The disks are placed
in 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 (g)(1) of
this section, the label license is not
determinative. None of the copyright rights
described in paragraph (c)(2) of this section
have been transferred in this transaction. P
has received a copy of the program, however,
and, therefore, under paragraph (c)(1)(ii) of
this section, P has acquired solely a
copyrighted article.
(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.
Example 2. (i) Facts. The facts are the same
as those in Example 1, except that instead of
selling disks, Corp A, the U.S. corporation,
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) None of the copyright
rights described in paragraph (c)(2) of this
section have passed to P. 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. Therefore, P has
acquired a copyrighted article.
(B) As in 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.
Example 3. (i) Facts. The facts are the same
as those in 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 (c)(2) of
this section, P has received no copyright
rights. Because P has received a copy of the
program under paragraph (c)(1)(ii) of this
section, he has, therefore, received a
copyrighted article.
(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 computer programs
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.
Example 4. (i) Facts. The facts are the same
as those in Example 2, where P, the Country
Z resident, receives Program X from Corp A’s
home page on the Internet, except that P may
only use Program X for a period of one week
at the end of which an electronic lock is
activated and the program can no longer be
accessed. Thereafter, if P wishes to use
Program X, it must return to the home page
and pay Corp A to send an electronic key to
reactivate the program for another week.
(ii) Analysis. (A) As in Example 3, under
paragraph (c)(2) of this section, P has not
received any copyright rights. P has received
a copy of the program, and under paragraph
(g)(2) of this section, the means of
transmission is irrelevant. P has, therefore,
under paragraph (c)(1)(ii) of this section,
received a copyrighted article.
(B) As in 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. 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

52979

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 computer programs as
provided in paragraph (f)(3) of this section,
the result in this Example 4 is the same as
in Example 3.
Example 5. (i) Facts. Corp A, a U.S.
corporation, 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.
(ii) Analysis. (A) Although Corp A has
transferred a disk with a copy of Program X
on it to Corp B, under paragraph (c)(1)(i) of
this section because this transfer is
accompanied by a copyright right identified
in paragraph (c)(2)(i) of this section, this
transaction is a transfer solely of copyright
rights, not of copyrighted articles. For
purposes of paragraph (b)(2) of this section,
the disk containing a copy of Program X is
a de minimis component of the transaction.
(B) 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.)
Example 6. (i) Facts. Corp A, a U.S.
corporation, transfers a disk containing
Program X to Corp B, a Country Z
corporation, and grants Corp B the non
exclusive right to reproduce (either directly
or by contracting with either Corp A or
another person to do so) and distribute for
sale to the public an unlimited number of
disks 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.
(ii) Analysis. (A) As in Example 5, the
transfer of the disk containing the copy of the
program does not constitute the transfer of a
copyrighted article under paragraph (c)(1) of
this section because Corp B has also acquired
a copyright right under paragraph (c)(2)(i) of
this section, the right to reproduce and
distribute to the public. For purposes of
paragraph (b)(2) of this section, the disk

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containing Program X is a de minimis
component of the transaction.
(B) Taking into account all of the facts and
circumstances, there has been a license of
Program X to Corp B, and the payments made
by Corp B are royalties. 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.
Example 7. (i) Facts. Corp C, a distributor
in Country Z, enters into an agreement with
Corp A, a U.S. corporation, 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
Example 1).
(ii) Analysis. (A) Corp C has not acquired
any copyright rights under paragraph (c)(2) of
this section with respect to Program X. It has
acquired individual copies of Program X,
which it may sell to others. The use of the
term license is not dispositive under
paragraph (g)(1) of this section. Under
paragraph (c)(1)(ii) of this section, Corp C has
acquired copyrighted articles.
(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.
Example 8. (i) Facts. Corp A, a U.S.
corporation, 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.
(ii) Analysis. The analysis is the same as
in Example 6. Under paragraph (c)(2)(i) of
this section, Corp D has acquired a copyright
right enabling it to exploit Program X by
copying it on to the hard drives of the
computers that it manufactures and then
sells. For purposes of paragraph (b)(2) of this
section, the disk containing Program X is a
de minimis component of the transaction.
Taking into account all of the facts and
circumstances, Corp D has not, however,
acquired all substantial rights in the
copyright to Program X (for example, the
term of the agreement is less than the
remaining life of the copyright). Under
paragraph (f)(1) of this section, this
transaction is, therefore, a license of Program
X to Corp D rather than a sale and the
payments made by Corp D are royalties. (The
result would be the same if Corp D included

with the computers it sells an archival copy
of Program X on a floppy disk.)
Example 9. (i) Facts. The facts are the same
as in 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 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) As in Example 7 (unlike
Example 8) no copyright right identified in
paragraph (c)(2) of this section has been
transferred. Corp D acquires the disks
without the right to reproduce and distribute
publicly further copies of Program X. This is
therefore the transfer of copyrighted articles
under paragraph (c)(1)(ii) of this section.
(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.)
Example 10. (i) Facts. Corp A, a U.S.
corporation, transfers a disk containing
Program X to Corp E, a Country Z
corporation, 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 onetime 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 peruser 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) 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 under
paragraph (c)(2) of this section. Therefore,
under paragraph (c)(1)(ii) of this section, this
transaction is a transfer of copyrighted
articles (50 copies of Program X).
(B) Taking into account all of the facts and
circumstances, P 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 corporations

that had a relationship to Corp E specified in
paragraph (g)(3) of this section.
Example 11. (i) Facts. The facts are the
same as in 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 Example 10, under
paragraph (c)(2) of this section, no copyright
right has been transferred, and, thus, under
paragraph (c)(1)(ii) of this section, this
transaction will be classified as the transfer
of a copyrighted article. 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
corporations that had a relationship to Corp
E specified in paragraph (g)(3) of this section.
Example 12. (i) Facts. The facts are the
same as in Example 11, except that Corp E
pays a monthly fee to Corp A, the U.S.
corporation, 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
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 to Corp E but
the agreement does not allocate the monthly
fee between 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 at the time the contract is entered
into but is expected to be de minimis. The
agreement specifically provides that Corp E
has not thereby been granted an option to
purchase Program X.
(ii) Analysis. (A) Corp E has received no
copyright rights under paragraph (c)(2) of this
section. Corp A has not provided any
services described in paragraph (d) of this
section. Based on all the facts and
circumstances of the transaction, Corp A has
provided de minimis technical services to
Corp E. Therefore, under paragraph (c)(1)(ii)
of this section, the transaction is a transfer of
a copyrighted article.
(B) 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

Federal Register / Vol. 63, No. 191 / Friday, October 2, 1998 / Rules and Regulations
advantageous (or, indeed, any) terms once a
certain amount of money has been paid to
Corp A or a certain period of time 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.
Example 13. (i) Facts. The facts are the
same as in 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
Example 10, paragraph (ii)(B), the transfer of
the program will be treated as a sale of a
copyrighted article rather than as a lease.
Example 14. (i) Facts. Corp G, a Country
Z corporation, enters into a contract with
Corp A, a U.S. corporation, 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 Example 10.
(ii) Analysis. (A) As in Example 10, no
copyright rights are being transferred under
paragraph (c)(2) of this section. In addition,
since no copyright rights are being
transferred to Corp G, this transaction does
not involve the provision of services by Corp
A under paragraph (d) of this section. This
transaction will be classified, therefore, as a
transfer of copyrighted articles under
paragraph (c)(1)(ii) of this section.
(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.
Example 15. (i) Facts. Corp H, a Country
Z corporation, enters into a license agreement
for a new computer program. Program Q is
to be written by Corp A, a U.S. corporation.
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. Taking into account all of the
facts and circumstances, Corp A is treated as
providing services to Corp H. Under
paragraph (d) of this section, Corp A is
treated as providing services to Corp H
because Corp H bears all of the risks of loss
associated with the development of Program
Q and is the owner of all copyright rights in
Program Q. 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).
Example 16. (i) Facts. Corp A, a U.S.
corporation, and Corp I, a Country Z
corporation, agree that a development
engineer employed by Corp A will travel to
Country Z to provide know-how 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. This transaction contains the
elements of know-how specified in paragraph
(e) of this section. Therefore, this transaction
will be treated as the provision of know-how.
Example 17 (i) Facts. Corp A, a U.S.
corporation, transfers a disk containing
Program Y to Corp E, a Country Z
corporation, 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. No element of these libraries is
a significant component of any overall new
program. 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 Example 1.
(ii) Analysis. (A) No non-de minimis
copyright rights described in paragraph (c)(2)
of this section have passed to Corp E. For
purposes of paragraph (b)(2) of this section,
the right to distribute the libraries in
conjunction with the programs created using
Program Y is a de minimis component of the
transaction. Because Corp E has received a
copy of the program under paragraph
(c)(1)(ii) of this section, it has received a
copyrighted article.
(B) 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.
Example 18 (i) Facts. (A) Corp A, a U.S.
corporation, transfers a disk containing
Program X to Corp E, a country Z
Corporation. The disk contains both the
object code and the source code to Program
X and the license agreement grants Corp E
the right to—

52981

(1) Modify the source code in order to
correct minor errors and make minor
adaptations to Program X so it will function
on Corp E’s computer; and
(2) Recompile the modified source code.
(B) 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 Example 1.
(ii) Analysis. (A) No non-de minimis
copyright rights described in paragraph (c)(2)
of this section have passed to Corp E. For
purposes of paragraph (b)(2) of this section,
the right to modify the source code and
recompile the source code in order to create
new code to correct minor errors and make
minor adaptations is a de minimis
component of the transaction. Because Corp
E has received a copy of the program under
paragraph (c)(1)(ii) of this section, it has
received a copyrighted article.
(B) 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.

(i) Effective date—(1) General. This
section applies to transactions occurring
pursuant to contracts entered into on or
after December 1, 1998.
(2) Elective transition rules—(i)
Contracts entered into in taxable years
ending on or after October 2, 1998. A
taxpayer may elect to apply this section
to transactions occurring pursuant to
contracts entered into in taxable years
ending on or after October 2, 1998. A
taxpayer that makes an election under
this paragraph (i)(2)(i) must apply this
section to all contracts entered into in
taxable years ending on or after October
2, 1998.
(ii) Contracts entered into before
October 2, 1998. A taxpayer may elect
to apply this section to transactions
occurring in taxable years ending on or
after October 2, 1998 pursuant to
contracts entered into before October 2,
1998 provided the taxpayer would not
be required under this section to change
its method of accounting as a result of
such election, or the taxpayer would be
required to change its method of
accounting but the resulting section
481(a) adjustment would be zero. A
taxpayer that makes an election under
this paragraph (i)(2)(ii) must apply this
section to all transactions occurring in
taxable years ending on or after October
2, 1998 pursuant to contracts entered
into before October 2, 1998.
(3) Manner of making election.
Taxpayers may elect, under paragraph
(i)(2)(i) or (i)(2)(ii) of this section, to
apply this section, by treating the
transactions in accordance with these
regulations on their original tax return.
(4) Examples. The following examples
illustrate application of the transition

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rule of paragraph (i)(2)(ii) of this
section:
Example 1. Corp A develops computer
programs for sale to third parties. Corp A
uses an overall accrual method of accounting
and files its tax return on a calendar-year
basis. In year 1, Corp A enters into a contract
to deliver a computer program in that year,
and to provide updates for each of the
following four years. Under the contract, the
computer program and the updates are priced
separately, and Corp A is entitled to receive
payments for the computer program and each
of the updates upon delivery. Assume Corp
A properly accounts for the contract as a
contract for the provision of services. Corp A
properly includes the payments under the
contract in gross income in the taxable year
the payments are received and the computer
program or updates are delivered. Corp A
properly deducts the cost of developing the
computer program and updates when the
costs are incurred. Year 3 includes October
2, 1998. Assume under the rules of this
section, the provision of updates would
properly be accounted for as the transfer of
copyrighted articles. If Corp A made an
election under paragraph (i)(2)(ii) of this
section, Corp A would not be required to
change its method of accounting for income
under the contract as a result of the election.
Corp A would also not be required to change
its method of accounting for the cost of
developing the computer program and the
updates under the contract as a result of the
election. Therefore, under paragraph (i)(2)(ii)
of this section, Corp A may elect to apply the
provisions of this section to the updates
provided in years 3, 4, and 5, because Corp
A is not required to change from its accrual
method of accounting for the contract as a
result of the election.
Example 2. Corp A develops computer
programs for sale to third parties. Corp A
uses an overall accrual method of accounting
and files its tax return on a calendar-year
basis. In year 1, Corp A enters into a contract
to deliver a computer program and to provide
one update the following year. Under the
contract, the computer program and the
update are priced separately, and Corp A is
entitled to receive payment for the computer
program and the update upon delivery of the
computer program. Assume Corp A properly
accounts for the contract as a contract for the
provision of services. Corp A properly
includes the portion of the payment relating
to the computer program in gross income in
year 1, the taxable year the payment is
received and the program delivered. Corp A
properly includes the portion of the payment
relating to the update in gross income in year
2, the taxable year the update is provided,
under Rev. Proc. 71–21, 1971–2 CB 549 (see
§ 601.601 (d)(2) of this chapter). Corp A
properly deducts the cost of developing the
computer program and update when the
costs are incurred. Year 2 includes October
2, 1998. Assume under the rules of this
section, provision of the update would
properly be accounted for as the transfer of
a copyrighted article. If Corp A made an

election under paragraph (i)(2)(ii) of this
section, Corp A would be required to change
its method of accounting for deferring
income under its contract as a result of the
election. However, the section 481(a)
adjustment would be zero because the
portion of the payment relating to the update
would be includible in gross income in year
2, the taxable year the update is provided,
under both Rev. Proc. 71–21 and § 1.451–5.
Corp A would not be required to change its
method of accounting for the cost of
developing the computer program and the
update under the contract as a result of the
election. Therefore, under paragraph (i)(2)(ii)
of this section, Corp A may elect to apply the
provisions of this section to the update in
year 2, because the section 481(a) adjustment
resulting from the change in method of
accounting for deferring advance payments
under the contract is zero, and because Corp
A is not required to change from its accrual
method of accounting for the cost of
developing the computer program and
updates under the contract as a result of the
election.
Example 3. Assume the same facts as in
Example 1 except that Corp A is entitled to
receive payments for the computer program
and each of the updates 30 days after
delivery. Corp A properly includes the
amounts due under the contract in gross
income in the taxable year the computer
program or updates are provided. Assume
that Corp A properly uses the nonaccrualexperience method described in section
448(d)(5) and § 1.448–2T to account for
income on its contracts. If Corp A made an
election under paragraph (i)(2)(ii) of this
section, Corp A would be required to change
from the nonaccrual-experience method for
income as a result of the election, because the
method is only available with respect to
amounts to be received for the performance
of services. Therefore, Corp A may not elect
to apply the provisions of this section to the
updates provided in years 3, 4, and 5, under
paragraph (i)(2)(ii) of this section, because
Corp A would be required to change from the
nonaccrual-experience method of accounting
for income on the contract as a result of the
election.

(j) Change in method of accounting
required by this section—(1) Consent. A
taxpayer is granted consent to change its
method of accounting for contracts
involving computer programs, to
conform with the classification
prescribed in this section. The consent
is granted for contracts entered into on
or after December 1, 1998, or in the case
of a taxpayer making an election under
paragraph (i)(2)(i) of this section, the
consent is granted for contracts entered
into in taxable years ending on or after
October 2, 1998. In addition, a taxpayer
that makes an election under paragraph
(i)(2)(ii) of this section is granted
consent to change its method of
accounting for any contract with
transactions subject to the election, if

the taxpayer is required to change its
method of accounting as a result of the
election.
(2) Year of change. The year of change
is the taxable year that includes
December 1, 1998, or in the case of a
taxpayer making an election under
paragraph (i)(2)(i) or (i)(2)(ii) of this
section, the taxable year that includes
October 2, 1998.
(k) Time and manner of making
change in method of accounting—(1)
General. A taxpayer changing its
method of accounting in accordance
with this section must file a Form 3115,
Application for Change in Method of
Accounting, in duplicate. The taxpayer
must type or print the following
statement at the top of page 1 of the
Form 3115: ‘‘FILED UNDER TREASURY
REGULATION § 1.861–18.’’ The original
Form 3115 must be attached to the
taxpayers original return for the year of
change. A copy of the Form 3115 must
be filed with the National Office no later
than when the original Form 3115 is
filed for the year of change.
(2) Copy of Form 3115. The copy
required by this paragraph (k)(l) to be
sent to the national office should be sent
to the Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A,
P.O. Box 7604, Benjamin Franklin
Station, Washington DC 20044 (or in the
case of a designated private delivery
service: Commissioner of Internal
Revenue, Attention: CC:DOM:IT&A,
1111 Constitution Avenue, NW.,
Washington, DC 20224).
(3) Effect of consent and Internal
Revenue Service review. A change in
method of accounting granted under
this section is subject to review by the
district director and the national office
and may be modified or revoked in
accordance with the provisions of Rev.
Proc. 97–37 (1997–33 IRB 18) (or its
successors) (see § 601.601(d)(2) of this
chapter).
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 4. In § 602.101, paragraph (c) is
amended by adding an entry to the table
in numerical order to read as follows:
§ 602.101

*

*

OMB Control numbers.

*

(c) * * *

*

*

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CFR part or section where identified and described

Current
OMB control No.

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1.861–18 ..................................................................................................................................................................................................

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1545–1594

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Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
Approved: April 1, 1998.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 98–26475 Filed 9–30–98; 8:45 am]
BILLING CODE 4830–01–U

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rule located in the final rules section of
the August 25, 1998, Federal Register.
List of Subjects in 40 CFR Part 52
Environmental protection, Air
pollution control, Incorporation by
reference, Intergovernmental relations,
Nitrogen dioxide, Ozone, Reporting and
recordkeeping requirements.

40 CFR PART 52

Dated: September 22, 1998.
A. Stanley Meiburg,
Acting Regional Administrator, Region 4.
[FR Doc. 98–26457 Filed 10–1–98; 8:45 am]

[GA–34–3–9819a; FRL–6170–8]

BILLING CODE 6560–50–P

Approval And Promulgation Of
Implementation Plans Georgia:
Approval of Revisions to the Georgia
State Implementation Plan

FEDERAL COMMUNICATIONS
COMMISSION

ENVIRONMENTAL PROTECTION
AGENCY

Environmental Protection
Agency (EPA).
ACTION: Direct final rule; withdrawal.
AGENCY:

SUMMARY: On August 25, 1998, EPA
published a direct final rule (63 FR
45172) approving, and an accompanying
proposed rule (63 FR 45208) proposing
to approve the Georgia Post 1996 Rateof-Progress Plan (9 percent plan) which
was submitted on November 15, 1993,
and amended on June 17, 1996. As
stated in the Federal Register
document, if adverse or critical
comments were received by September
24, 1998, timely notice of withdrawal
would be published in the Federal
Register. Therefore, due to receiving an
adverse comment within the comment
period, EPA is withdrawing the direct
final rule and will address all public
comments received in a subsequent
final rule based on the proposed rule.
EPA will not institute a second
comment period on this document.
DATES: The direct final rule published at
63 FR 45172 (August 25, 1998) is
withdrawn as of October 2, 1998.
FOR FURTHER INFORMATION CONTACT:
Scott M. Martin, Regulatory Planning
Section, Air Planning Branch, Air,
Pesticides & Toxics Management
Division, Region 4 Environmental
Protection Agency, 61 Forsyth Street,
SW, Atlanta, Georgia 30303–3104. The
telephone number is 404/562–9036.
SUPPLEMENTARY INFORMATION: See the
information provided in the direct final

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Management and Budget (‘‘OMB’’)
approved the new information
collections in the Accelerated Docket
rules, pursuant to OMB Control No.
3060–0411. Accordingly, the
Accelerated Docket rules in sections
1.115, 1.721, 1.724, 1.726, 1.729, 1.730
and 1.733 will be effective on October
5, 1998. This document satisfies the
Commission’s commitment to announce
the effective date of these sections.
List of Subjects in 47 CFR Part 1
Communications common carriers.
Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 98–26566 Filed 10–1–98; 8:45 am]
BILLING CODE 6712–01–M

47 CFR Part 1
[CC Docket No. 96–238; FCC 98–154]

Procedures To Be Followed When
Formal Complaints Are Filed Against
Common Carriers
Federal Communications
Commission.
ACTION: Final rule; announcement of
effective date.
AGENCY:

This rule announces the
effective date for information collection
requirements in the rule published
August 4, 1998. That rule created an
Accelerated Docket that provides for a
decision, within 60 days, of formal
complaint proceedings that are accepted
onto the Accelerated Docket. The
Accelerated Docket will stimulate the
growth of competition for
telecommunications services by
ensuring the prompt resolution of
disputes that may arise between market
participants as well as allow for the
prompt disposal of complaints that are
without substantial merit.
DATES: Sections 1.115, 1.721, 1.724,
1.726, 1.729, 1.730 and 1.733, published
at 63 FR 41433 (August 4, 1998) are
effective October 5, 1998.
FOR FURTHER INFORMATION CONTACT:
Dorothy Attwood or Frank Lamancusa,
Common Carrier Bureau, Enforcement
Division (202) 418–0700.
SUPPLEMENTARY INFORMATION: On
September 9, 1998, the Office of
SUMMARY:

FEDERAL COMMUNICATIONS
COMMISSION
47 CFR Part 73
[MM Docket No. 98–18; RM–9204, RM–9326]

Radio Broadcasting Services; Macon,
Hampton and Roswell, GA
Federal Communications
Commission.
ACTION: Final rule.
AGENCY:

The Commission, at the
request of U.S. Broadcasting Limited
Partnership, reallots Channel 300C1
from Macon, GA, to Hampton, GA, as
the community’s first local aural
service, and modifies the license of
Station WPEZ to specify Hampton as its
community of license. See 63 FR 10354,
March 3, 1998. Channel 300C1 can be
allotted to Hampton, GA, in compliance
with the Commission’s minimum
distance separation requirements with a
site restriction of 19.8 kilometers (12.3
miles) southwest, at coordinates 33–15–
04 North Latitude and 84–25–10 West
Longitude, to accommodate petitioner’s
desired transmitter site. In addition, the
proposal must conform to the technical
requirements of Section 73.1030(c)(1)–
(5) of the Commission’s Rules regarding
protection to the Commission’s
monitoring stations at Powder Springs,
GA. At the request of Dogwood
Communications, Inc., its
SUMMARY: