Internal Revenue Bulletin 2019-36 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 2019–36
September 3, 2019
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
EMPLOYEE PLANS
NOT 2019-48, page 678.
This notice sets forth updates on the corporate bond month-
ly yield curve, the corresponding spot segment rates for Au-
gust 2019 used under § 417(e)(3)(D), the 24-month average
segment rates applicable for August 2019, and the 30-year
Treasury rates, as reflected by the application of § 430(h)(2)
(C)(iv).
REV RUL 2019-19, page 674.
This revenue ruling provides that an individual’s failure to
cash a distribution check from a qualified plan does not per-
mit the individual to exclude the amount of the designated
distribution from gross income under § 402(a) and does not
alter an employer’s withholding and reporting obligations un-
der §§ 3405 and 6047(d).
INCOME TAX
REG-130700-14, page 681.
This document contains proposed regulations regarding the
classification of cloud transactions for purposes of the in-
ternational provisions of the Internal Revenue Code. These
proposed regulations also modify the rules for classifying
transactions involving transfers of computer programs, in-
cluding by applying the rules to transfers of digital content.
REV RUL 2019-20, page 675.
Federal rates; adjusted federal rates; adjusted federal long-
term rate, the long-term exempt rate, and the blended annual
rate. For purposes of sections 382, 1274, 1288, 7872 and
other sections of the Code, tables set forth the rates for
September 2019.
Finding Lists begin on page ii.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and en-
force the law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing of-
ficial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of inter-
nal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rul-
ings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
September 3, 2019 Bulletin No. 2019–36

Part I.
Section 402.—Taxability of
beneficiary of employees’
trust
Failure To Cash a Distribution Check From a Quali-
fied Retirement Plan
(Also §§ 3405, 6047)
Rev. Rul. 2019-19
ISSUES
(1) Under the facts presented, does In-
dividual A’s failure to cash the distribution
check she received in 2019 permit her
to exclude the amount of the designated
distribution from her gross income in that
year under § 402(a) of the Internal Reve-
nue Code?
(2) Does Individual A’s failure to cash
the distribution check she received alter
Employer M’s obligations with respect to
withholding under § 3405?
(3) Does Individual A’s failure to cash
the distribution check she received alter
Employer M’s obligations with respect to
reporting under § 6047(d)?
FACTS
Employer M is the plan administrator
of Plan X, a qualified retirement plan un-
der § 401(a) that does not include a qual-
ified Roth contribution program under
§ 402A(b). A distribution of $900 is re-
quired to be made from Plan X to Individ-
ual A in 2019. Individual A has no invest-
ment in the contract within the meaning
of § 72 with respect to her Plan X benefit,
has a calendar year taxable year, and has
never made a withholding election with
respect to her Plan X benefit. Employer
M makes the required $900 distribution,
a designated distribution within the mean-
ing of § 3405(e)(1), by withholding tax as
required under § 3405(d)(2) and mailing a
check for the remainder to Individual A.
Although Individual A receives the check
and could cash it in 2019, she does not do
so.
1
Individual A does not make a rollover
contribution with respect to any portion
of the designated distribution, and no oth-
er exception to income inclusion under
§ 402(a) applies.
LAW AND ANALYSIS
(1) Includibility in Gross Income
Section 402(a) provides that, except
as otherwise provided in § 402 (for ex-
ample, a rollover under § 402(c)(1)), any
amount actually distributed to a distrib-
utee by an employees’ trust described in
§ 401(a) which is exempt from tax un-
der § 501(a) is taxable to the distributee,
in the taxable year of the distributee in
which distributed, under § 72. Section
72 provides rules relating to inclusion in
gross income of amounts received from
qualified plans and certain other arrange-
ments.
Under § 402(a), the amount of the
designated distribution is actually dis-
tributed from Plan X to Individual A in
2019. Because Individual A has no in-
vestment in the contract within the mean-
ing of § 72 and no exception to § 402(a)
applies, the amount of the designated
distribution is includible in her gross in-
come in 2019. Individual A’s failure to
cash the distribution check she received
in 2019 does not permit her to exclude
the amount of the designated distribution
from her gross income in that year under
§ 402(a).
(2) Withholding
Section 3405 provides federal income
tax withholding rules with respect to
designated distributions as defined un-
der § 3405(e)(1). With respect to speci-
fied plans, including a plan described in
§ 401(a), § 3405(d)(2) provides that the
plan administrator shall withhold and be
liable for payment of the tax required to be
withheld under § 3405 unless the plan ad-
ministrator directs the payor to withhold
the tax and provides the payor with such
information as the Secretary may require
by regulations.
Employer M, as the plan administrator
of Plan X, withheld tax as required under
§ 3405(d)(2) from Individual A’s desig-
nated distribution.
2
Individual A’s failure
to cash the distribution check she received
does not alter Employer M’s obligations
with respect to withholding of tax, and
liability for payment of that tax, under
§ 3405.
(3) Reporting
Section 6047(d) provides that the Sec-
retary of the Treasury shall, by forms or
regulations, require the employer main-
taining a plan from which designated dis-
tributions (as defined in § 3405(e)(1)) may
be made, or the plan administrator of that
plan, to make returns and reports regard-
ing the plan. However, no such return or
report may be required with respect to dis-
tributions to any person during any year
unless the distributions aggregate $10 or
more.
Form 1099-R, Distributions From
Pensions, Annuities, Retirement or Prof-
it-Sharing Plans, IRAs, Insurance Con-
tracts, etc., is used to satisfy the reporting
obligations under § 6047(d). Under the
2019 instructions to Form 1099-R, a Form
1099-R must be filed for each person to
whom a designated distribution of $10 or
more has been made, and the total amount
of the distribution (before income tax or
other withholding) must be reported in
Box 1. In addition, under those instruc-
tions, the taxable amount of the distribu-
tion (including income tax withheld) must
be reported in Box 2a, and the federal
income tax withheld must be reported in
Box 4.
The Plan X distribution to Individual
A, including both the amount of the check
and the amount withheld, is a designated
1
For purposes of this revenue ruling, whether Individual A keeps the check, sends it back, destroys it, or cashes it in a subsequent year is irrelevant.
2
As described in the facts, Employer M withheld tax as required under § 3405(d)(2) from the designated distribution. However, under certain circumstances, withholding with respect to a
designated distribution is not required. For example, under § 31.3405(c)-1, Q&A-14, no withholding is required if the amount of an eligible rollover distribution (as defined in § 402(f)(2)(A))
is less than $200 (subject to specified aggregation rules).
September 3, 2019 674 Bulletin No. 2019–36

distribution under § 3405(e)(1) that ex-
ceeds the reporting threshold. According-
ly, Employer M is required to report that
designated distribution in Box 1 of a Form
1099-R for 2019. Because Individual A
has no investment in the contract within
the meaning of § 72 and no exception to
income inclusion under § 402(a) applies,
Employer M must report the same amount
in Box 2a as in Box 1 and must report the
federal income tax withheld in Box 4. In-
dividual A’s failure to cash the distribution
check she received does not alter Employ-
er M’s obligations with respect to report-
ing under § 6047(d).
HOLDINGS
(1) Individual A’s failure to cash
the distribution check she received in
2019 does not permit her to exclude the
amount of the designated distribution
from her gross income in that year under
§ 402(a).
(2) Individual A’s failure to cash the
distribution check she received does not
alter Employer M’s obligations with re-
spect to withholding under § 3405.
(3) Individual A’s failure to cash the
distribution check she received does not
alter Employer M’s obligations with re-
spect to reporting under § 6047(d).
The Department of the Treasury and
the Internal Revenue Service continue to
analyze issues that arise in other situations
involving uncashed checks from eligible
retirement plans described in § 402(c)(8)
(B), including situations involving miss-
ing individuals with benefits under those
plans.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Angelique Carrington of the Of-
fice of Associate Chief Counsel (Employ-
ee Benefits, Exempt Organizations, and
Employment Taxes). Ms. Carrington may
be reached at (202) 317-4148 (not a toll-
free number).

Section 1274.—
Determination of Issue
Price in the Case of Certain
Debt Instruments Issued for
Property
(Also Sections 42, 280G, 382, 467, 468, 482, 483,
1288, 7520, 7872.)
Rev. Rul. 2019-20
This revenue ruling provides various
prescribed rates for federal income tax
purposes for September 2019 (the current
month). Table 1 contains the short-term,
mid-term, and long-term applicable feder-
al rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(1) for buildings placed in
service during the current month. Howev-
er, under section 42(b)(2), the applicable
percentage for non-federally subsidized
new buildings placed in service after July
30, 2008, shall not be less than 9%. Final-
ly, Table 5 contains the federal rate for de-
termining the present value of an annuity,
an interest for life or for a term of years, or
a remainder or a reversionary interest for
purposes of section 7520.
Bulletin No. 2019–36 675 September 3, 2019

September 3, 2019 676 Bulletin No. 2019–36
REV. RUL. 2019-20 TABLE 1
Applicable Federal Rates (AFR) for September 2019
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR1.85%1.84%1.84%1.83%
110% AFR2.03%2.02%2.01%2.01%
120% AFR2.22%2.21%2.20%2.20%
130% AFR2.40%2.39%2.38%2.38%
Mid-term
AFR1.78%1.77%1.77%1.76%
110% AFR 1.96%1.95%1.95%1.94%
120% AFR2.13%2.12%2.11%2.11%
130% AFR2.31%2.30%2.29%2.29%
150% AFR2.68%2.66%2.65%2.65%
175% AFR3.12%3.10%3.09%3.08%
Long-term
AFR2.21%2.20%2.19%2.19%
110% AFR2.43%2.42%2.41%2.41%
120% AFR2.66%2.64%2.63%2.63%
130% AFR2.88%2.86%2.85%2.84%
REV. RUL. 2019-20 TABLE 2
Adjusted AFR for September 2019
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term adjusted AFR1.40%1.40%1.40%1.40%
Mid-term adjusted AFR1.34%1.34%1.34%1.34%
Long-term adjusted AFR1.68%1.67%1.67%1.66%
REV. RUL. 2019-20 TABLE 3
Rates Under Section 382 for September 2019
Adjusted federal long-term rate for the current month1.68%
Long-term tax-exempt rate for ownership changes during the current month (the highest of
the adjusted federal long-term rates for the current month and the prior two months.)
1.89%
REV. RUL. 2019-20 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for September 2019
Note: Under section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after July
30, 2008, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.46%
Appropriate percentage for the 30% present value low-income housing credit 3.20%

Bulletin No. 2019–36 677 September 3, 2019
REV. RUL. 2019-20 TABLE 5
Rate Under Section 7520 for September 2019
Applicable federal rate for determining the present value of an annuity, an interest for life or
a term of years, or a remainder or reversionary interest
2.2%
Section 42.—Low-Income
Housing Credit
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 280G.—Golden
Parachute Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 382.—Limitation
on Net Operating Loss
Carryforwards and
Certain Built-In Losses
Following Ownership
Change
The adjusted applicable federal long-term rate
is set forth for the month of September 2019. See
Rev. Rul. 2019-20, page 675.

Section 467.—Certain
Payments for the Use of
Property or Services
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 482.—Allocation
of Income and Deductions
Among Taxpayers
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 483.—Interest on
Certain Deferred Payments
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of September 2019. See Rev. Rul. 2019-20, page 675.

Section 7520.—Valuation
Tables
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

Section 7872.—Treatment
of Loans With Below-
Market Interest Rates
The applicable federal short-term, mid-term,
and long-term rates are set forth for the month of
September 2019. See Rev. Rul. 2019-20, page 675.

September 3, 2019 678 Bulletin No. 2019–36
Part III.
Update for Weighted
Average Interest Rates,
Yield Curves, and Segment
Rates
Notice 2019-48
This notice provides guidance on the
corporate bond monthly yield curve, the
corresponding spot segment rates used
under § 417(e)(3), and the 24-month aver-
age segment rates under § 430(h)(2) of the
Internal Revenue Code. In addition, this
notice provides guidance as to the interest
rate on 30-year Treasury securities under
§ 417(e)(3)(A)(ii)(II) as in effect for plan
years beginning before 2008 and the 30-
year Treasury weighted average rate under
§ 431(c)(6)(E)(ii)(I).
YIELD CURVE AND SEGMENT
RATES
Section 430 specifies the minimum
funding requirements that apply to sin-
gle-employer plans (except for CSEC
plans under § 414(y)) pursuant to § 412.
Section 430(h)(2) specifies the inter-
est rates that must be used to determine
a plan’s target normal cost and funding
target. Under this provision, present val-
ue is generally determined using three
24-month average interest rates (“segment
rates”), each of which applies to cash
flows during specified periods. To the ex-
tent provided under § 430(h)(2)(C)(iv),
these segment rates are adjusted by the ap-
plicable percentage of the 25-year average
segment rates for the period ending Sep-
tember 30 of the year preceding the cal-
endar year in which the plan year begins.
1

However, an election may be made under
§ 430(h)(2)(D)(ii) to use the monthly yield
curve in place of the segment rates.
Notice 2007-81, 2007-44 I.R.B. 899,
provides guidelines for determining the
monthly corporate bond yield curve, and
the 24-month average corporate bond
segment rates used to compute the target
normal cost and the funding target. Con-
sistent with the methodology specified in
Notice 2007-81, the monthly corporate
bond yield curve derived from July 2019
data is in Table 2019-7 at the end of this
notice. The spot first, second, and third
segment rates for the month of July 2019
are, respectively, 2.34, 3.38, and 4.01.
The 24-month average segment rates
determined under § 430(h)(2)(C)(i)
through (iii) must be adjusted pursuant to
§ 430(h)(2)(C)(iv) to be within the appli-
cable minimum and maximum percentag-
es of the corresponding 25-year average
segment rates. For plan years beginning
before 2021, the applicable minimum per-
centage is 90% and the applicable maxi-
mum percentage is 110%. The 25-year
average segment rates for plan years be-
ginning in 2018 and 2019 were published
in Notice 2017-50, 2017-41 I.R.B. 280,
and Notice 2018-73, 2018-40 I.R.B. 526,
respectively.
24-MONTH AVERAGE CORPORATE
BOND SEGMENT RATES
The three 24-month average corporate
bond segment rates applicable for August
2019 without adjustment for the 25-year
average segment rate limits are as follows:
24-Month Average Segment Rates Without 25-Year Average Adjustment
Applicable Month First Segment Second Segment Third Segment
August 2019 2.78 3.94 4.41
Based on § 430(h)(2)(C)(iv), the
24-month averages applicable for August
2019, adjusted to be within the applicable
minimum and maximum percentages of
the corresponding 25-year average seg-
ment rates, are as follows:
Adjusted 24-Month Average Segment Rates
For Plan Years
Beginning InApplicable MonthFirst SegmentSecond SegmentThird Segment
2018August 20193.925.526.29
2019August 20193.745.356.11
30-YEAR TREASURY SECURITIES
INTEREST RATES
Section 431 specifies the minimum
funding requirements that apply to multi-
employer plans pursuant to § 412. Section
431(c)(6)(B) specifies a minimum amount
for the full-funding limitation described in
§ 431(c)(6)(A), based on the plan’s current
liability. Section 431(c)(6)(E)(ii)(I) pro-
vides that the interest rate used to calculate
current liability for this purpose must be
no more than 5 percent above and no more
than 10 percent below the weighted aver-
age of the rates of interest on 30-year Trea-
sury securities during the four-year period
ending on the last day before the beginning
of the plan year. Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining
the weighted average interest rate. The rate
of interest on 30-year Treasury securities
1
Pursuant to § 433(h)(3)(A), the 3rd segment rate determined under § 430(h)(2)(C) is used to determine the current liability of a CSEC plan (which is used to calculate the minimum amount
of the full funding limitation under § 433(c)(7)(C)).

Bulletin No. 2019–36 679 September 3, 2019
for July 2019 is 2.57 percent. The Service
determined this rate as the average of the
daily determinations of yield on the 30-
year Treasury bond maturing in May 2049.
For plan years beginning in August 2019,
the weighted average of the rates of inter-
est on 30-year Treasury securities and the
permissible range of rates used to calculate
current liability are as follows:
Treasury Weighted Average Rates
For Plan Years
Beginning In
30-Year Treasury
Weighted Average
Permissible Range
90% to 105%
August 20192.922.63 to 3.06
MINIMUM PRESENT VALUE
SEGMENT RATES
In general, the applicable interest rates
under § 417(e)(3)(D) are segment rates
computed without regard to a 24-month
average. Notice 2007-81 provides guide-
lines for determining the minimum pres-
ent value segment rates. Pursuant to that
notice, the minimum present value seg-
ment rates determined for July 2019 are
as follows:
Minimum Present Value Segment Rates
Month First Segment Second Segment Third Segment
July 2019 2.34 3.38 4.01
DRAFTING INFORMATION
The principal author of this notice is
Tom Morgan of the Office of the Asso-
ciate Chief Counsel (Employee Benefits,
Exempt Organizations, and Employment
Taxes). However, other personnel from
the IRS participated in the development
of this guidance. For further information
regarding this notice, contact Mr. Morgan
at 202-317-6700 or Paul Stern at 202-317-
8702 (not toll-free numbers).

September 3, 2019 680 Bulletin No. 2019–36
Table 2019-7
Monthly Yield Curve for July 2019
Derived from July 2019 Data
MaturityYieldMaturityYieldMaturityYieldMaturityYieldMaturityYield
0.52.2820.53.8340.54.0360.54.1080.54.13
1.02.3021.03.8441.04.0361.04.1081.04.13
1.52.3121.53.8541.54.0361.54.1081.54.13
2.02.3122.03.8642.04.0362.04.1082.04.13
2.52.3222.53.8642.54.0462.54.1082.54.14
3.02.3223.03.8743.04.0463.04.1083.04.14
3.52.3323.53.8843.54.0463.54.1083.54.14
4.02.3624.03.8844.04.0464.04.1084.04.14
4.52.3924.53.8944.54.0564.54.1184.54.14
5.02.4425.03.9045.04.0565.04.1185.04.14
5.52.5125.53.9045.54.0565.54.1185.54.14
6.02.5826.03.9146.04.0566.04.1186.04.14
6.52.6526.53.9246.54.0566.54.1186.54.14
7.02.7427.03.9247.04.0667.04.1187.04.14
7.52.8227.53.9347.54.0667.54.1187.54.14
8.02.9128.03.9348.04.0668.04.1188.04.14
8.52.9928.53.9448.54.0668.54.1188.54.14
9.03.0729.03.9449.04.0669.04.1189.04.14
9.53.1429.53.9549.54.0769.54.1289.54.14
10.03.2130.03.9550.04.0770.04.1290.04.14
10.53.2830.53.9650.54.0770.54.1290.54.14
11.03.3431.03.9651.04.0771.04.1291.04.14
11.53.4031.53.9751.54.0771.54.1291.54.15
12.03.4532.03.9752.04.0772.04.1292.04.15
12.53.5032.53.9752.54.0872.54.1292.54.15
13.03.5433.03.9853.04.0873.04.1293.04.15
13.53.5733.53.9853.54.0873.54.1293.54.15
14.03.6134.03.9954.04.0874.04.1294.04.15
14.53.6434.53.9954.54.0874.54.1294.54.15
15.03.6735.03.9955.04.0875.04.1295.04.15
15.53.6935.54.0055.54.0875.54.1395.54.15
16.03.7136.04.0056.04.0976.04.1396.04.15
16.53.7336.54.0056.54.0976.54.1396.54.15
17.03.7537.04.0157.04.0977.04.1397.04.15
17.53.7637.54.0157.54.0977.54.1397.54.15
18.03.7838.04.0158.04.0978.04.1398.04.15
18.53.7938.54.0258.54.0978.54.1398.54.15
19.03.8039.04.0259.04.0979.04.1399.04.15
19.53.8139.54.0259.54.0979.54.1399.54.15
20.03.8240.04.0260.04.1080.04.13100.04.15

Bulletin No. 2019–36 681 September 3, 2019
Part IV.
Notice of Proposed
Rulemaking
Classification of Cloud
Transactions and
Transactions Involving
Digital Content
REG-130700-14
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking.
SUMMARY: This document contains
proposed regulations regarding the classi-
fication of cloud transactions for purpos-
es of the international provisions of the
Internal Revenue Code. These proposed
regulations also modify the rules for clas-
sifying transactions involving computer
programs, including by applying the rules
to transfers of digital content.
DATES: Comments and requests for a
public hearing must be received by No-
vember 12, 2019.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG-130700-14), room
5203, Internal Revenue Service, P.O.
Box 7604, Ben Franklin Station, Wash-
ington, DC 20044. Submissions may be
hand-delivered Monday through Friday
between the hours of 8 a.m. and 4 p.m.
to: CC:PA:LPD:PR (REG-130700-14),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue NW., Wash-
ington, DC. Alternatively, taxpayers may
submit comments electronically via the
Federal eRulemaking Portal at www.reg-
ulations.gov (REG-130700-14).
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions Robert Z. Kelley, (202) 317-6939;
concerning submissions of comments
and requests for a public hearing, Regina
L. Johnson, (202) 317-6901 (not toll free
numbers).
SUPPLEMENTARY INFORMATION:
Background
These regulations (the proposed reg-
ulations) clarify the treatment under cer-
tain provisions of the Internal Revenue
Code (Code) of income from transactions
involving on-demand network access to
computing and other similar resources.
The proposed regulations also extend the
classification rules in existing §1.861-18
to transfers of digital content other than
computer programs and clarify the source
of income for certain transactions gov-
erned by existing §1.861-18.
Existing §1.861-18 provides rules for
classifying transactions involving com-
puter programs. For this purpose, §1.861-
18(a)(3) 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” and
includes “any media, user manuals, doc-
umentation, 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.”
Under §1.861-18(b)(1), a transaction to
which the section applies is categorized as
(i) a transfer of a copyright right in a com-
puter program; (ii) a transfer of a copy of
a computer program (a “copyrighted arti-
cle”); (iii) the provision of services for the
development or modification of a comput-
er program; or (iv) the provision of know-
how relating to computer programming
techniques. Section 1.861-18(c) provides
that a transfer of a computer program is
classified as the transfer of a copyright
right if there is a non-de minimis grant
of any of the following four rights: (i)
The right to make copies of the comput-
er 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 comput-
er programs based upon the copyrighted
computer program; (iii) the right to make
a public performance of the computer pro-
gram; or (iv) the right to publicly display
the computer program. Section 1.861-
18(f) further categorizes a transfer of a
copyright right as either the sale or license
of the copyright right and a transfer of a
copyrighted article as either the sale or
lease of the copyrighted article.
Section 1.861-18 generally does not
provide a comprehensive basis for cat-
egorizing many common transactions
involving what is commonly referred to
as “cloud computing,” which typically
is characterized by on-demand network
access to computing resources, such as
networks, servers, storage, and software.
See, e.g., National Institute of Standards
and Technology, Special Publication
500-322 (February 2018) (“NIST Re-
port”). Cloud computing transactions
typically are described for non-tax pur-
poses as following one or more of the
following three models: Software as a
Service (“SaaS”); Platform as a Service
(“PaaS”); and Infrastructure as a Service
(“IaaS”). SaaS allows customers to ac-
cess applications on a provider’s cloud
infrastructure through an interface such
as a web browser. NIST Report, pp. 9-10.
PaaS allows customers to deploy appli-
cations created by the customer onto a
provider’s cloud infrastructure using pro-
gramming languages, libraries, services,
and tools supported by the provider.
NIST Report, pp. 10-11. IaaS allows cus-
tomers to access processing, storage, net-
works, and other infrastructure resourc-
es on a provider’s cloud infrastructure.
NIST Report, p. 11. A cloud computing
transaction typically does not involve
any transfer of a computer program clas-
sified under §1.861-18 as a transfer of a
copyright right or copyrighted article or
any provision of development services or
know-how relating to computer programs
or programming. Although certain cloud
computing transactions may provide
similar functionality with respect to com-
puter programs as transactions subject to
§1.861-18 (for example, the transfer of
a computer program via download may
provide similar functionality as the same
program accessed via a web browser),
§1.861-18 does not address the provision
of online access to use the computer pro-
gram. Accordingly, §1.861-18 would not
apply to classify such a transaction.

September 3, 2019 682 Bulletin No. 2019–36
In addition to the cloud computing
models described above, other transac-
tions exist that are not solely related to
computing but still involve on-demand
network access to technological resourc-
es (these transactions and cloud comput-
ing transactions are collectively referred
to herein as “cloud transactions”). These
transactions have increased in frequency
over time and share similarities with the
three cloud computing models described
above. Examples include streaming music
and video, transactions involving mobile
device applications (“apps”), and access
to data through remotely hosted software.
These transactions may not involve, in
whole or in part, a transfer under §1.861-
18 of a copyright right or copyrighted ar-
ticle, or a provision of development ser-
vices or know-how relating to computer
programs or programming.
In general, a cloud transaction involves
access to property or use of property, in-
stead of the sale, exchange, or license of
property, and therefore typically would be
classified as either a lease of property or
a provision of services. Section 7701(e)
and case law provide factors that are rel-
evant for classifying a transaction as ei-
ther a lease of property or a provision of
services. In particular, section 7701(e)(1)
provides that a contract that purports to be
a service contract will be treated instead as
a lease of property if the contract is prop-
erly treated as a lease taking into account
all relevant factors, including whether (1)
the service recipient is in physical posses-
sion of the property, (2) the service recip-
ient controls the property, (3) the service
recipient has a significant economic or
possessory interest in the property, (4) the
service provider does not bear any risk of
substantially diminished receipts or sub-
stantially increased expenditures if there
is nonperformance under the contract,
(5) the service provider does not use the
property concurrently to provide signif-
icant services to entities unrelated to the
service recipient, and (6) the total contract
price does not substantially exceed the
rental value of the property for the con-
tract period. Section 7701(e)(2) provides
that the factors in section 7701(e)(1) apply
to determine whether any arrangement,
not just contracts which purport to be
service contracts, is properly treated as a
lease. Consistent with the inclusive statu-
tory language, the legislative history indi-
cates that this list of factors is meant to be
non-exclusive and constitutes a balancing
test, such that the presence or absence of
a single factor may not be dispositive in
every case. S. Prt. No. 169 (Vol. I), 98th
Cong., 2d Sess., at 138 (1984); Joint Com-
mittee on Taxation Staff, General Expla-
nation of the Revenue Provisions of the
Deficit Reduction Act of 1984, 98th Cong.,
at 60 (Comm. Print 1984).
In addition, courts have also consid-
ered other factors in determining whether
transactions are leases of property or the
provision of services, including whether
the service provider had the right to re-
place the relevant property with compa-
rable property, whether the property was
a component of an integrated operation
in which the service provider had other
responsibilities, whether the service pro-
vider operated the equipment, and wheth-
er the service provider’s fee was based on
a measure of work performed rather than
the mere passage of time. See, e.g., Mus-
co Sports Lighting, Inc. v. Comm’r, T.C.
Memo 1990-331, aff’d, 943 F.2d 906 (8th
Cir. 1991); Xerox Corp v. U.S., 656 F.2d
659 (Ct. Cl. 1981); and Smith v. Comm’r,
T.C. Memo 1989-318.
Explanation of Provisions
I. Proposed §1.861-19
Proposed §1.861-19 provides rules for
classifying a cloud transaction as either a
provision of services or a lease of prop-
erty. Proposed §1.861-19(a) specifies that
the rules apply for purposes of sections
59A, 245A, 250, 267A, 367, 404A, 482,
679, and 1059A; subchapter N of chapter
1; chapters 3 and 4; and sections 842 and
845 (to the extent involving a foreign per-
son), as well as with respect to transfers to
foreign trusts not covered by section 679.
In order to make other sections consis-
tent with proposed §1.861-19, Example 5
in §1.937-3(e) is proposed to be removed
from the rules for determining whether
income is derived from sources within a
U.S. possession or territory.
A. Definition of “Cloud Transaction”
Proposed §1.861-19(b) defines a cloud
transaction as a transaction through which
a person obtains non-de minimis on-de-
mand network access to computer hard-
ware, digital content (as defined in pro-
posed §1.861-18(a)(3)), or other similar
resources. This definition is not limited to
computer hardware and software, or to the
IaaS, PaaS, and SaaS models described
above, because it is intended also to ap-
ply to other transactions that share char-
acteristics of on-demand network access
to technological resources, including ac-
cess to streaming digital content and ac-
cess to information in certain databases.
Although this definition is broad, it does
not encompass every transaction execut-
ed or completed through the Internet. For
example, proposed §1.861-19 clarifies
that the mere download or other electronic
transfer of digital content for storage and
use on a person’s computer hardware or
other electronic device does not constitute
on-demand network access to the digital
content and so would not be considered
a cloud transaction for purposes of pro-
posed §1.861-19.
B. Classification of Cloud Transactions
1. Single Classification
Proposed §1.861-19(c) provides that
a cloud transaction is classified solely as
either a lease of property or the provision
of services. Certain cloud transactions
may have characteristics of both a lease
of property and the provision of services.
Such transactions are generally classified
in their entirety as either a lease or a ser-
vice, and not bifurcated into a lease trans-
action and a separate service transaction.
For example, section 7701(e)(1) classifies
a purported service contract as either a
lease or a service contract and does not
contemplate mixed classifications of a sin-
gle, integrated transaction. In Tidewater v.
U.S., 565 F.3d 299 (5th Cir. 2009), action
on dec., 2010-01 (June 1, 2010) (Tidewa-
ter), the Fifth Circuit applied the factors
in section 7701(e)(1) to determine a single
character for a time charter with respect to
an ocean-going vessel, rather than follow-
ing the taxpayer’s allocation of consider-
ation from the transaction into separate
service and lease components.
In some cases, the facts and circum-
stances may support the conclusion that
an arrangement involves multiple cloud

Bulletin No. 2019–36 683 September 3, 2019
transactions to which proposed §1.861-19
applies. In such cases, proposed §1.861-
19 requires a separate classification of
each cloud transaction except any transac-
tion that is de minimis.
2. Determination Based on All Relevant
Factors
Proposed §1.861-19(c)(1) provides
that all relevant factors must be taken into
account in determining whether a cloud
transaction is classified as a lease of prop-
erty (specifically, computer hardware,
digital content (as defined in proposed
§1.861-18(a)(3)), or other similar resourc-
es) or the provision of services. The rele-
vance of any factor varies depending on
the factual situation, and any particular
factor may not be relevant in a given in-
stance.
Proposed §1.861-19(c)(2) contains
a non-exhaustive list of factors for de-
termining whether a cloud transaction is
classified as the provision of services or a
lease of property. In general, application of
the relevant factors to a cloud transaction
will result in the transaction being treated
as the provision of services rather than a
lease of property. In addition to the statuto-
ry factors described in section 7701(e)(1),
the proposed regulations set forth several
factors applied by courts that the Treasury
Department and the IRS have determined
are relevant in demonstrating that a cloud
transaction is classified as the provision
of services: whether the provider has the
right to determine the specific property
used in the cloud transaction and replace
such property with comparable property;
whether the property is a component of
an integrated operation in which the pro-
vider has other responsibilities, including
ensuring the property is maintained and
updated; and whether the provider’s fee
is primarily based on a measure of work
performed or the level of the customer’s
use rather than the mere passage of time.
The proposed regulations include several
examples applying the factors in proposed
§1.861-19(c)(2) to different types of cloud
transactions.
Certain factors that are relevant under
proposed §1.861-19(c) may be the same
as or similar to those used to determine
whether transactions other than cloud
transactions are classified as leases or ser-
vices under other authorities. However,
cloud transactions, which involve on-de-
mand network access to property such as
computer hardware and digital content,
may have significant differences from
other lease and service transactions that
involve direct physical access to property.
Accordingly, the interpretation of factors
and their application to cloud transactions
require an analysis that is sensitive to the
inherent differences between transactions
involving physical access to property and
transactions involving on-demand net-
work access.
C. Classification of Cloud Transactions
Related to Other Transactions
Certain arrangements may involve
multiple transactions, where one or more
transactions would be classified as a cloud
transaction under proposed §1.861-19(b)
and one or more transactions do not qual-
ify as a cloud transaction and would be
classified under other sections of the Code
and regulations, or under general tax law
principles. For example, an arrangement
might involve both a cloud transaction
and a transaction that would be classified
under the rules of §1.861-18 as a lease of
a copyrighted article. Proposed §1.861-
19(c)(3) provides that, in such cases, the
classification rules apply only to classify
the cloud transaction, and any non-cloud
transaction will be classified separately
under such other section of the Code or
regulations, or under general tax law prin-
ciples. However, for purposes of admin-
istrability, proposed §1.861-19(c)(3) pro-
vides that no transaction will be classified
separately if it is de minimis. This rule is
illustrated by examples contained in pro-
posed §1.861-19(d).
II. Modifications of §1.861-18
A. Scope of Application
The preamble to the final regulations
under §1.861-18 governing the classifi-
cation of transactions involving computer
programs (T.D. 8785, 63 FR 52971 (Oc-
tober 2, 1998)) indicated that §1.861-18
would apply only to such transactions be-
cause the need for guidance with respect to
transactions involving computer programs
was most pressing. The preamble noted,
however, that the Treasury Department
and the IRS may consider as part of a sep-
arate guidance project whether to apply
the principles of those regulations to other
transactions. Since §1.861-18 was adopt-
ed as a final regulation in 1998, content
in digital format and subject to copyright
law, including music, video, and books,
has become a common basis for commer-
cial transactions. Consumption of such
digital content has grown in part because
of new computer hardware, including lap-
tops, tablets, e-readers, and smartphones,
that allows users to more easily obtain and
use digital content.
The Treasury Department and the IRS
have determined that the rules and prin-
ciples underlying existing §1.861-18 have
provided useful guidance with respect to
computer programs and that these rules
and principles should apply to certain oth-
er digital content. Accordingly, proposed
§1.861-18 broadens the scope of existing
§1.861-18 to apply to all transfers of “dig-
ital content,” defined in proposed §1.861-
18(a)(3) as any content in digital format
and that is either protected by copyright
law or is no longer protected by copyright
law solely due to the passage of time,
whether or not the content is transferred
in a physical medium. Digital content in-
cludes, for example, books, movies, and
music in digital format in addition to com-
puter programs.
Certain terms have been changed in
proposed §1.861-18, including referenc-
es to computer programs being replaced
with references to digital content. The ap-
plication of proposed §1.861-18 to digital
content other than computer programs is
illustrated by proposed §1.861-18(h)(19)
through (21) (Examples 19 through 21).
B. Rights to Advertise Copyrighted
Articles
Comments received on the proposed
regulations (REG-251520-96; 61 FR
58152; November 13, 1996) (the “1996
proposed regulations”) that were final-
ized in 1998 as existing §1.861-18 rec-
ommended that the transfer of a right to
publicly perform or display a computer
program should not be considered the
transfer of a copyright right if the right
is limited to the advertisement of a copy-
righted article and the public performance

September 3, 2019 684 Bulletin No. 2019–36
or display of the entire copyrighted arti-
cle is not permitted. The recommendation
of these comments was not incorporated
into existing §1.861-18, but the Treasury
Department and the IRS acknowledged in
the preamble to existing §1.861-18 that it
may be appropriate to revisit the issue in
the future and observed that the transfer
of such rights to advertise a copyrighted
article in many cases would be de minimis
under existing §1.861-18(c)(1)(ii).
In light of experience in administering
existing §1.861-18, the Treasury Depart-
ment and the IRS have determined that the
transfer of the right to publicly perform
or display digital content for the purpose
of advertising the sale of the digital con-
tent should not constitute the transfer of a
copyright right for purposes of those por-
tions of the Code enumerated in §1.861-
18(a)(1). For example, rights provided to
a video game retailer allowing the retailer
to display screenshots of a video game on
television commercials promoting sales
of the game generally would not, on their
own, constitute a transfer of copyright
rights that is significant in context. Ac-
cordingly, proposed §1.861-18 modifies
existing §1.861-18(c)(2)(iii) and (iv) to
provide that a transfer of the mere right
to public performance or display of digi-
tal content for purposes of advertising the
digital content does not by itself constitute
a transfer of a copyright right.
C. Source of Income for Sales of
Copyrighted Articles in Electronic
Medium
Comments received on the 1996 pro-
posed regulations addressed the sourcing
of income from the sale of computer pro-
grams through electronic downloads and
noted uncertainty regarding the applica-
tion of the title passage rule of §1.861-
7(c) to these sales of copyrighted articles.
Although the preamble indicated that the
parties in many cases can agree where ti-
tle passes for inventory property, the final
regulations under §1.861-18 included only
a general reference to the relevant source
rules and did not specifically address the
application of the title passage rule for
sales of copyrighted articles. Based on ex-
perience in administering existing §1.861-
18 since 1998, the Treasury Department
and the IRS have become more aware
of the uncertainty associated with deter-
mining the source of sales of copyrighted
articles by application of §1.861-7(c), in
particular in the context of electronically
downloaded software. In many sales of
copyrighted articles, the location where
rights, title, and interest are transferred is
not specified. In some cases, due to intel-
lectual property law concerns, there may
be no passage of legal title when the copy-
righted article is sold. Moreover, the Trea-
sury Department and the IRS have deter-
mined that contractual specification of a
location — other than the customer’s loca-
tion — as the location of transfer could be
easily manipulated and would bear little
connection to economic reality in the case
of a transfer by electronic medium of dig-
ital content, given that a sale and transfer
of digital content by electronic medium
generally would not be considered com-
mercially complete until the customer has
successfully downloaded the copy.
In light of these considerations, pro-
posed §1.861-18(f)(2)(ii) provides that
when copyrighted articles are sold and
transferred through an electronic medium,
the sale is deemed to occur at the loca-
tion of download or installation onto the
end-user’s device used to access the dig-
ital content for purposes of §1.861-7(c).
It is expected that vendors generally will
be able to identify the location of such
download or installation. Comments are
requested as to the availability, reliability
and cost of this information. In the ab-
sence of information about the location of
download or installation onto the end-us-
er’s device used to access the digital con-
tent, the sale is deemed to have occurred
at the location of the customer based on
the taxpayer’s recorded sales data for
business or financial reporting purposes.
Consistent with existing §1.861-18, pro-
posed §1.861-18(f)(2)(ii) provides that
income from sales or exchanges of copy-
righted articles is sourced under sections
861(a)(6), 862(a)(6), 863, or 865(a), (b),
(c), or (e), as appropriate. The Treasury
Department and the IRS do not expect
proposed §1.861-18(f)(2)(ii) to impact the
application of income tax treaties to which
the United States is a party given that the
taxation of gains under those treaties is
generally determined by reference to the
residence country of the seller and not the
source of income from the sale. Income
from leases of copyrighted articles is
sourced under section 861(a)(4) or 862(a)
(4), as appropriate.
In order to make other sections consis-
tent with proposed §1.861-18(f)(2)(ii), a
cross-reference has been added in the rules
for sales of inventory property in §1.861-
7(c), and Example 4 in §1.937-3(e) has
been removed from the rules for determin-
ing whether income is derived from sourc-
es within a U.S. possession or territory.
III. Change in Method of Accounting
The application of these new rules for
purposes of the affected Code sections
may require certain taxpayers to change
their methods of accounting under sec-
tion 446(e) for affected transactions. Any
change in method of accounting that a tax-
payer makes in order to comply with these
regulations would be a change initiated by
the taxpayer. Accordingly, the change in
method of accounting must be implement-
ed under the rules of §1.446-1(e) and the
applicable administrative procedures that
govern voluntary changes in method of
accounting under section 446(e).
IV. Request for Comments
Comments are requested on all aspects
of these proposed regulations, including
the following topics:
(1) Whether the definition of digital con-
tent should be defined more broadly
than content protected by copyright
law and content that is no longer pro-
tected by copyright law solely due to
the passage of time;
(2) whether any special considerations
should be taken into account in apply-
ing the rules in existing §1.861-18 to
transfers of digital content other than
computer programs;
(3) whether any other aspects of existing
§1.861-18 need to be modified if that
section is amended as proposed;
(4) whether the classification of cloud
transactions as either a service or
a lease is correct, or whether cloud
transactions are more properly classi-
fied in another category (for example,
a license or a sale);
(5) realistic examples of cloud transac-
tions that would be treated as leases
under proposed §1.861-19;

Bulletin No. 2019–36 685 September 3, 2019
(6) the existence of arrangements in-
volving both a transaction that would
qualify as a cloud transaction and an-
other non-de minimis transaction that
would be classified under another
provision of the Code or Regulations,
or under general tax law principles;
(7) potential bases for allocating con-
sideration in arrangements involving
both a transaction that would quali-
fy as a cloud transaction and anoth-
er non-de minimis transaction that
would be classified under another
provision of the Code or Regulations,
or under general tax law principles;
(8) administrable rules for sourcing in-
come from cloud transactions in a
manner consistent with sections 861
through 865; and
(9) application of proposed §1.861-19 to
an arrangement that involves non-de
minimis rights both to access digital
content on-demand over a network
and to download such digital content
onto a user’s electronic device for of-
fline use.
Proposed Effective Date
The regulations are proposed to ap-
ply to taxable years beginning on or after
the date of publication of the Treasury
decision adopting these regulations as fi-
nal regulations in the Federal Register.
No inference should be drawn from the
proposed effective date concerning the
treatment of transactions involving dig-
ital content or cloud transactions entered
into before the regulations are applicable.
For transactions involving transfers of
computer programs occurring pursuant to
contracts entered into before publication
of the final regulations, the rules in former
§1.861-18, T.D. 8785 and T.D. 9870, will
apply. For proposed dates of applicability,
see §§1.861-18(i) and 1.861-19(e).
Special Analyses
Regulatory Planning and Review
Executive Orders 13563 and 12866
direct agencies to assess costs and ben-
efits of available regulatory alternatives
and, if regulation is necessary, to select
regulatory approaches that maximize net
benefits (including potential economic,
environmental, public health and safety
effects, distributive impacts, and equity).
Executive Order 13563 emphasizes the
importance of quantifying both costs and
benefits, of reducing costs, of harmoniz-
ing rules, and of promoting flexibility.
These proposed rules have been des-
ignated by the Office of Management
and Budget’s Office of Information and
Regulatory Affairs as subject to review
under Executive Order 12866 pursuant to
the Memorandum of Agreement (MOA)
(April 11, 2018) between the Treasury
Department and the Office of Manage-
ment and Budget regarding review of tax
regulations. The Treasury Department and
the IRS project that these rules are not
economically significant because current
industry practice is generally consistent
with the principles underlying the pro-
posed regulations. Comments are request-
ed as to whether this characterization of
industry practice is inaccurate.
A. Background
When assessing tax on income aris-
ing from international transactions, the
“source” of income is important in de-
termining a taxpayer’s tax liability. U.S.
sourcing rules, generally contained in
code sections 861 to 865, determine
whether income earned is considered do-
mestic or foreign source. For U.S. resident
taxpayers, the U.S. generally taxes both
domestic and foreign source income and,
for the latter, provides credits for foreign
taxes up to the level of U.S. tax. Taxpayers
with significant foreign tax credits (FTCs)
typically prefer that income be considered
foreign rather than U.S. source in order to
maximize their use of FTCs and minimize
their U.S. taxes.
Proper assessment of the source of
a particular item of income depends on
the nature and type (or character) of that
income (for example, interest, dividend,
compensation for services, royalties paid
under a license, gains recorded in a sale).
Source rules differ for different types of
income, so it is first necessary for income
tax purposes to classify the character of an
item of income. In the case of transactions
involving digital content and cloud trans-
actions, the types of income most relevant
are sales, licenses, and services, but there
are currently no regulations specifically
applicable to the classification of transac-
tions involving digital content other than
computer programs or the classification
of transactions involving remote access to
digital content through the cloud. These
proposed regulations provide that guid-
ance.
The character of income also affects
the U.S. taxation of income earned by U.S.
taxpayers through their foreign subsidiary
corporations. Certain U.S. shareholders of
controlled foreign corporations (as defined
in section 957) must include their share of
a controlled foreign corporation’s subpart
F income in the U.S. shareholder’s gross
income on a current basis. Section 951(a)
(1)(A). The characterization of income
can impact whether it is considered sub-
part F income (as defined in section 952).
B. Need for Proposed Regulations
Transactions involving digital con-
tent and cloud computing have become
common due to the growth of electron-
ic commerce. Such transactions must be
classified in terms of character in order
to apply various provisions of the Code,
such as sourcing rules and subpart F. Ex-
isting Reg. §1.861-18, finalized in 1998,
provides rules for classifying transactions
involving computer programs as, for ex-
ample, a license of a computer program,
a rental of a computer program, or a sale
of a computer program. These existing
regulations, however, do not explicitly
cover transactions involving other digital
content, such as digital music and video,
or to cloud computing transactions, and
thus taxpayers must determine how these
transactions should be classified for tax
purposes without clear guidance. The
proposed regulations are needed to re-
duce this uncertainty. The proposed reg-
ulations also reduce the opportunities for
taxpayers to take positions on source and
character that inappropriately minimize
their taxes.
C. Overview of Proposed Regulations
The proposed regulations provide up-
dated guidance with respect to the classi-
fication of transactions involving digital
content (proposed §1.861-18) and new
guidance with respect to cloud transac-
tions (proposed §1.861-19).

September 3, 2019 686 Bulletin No. 2019–36
Existing rules, particularly final regu-
lations under §1.861-18, which were ad-
opted in 1998, govern the classification
of transactions involving computer pro-
grams. The Treasury Department and the
IRS have determined that the rules and
principles underlying existing §1.861-
18 provide useful guidance for transac-
tions involving digital content. Proposed
§1.861-18 broadens the scope of its ap-
plication to include digital content, which
is defined in proposed §1.861-18(a)(3) as
any content in digital format that is either
protected by copyright law or is no lon-
ger protected solely due to the passage
of time (e.g., books, movies, and music
in digital format, in addition to computer
programs).
Cloud computing transactions, which
are typically characterized by on-demand
network access to computing resources,
would not generally be subject to classi-
fication under existing §1.861-18 since
such transactions typically do not include
the transfer of a computer program, nor
would such transactions be subject to pro-
posed §1.861-18 since such transactions
typically do not include the transfer of a
copyright right or copyrighted article, or
provision of development services related
to computer programming. Consequent-
ly, proposed §1.861-19 provides rules for
classifying a cloud transaction as either a
provision of service or a lease of property.
D. Economic analysis
1. Baseline
The Treasury Department and the IRS
have assessed the benefits and costs of
the proposed regulation compared to a
no-action baseline that reflects anticipated
Federal income tax-related behavior in the
absence of these proposed regulations.
2. Summary of Economic Effects
The proposed regulations provide
certainty and clarity with respect to the
characterization of income from digital
transactions and cloud computing. In the
absence of such guidance, the chances
that different U.S. taxpayers would inter-
pret the Code differentially, either from
each other or from the intents and pur-
poses of the underlying statutes, would
be exacerbated. This divergence in in-
terpretation could cause U.S. businesses
to make economic decisions based on
different interpretations of, for exam-
ple, whether income from making digital
music available to a user would be char-
acterized as derived from a service or a
lease transaction for purposes of applying
sourcing rules and thus whether such in-
come is considered domestic or foreign.
If economic decisions are not guided by
uniform incentives across otherwise sim-
ilar investors and across otherwise sim-
ilar investments, the resulting pattern of
economic activity is generally inefficient.
Thus, the Treasury Department and the
IRS expect that the definitions and guid-
ance provided in the proposed regulation
will help support an efficient allocation
of economic activity among taxpayers,
relative to the baseline.
The characterization of income from
digital transactions and cloud computing,
for example, may impact taxpayer incen-
tives under section 59A (the tax on certain
base erosion payments) and section 250
(foreign derived intangible income and
global intangible low-taxed income). For
example, under section 59A, the charac-
terization of a cloud transaction as a ser-
vice, as opposed to a lease, may implicate
the services cost method exception under
section 59A(d)(5). Such characterization
may also impact the documentation re-
quirements or eligibility for treatment as
foreign-derived intangible income under
section 250(b). However, because current
industry practice is generally consistent
with the principles underlying the pro-
posed regulations, the Treasury Depart-
ment and the IRS expect these regulations
to have only a small effect on economic
activity or compliance costs relative to the
baseline.
The Treasury Department and IRS so-
licit comments on the economic effects of
the proposed regulations.
3. Economic Effects of Specific
Provisions
a. Transactions involving copyright-
protected digital content
Existing §1.861-18 provides rules for
classifying transfers of computer pro-
grams as, for example, a license of a
computer program, a lease of a comput-
er program, or a sale of a computer pro-
gram. Proposed §1.861-18 broadens the
scope of existing §1.861-18 to apply to all
transfers of digital content. In addition, as
discussed in Part II.B of the Explanation
of Provisions section, proposed §1.861-18
clarifies that a transfer of the mere right
to public performance or display of digital
content for advertising purposes does not
by itself constitute a transfer of a copy-
right right. Further, as explained in Part
II.C of the Explanation of Provisions sec-
tion, proposed §1.861-18 provides clarity
around the title passage rule of §1.861-
7(c) by providing that when copyrighted
articles are sold, the sale is deemed to oc-
cur at the location of the download or in-
stallation onto the end-user’s device, or in
the absence of that information then at the
location of the customer. Proposed 1.861-
7(c) provides that a sale of personal prop-
erty is consummated at the place where
the rights, title, and interest of the seller in
the property are transferred to the buyer,
or, when bare legal title is retained by the
seller, where beneficial ownership passes.
In considering how the place of sale
should be determined for digital content,
the Treasury Department and the IRS
considered, as an alternative, not issuing
specific rules and instead retaining the
existing rules without further clarifica-
tion for copyrighted articles. The Treasury
Department and the IRS elected to pro-
vided further clarity about the sourcing
of income from the sale of copyrighted
articles because (1) in the context of elec-
tronically downloaded software, the loca-
tion in which rights, title, and interest are
transferred is often difficult to determine
or not specified, and (2) the location of
transfer could be easily manipulated (for
example, the server location from which a
copyrighted article is downloaded). Con-
sequently, for administrative and clarifi-
cation purposes, proposed §1.861-18(f)
(2)(ii) provides that when a copyrighted
article is sold through an electronic me-
dium, the sale is deemed to occur at the
location of download or installation onto
the end-user’s device. The Treasury De-
partment and the IRS are proposing this
location definition because that is where
the sale is completed, since until the
download is complete, the content is not
entirely transferred.

Bulletin No. 2019–36 687 September 3, 2019
The Treasury Department and the IRS
solicit comments on these proposed regu-
lations and particularly solicit comments
that provide data, other evidence, or mod-
els that would enhance the rigor with
which the final regulations governing dig-
ital content might be developed.
b. Cloud transactions
Proposed §1.861-19 provides rules for
classifying a cloud transaction as either a
lease of property (i.e., computer hardware,
digital content, or other similar resources)
or a provision of services. These rules
contain a non-exhaustive list of factors
which include statutory factors described
in section 7701(e)(1) and factors applied
by courts, as explained in Part I.B.2. of the
Explanation of Provisions section.
As an alternative, the Treasury Depart-
ment and the IRS considered not provid-
ing further specific guidance regarding
how cloud computing transactions should
be classified (for sourcing and other pur-
poses). The Treasury Department and the
IRS have developed the proposed regula-
tions (proposed §1.861-18 and proposed
§1.861-19) because they will provide
clarity to taxpayers and the IRS when de-
termining the character of income arising
from transactions involving digital con-
tent and cloud computing. This increased
clarity, relative to the baseline, will reduce
the potential for tax planning strategies
that exploit uncertainty resulting from the
lack of explicit guidance for characteriz-
ing common transactions involving digital
content and cloud computing. Consistent
reporting across taxpayers also increases
the IRS’s ability to consistently enforce
the tax rules, thus increasing equity and
decreasing opportunities for tax evasion.
The Treasury Department and the
IRS solicit comments on these proposed
regulations and particularly solicit com-
ments that provide data, other evidence,
or models that would enhance the rigor
with which the final regulations governing
cloud transactions might be developed.
E. Regulatory Flexibility Act
The Regulatory Flexibility Act requires
consideration of the regulatory impact on
small businesses. It is hereby certified that
these proposed regulations will not have a
significant economic impact on a substan-
tial number of small entities within the
meaning of section 601(6) of the Regula-
tory Flexibility Act (5 U.S.C. chapter 6).
As discussed elsewhere in the Special
Analyses, transactions involving digital
content and cloud computing have be-
come common due to the growth of elec-
tronic commerce. Such transactions must
be classified in terms of character in order
to apply various provisions of the Code,
such as sourcing rules and subpart F. Ex-
isting Reg. §1.861-18, finalized in 1998,
provides rules for classifying transactions
involving computer programs as, for ex-
ample, a license of a computer program,
a rental of a computer program, or a sale
of a computer program. These existing
regulations, however, do not explicitly
cover transactions involving other digital
content, such as digital music and video,
or to cloud computing transactions and
thus taxpayers must determine how these
transactions should be classified for tax
purposes without clear guidance. The pro-
posed regulations provide certainty and
clarity to these affected taxpayers.
Although data are not readily available
to estimate the number of small entities that
would be affected by this proposed rule, the
Treasury Department and the IRS project
that any economic impact of the regulations
would be minimal for businesses regardless
of size. These proposed regulations gen-
erally provide clarification of definitions
regarding how transactions are classified,
they are not expected to have an impact on
burden for large or small businesses. The
Treasury Department and the IRS project
that any economic impact would be small
because current industry practice is gener-
ally consistent with the principles underly-
ing the proposed regulations.
Notwithstanding this certification that
the proposed rule will not have a signif-
icant economic impact on a substantial
number of small entities, the Treasury De-
partment and the IRS invite comments on
the impact this proposed rule would have
on small entities.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consider-
ation will be given to any comments that
are submitted timely to the IRS as pre-
scribed in this preamble under the “AD-
DRESSES” section. All comments will be
available at www.regulations.gov or upon
request. A public hearing will be sched-
uled if requested in writing by any person
that timely submits comments. If a public
hearing is scheduled, notice of the date,
time, and place for the public hearing will
be published in the Federal Register.
Drafting Information
The principal author of these proposed
regulations is Robert Z. Kelley of the Of-
fice of the Associate Chief Counsel (Inter-
national). However, other personnel from
the Treasury Department and the IRS par-
ticipated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting, and record-
keeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.861-7 is amended by
revising paragraph (c) to read as follows:
§1.861-7 Sale of personal property.
* * * * *
(c) Country in which sold. For purpos-
es of part I (section 861 and following),
subchapter N, chapter 1 of the Code, and
the regulations thereunder, a sale of per-
sonal property is consummated at the time
when, and the place where, the rights, ti-
tle, and interest of the seller in the proper-
ty are transferred to the buyer. Where bare
legal title is retained by the seller, the sale
shall be deemed to have occurred at the
time and place of passage to the buyer of
beneficial ownership and the risk of loss.
For determining the place of sale of copy-
righted articles transferred in electronic
medium, see §1.861-18(f)(2)(ii). Howev-

September 3, 2019 688 Bulletin No. 2019–36
er, in any case in which the sales trans-
action is arranged in a particular manner
for the primary purpose of tax avoidance,
the foregoing rules will not be applied. In
such cases, all factors of the transaction,
such as negotiations, the execution of the
agreement, the location of the property,
and the place of payment, will be consid-
ered, and the sale will be treated as having
been consummated at the place where the
substance of the sale occurred.
* * * * *
Par. 3. Section 1.861-18 is amended as
follows:
a. For each paragraph listed in the fol-
lowing table, remove the language in
the “Remove” column and adding in
its place the language in the “Add”
column.
ParagraphRemoveAdd
(a)(1)computer programsdigital content
(b)(1) introductory texta computer programdigital content
(b)(1)(i)computer programdigital content
(b)(1)(ii)computer programdigital content
(b)(1)(iii)computer programdigital content
(b)(1)(iv)computer programming techniquesdevelopment of digital content
(b)(2), first sentenceAny transactionAny arrangement
(b)(2), first sentencecomputer programsdigital content
(b)(2), second sentenceoverall transaction overall arrangement
(c)(1)(i), first sentencea computer programdigital content
(c)(1)(i), third sentencea computer programdigital content
(c)(1)(i), third sentencethat programthat digital content
(c)(1)(ii)a computer programdigital content
(c)(1)(ii)the computer programthe digital content
(c)(2)(i)computer programdigital content
(c)(2)(ii)computer programsdigital content
(c)(2)(ii)copyrighted computer programdigital content
(c)(3), first sentencea computer programdigital content
(c)(3), second sentenceprogramdigital content
(d)a newly developed or modified computer
program
newly developed or modified digital
content
(d)computer programdigital content
(e) introductory texta computer programdigital content
(e)(1)computer programming techniquesthe development of digital content
(f)(3), headingcomputer programsdigital content
(f)(3), first sentencecomputer programsdigital content
(f)(3), second sentencea computer program on diskdigital content on a disk
(f)(3), third sentenceprogramdigital content
(g)(2)a computer programdigital content
(g)(3)(i), first sentence a computer programdigital content
(g)(3)(i), first sentencethe program the digital content
(g)(3)(i), first sentencesoftwaredigital content
(g)(3)(ii), first sentencea computer programdigital content
(g)(3)(ii), first sentencethe programthe digital content
(g)(3)(ii), second sentencea computer programdigital content
(g)(3)(ii), second sentencethe programthe digital content

Bulletin No. 2019–36 689 September 3, 2019
b. Amend paragraph (a)(1) by:
i. Adding before “367”, the phrase
“59A, 245A, 250, 267A,”;
ii. Removing the phrase “551,”; and
iii. Removing the phrase “chapter
3, chapter 5,” and adding in its
place “chapters 3 and 4,”.
c. Revising paragraphs (a)(3), (c)(2)(iii)
and (iv), and (f)(2).
d. Redesignated examples 1 through 18
of paragraph (h) as paragraphs (h)(1)
through (18), respectively, and add-
ing paragraphs (h)(19) through (21).
e. Revising paragraphs (i) and (j).
f. Removing paragraph (k).
The revisions read as follows:
§1.861-18 Classification of transactions
involving digital content.
* * * * *
(a)* * *
(3) Digital content. For purposes of this
section, digital content means a comput-
er program or any other content in digital
format that is either protected by copyright
law or no longer protected by copyright law
solely due to the passage of time, whether
or not the content is transferred in a phys-
ical medium. For example, digital content
includes books in digital format, movies in
digital format, and music in digital format.
For purposes of this section, a computer pro-
gram is a set of statements or instructions to
be used directly or indirectly in a computer
in order to bring about a certain result and
includes any media, user manuals, docu-
mentation, data base, or similar item if the
media, user manuals, documentation, data
base, or other similar item is incidental to
the operation of the computer program.
* * * * *
(c) * * *
(2) * * *
(iii) The right to make a public perfor-
mance of digital content, other than a right
to publicly perform digital content for the
purpose of advertising the sale of the digi-
tal content performed; or
(iv) The right to publicly display dig-
ital content, other than a right to publicly
display digital content for the purpose of
advertising the sale of the digital content
displayed.
* * * * *
(f) * * *
(2) Transfers of copyrighted articles—
(i) Classification. The determination of
whether a transfer of a copyrighted article
is a sale or exchange is made on the basis
of whether, taking into account all facts
and circumstances, the benefits and bur-
dens 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 transfer-
ee is properly treated as the owner of the
copyrighted article, will be classified as a
lease generating rental income.
(ii) Source. 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,
or 865(a), (b), (c), or (e), as appropriate.
When a copyrighted article is sold and
transferred through an electronic medi-
um, the sale is deemed to have occurred
at the location of download or installation
onto the end-user’s device used to access
the digital content for purposes of §1.861-
7(c), subject to the tax avoidance provi-
sions in §1.861-7(c). However, in the ab-
sence of information about the location of
download or installation onto the end-us-
er’s device used to access the digital
content, the sale will be deemed to have
occurred at the location of the customer,
which is determined based on the taxpay-
er’s recorded sales data for business or
financial reporting purposes. Income de-
rived from leasing a copyrighted article
will be sourced under section 861(a)(4) or
862(a)(4), as appropriate.
* * * * *
(h) * * *
(19) Example 19—(i) Facts. Corp A operates a
website that offers electronic books for download
onto end-users’ computers or other electronic de-
vices. The books offered by Corp A are protected by
copyright law. Under the agreements between con-
tent owners and Corp A, Corp A receives from the
content owners a digital master copy of each book,
which Corp A downloads onto its server, in addition
to the non-exclusive right to distribute for sale to
the public an unlimited number of copies in return
for paying each content owner a specified amount
for each copy sold. Corp A may not transfer any of
the distribution rights it receives from the content
owners. The term of each agreement Corp A has
with a content owner is shorter than the remaining
life of the copyright. Corp A charges each end-user
a fixed fee for each book purchased. When purchas-
ing a book on Corp A’s website, the end-user must
acknowledge the terms of a license agreement with
the content owner that states that the end-user may
view the electronic book but may not reproduce or
distribute copies of it. In addition, the agreement pro-
vides that the end-user may download the book onto
a limited number of its devices. Once the end-user
downloads the book from Corp A’s server onto a
device, the end-user may access and view the book
from that device, which does not need to be connect-
ed to the Internet in order for the end-user to view
the book. The end-user owes no additional payment
to Corp A for the ability to view the book in the fu-
ture.
(ii) Analysis. (A) Notwithstanding the license
agreement between each end-user and content owner
granting the end-user rights to use the book, the rel-
evant transactions are the transfer of a master copy
of the book and rights to sell copies from the content
owner to Corp A, and the transfers of copies of books
by Corp A to end-users. Although the content own-
er is identified as a party to the license agreement
memorializing the end-user’s rights with respect to
the book, each end-user obtains those rights directly
from Corp A, not from the content owner. Because
the end-user receives only a copy of each book and
does not receive any of the copyright rights described
in paragraph (c)(2) of this section, the transaction be-
tween Corp A and the end-user is classified as the
transfer of a copyrighted article under paragraph (c)
(1)(ii) of this section. See paragraphs (h)(1) and (2)
of this section (Example 1 and Example 2). Under
the benefits and burdens test of paragraph (f)(2) of
this section, the transaction is classified as a sale and
not a lease, because the end-user receives the right to
view the book in perpetuity on its device.
(B) The transaction between each content owner
and Corp A is a transfer of copyright rights. In ob-
taining a master copy of the book along with the right
to sell an unlimited number of copies to customers,
Corp A receives a copyright right described in para-
graph (c)(2)(i) of this section. For purposes of para-
graph (b)(2) of this section, the digital master copy
is de minimis. Under paragraph (f)(1) of this section,
there has not been a transfer of all substantial rights
in the copyright rights to the content because each
content owner retains the right to further license or
sell the copyrights, subject to Corp A’s interest; Corp
A has acquired no right itself to transfer the copy-
right rights to any of the content; and the grant of
distribution rights is for less than the remaining life
of the copyright to each book. Therefore, the transac-
tion between each content owner and Corp A is clas-
sified as a license, and not a sale, of copyright rights.
(20) Example 20—(i) Facts. Corp A offers
end-users memberships that provide them with un-
limited access to Corp A’s catalog of copyrighted
music in exchange for a monthly fee. In order to
access the music, an end-user must download each
song onto a computer or other electronic device. The
end-user may download songs onto a limited num-
ber of its devices. Under the membership agreement
terms, an end-user may listen to the songs but may
not reproduce or distribute copies of them. Once the
end-user stops paying Corp A the monthly member-
ship fee, an electronic lock is activated so that the
end-user can no longer access the music.
(ii) Analysis. The end-users receive none of the
copyright rights described in paragraph (c)(2) of this
section and instead receive only copies of the digital
content. Therefore, under paragraph (c)(1)(ii) of this
section, each download is classified as the transfer
of a copyrighted article. Although an end-user will
retain a copy of the content at the end of the payment

September 3, 2019 690 Bulletin No. 2019–36
term, the end-user cannot access the content after the
electronic lock is activated. Taking into account the
special characteristics of digital content as provid-
ed in paragraph (f)(3) of this section, the activation
of the electronic lock is the equivalent of having to
return the copy. Therefore, under paragraph (f)(2) of
this section, each transaction is classified as a lease
of a copyrighted article because the right to access
the music is limited.
(21) Example 21—(i) Facts. Corp A offers a
catalog of movies and TV shows, all of which are
subject to copyright protection. Corp A gives end-us-
ers several options for viewing the content, each of
which has a separate price. A “streaming” option al-
lows an end-user to view the video, which is hosted
on Corp A’s servers, while connected to the Internet
for as many times as the end-user wants during a
limited period. A “rent” option allows an end-user
to download the video to its computer or other elec-
tronic device (which does not need to be connect-
ed to the Internet for viewing) and watch the video
as many times as the end-user wants for a limited
period, after which an electronic lock is activated
and the end-user may no longer view the content. A
“purchase” option allows an end-user to download
the video and view it as many times as the end-user
chooses with no end date. Under all three options,
the end-user may view the video but may not repro-
duce or distribute copies of it. Under the “rent” and
“purchase” options, the end-user may download the
video onto a limited number of its devices.
(ii) Analysis. (A) With respect to the “rent” and
“purchase” options, the end-user receives none of the
copyright rights described in paragraph (c)(2) of this
section but, rather, receives only copies of the digital
content. Therefore, transactions under those two op-
tions are transfers of copyrighted articles. Transac-
tions for which the end-user chooses the “purchase”
option are classified as sales of copyrighted articles
under the benefits and burdens test of paragraph (f)
(2) of this section because the end-user receives the
right to view the videos in perpetuity. Transactions
under the “rent” option are classified as leases of
copyrighted articles under paragraph (f)(2) of this
section because the end-user’s right to view the vid-
eos is for a limited period.
(B) For transactions under the “streaming” op-
tion, there is no transfer of any copyright rights de-
scribed in paragraph (c)(2) of this section. There is
also no transfer of a copyrighted article, because the
content is not downloaded by an end-user, but rath-
er is accessed through an on-demand network. The
transaction also does not constitute the provision of
services for the development of digital content or
the provision of know-how under paragraph (b)(1)
of this section. Therefore, paragraph (b)(1) of this
section does not apply to such transaction. Instead,
the transaction is a cloud transaction that is classified
under §1.861-19. See §1.861-19(d)(9).
(i) Effective date. This section applies
to transactions involving the transfer of
digital content, or the provision of ser-
vices or of know-how in connection with
digital content, pursuant to contracts
entered into in taxable years beginning
on or after the date of publication of a
Treasury decision adopting these rules
as final regulations in the Federal Regis-
ter. For transactions involving computer
programs occurring pursuant to contracts
entered into in taxable years beginning
before the date of publication of a Trea-
sury decision adopting these rules as final
regulations in the Federal Register, see
§1.861-18(i) as contained in T.D. 8785
and T.D. 9870.
(j) Change in method of accounting
required by this section. In order to com-
ply with this section, a taxpayer engaging
in a transaction involving digital content
pursuant to a contract entered into in tax-
able years beginning on or after the date
described in paragraph (i) of this section
may be required to change its method of
accounting. If so required, the taxpayer
must secure the consent of the Commis-
sioner in accordance with the require-
ments of §1.446-1(e) and the applicable
administrative procedures for obtaining
the Commissioner’s consent under section
446(e) for voluntary changes in methods
of accounting.
Par. 4. Section 1.861-19 is added to
read as follows:
§1.861-19 Classification of cloud
transactions.
(a) In general. This section provides
rules for classifying a cloud transaction
(as defined in paragraph (b) of this sec-
tion) either as a provision of services or
as a lease of property. The rules of this
section apply for purposes of Internal
Revenue Code sections 59A, 245A, 250,
267A, 367, 404A, 482, 679, and 1059A;
subchapter N of chapter 1; chapters 3 and
4; and sections 842 and 845 (to the extent
involving a foreign person), and apply
with respect to transfers to foreign trusts
not covered by section 679.
(b) Cloud transaction defined. A cloud
transaction is a transaction through which
a person obtains on-demand network ac-
cess to computer hardware, digital content
(as defined in §1.861-18(a)(3)), or other
similar resources, other than on-demand
network access that is de minimis taking
into account the overall arrangement and
the surrounding facts and circumstances.
A cloud transaction does not include net-
work access to download digital content
for storage and use on a person’s computer
or other electronic device.
(c) Classification of transactions—(1)
In general. A cloud transaction is classified
solely as either a lease of computer hard-
ware, digital content (as defined in §1.861-
18(a)(3)), or other similar resources, or the
provision of services, taking into account
all relevant factors, including the factors set
forth in paragraph (c)(2) of this section. The
relevance of any factor varies depending on
the factual situation, and one or more of the
factors set forth in paragraph (c)(2) of this
section may not be relevant in a given in-
stance. For purposes of this paragraph (c),
computer hardware, digital content, or oth-
er similar resources are referred to as “the
property,” and the party to the transaction
making such property available to custom-
ers for use is referred to as “the provider.”
(2) Factors demonstrating classifica-
tion as the provision of services. Factors
demonstrating that a cloud transaction
is classified as the provision of services
rather than a lease of property include the
following factors—
(i) The customer is not in physical pos-
session of the property;
(ii) The customer does not control the
property, beyond the customer’s network
access and use of the property;
(iii) The provider has the right to de-
termine the specific property used in the
cloud transaction and replace such proper-
ty with comparable property;
(iv) The property is a component of
an integrated operation in which the pro-
vider has other responsibilities, including
ensuring the property is maintained and
updated;
(v) The customer does not have a sig-
nificant economic or possessory interest in
the property;
(vi) The provider bears any risk of sub-
stantially diminished receipts or substan-
tially increased expenditures if there is
nonperformance under the contract;
(vii) The provider uses the property
concurrently to provide significant ser-
vices to entities unrelated to the customer;
(viii) The provider’s fee is primarily
based on a measure of work performed or
the level of the customer’s use rather than
the mere passage of time; and
(ix) The total contract price substantial-
ly exceeds the rental value of the property
for the contract period.
(3) Application to arrangements
comprised of multiple transactions.

Bulletin No. 2019–36 691 September 3, 2019
An arrangement comprised of multiple
transactions generally requires separate
classification for each transaction. If at
least one of the transactions is a cloud
transaction, but not all of the transactions
are cloud transactions, this section applies
only to classify the cloud transactions.
However, any transaction that is de mi-
nimis, taking into account the overall ar-
rangement and the surrounding facts and
circumstances, will not be treated as a
separate transaction, but as part of another
transaction.
(d) Examples. The provisions of this
section may be illustrated by the exam-
ples in this paragraph (d). For purposes
of this paragraph, unless otherwise indi-
cated, Corp A is a domestic corporation;
Corp B is a foreign corporation; end-users
are individuals; and no rights described
in §1.861-18(c)(2) (copyright rights) are
transferred as part of the transactions de-
scribed.
(1) Example 1: Computing capacity—(i) Facts.
Corp A operates data centers on its premises in var-
ious locations. Corp A provides Corp B comput-
ing capacity on Corp A’s servers in exchange for
a monthly fee based on the amount of computing
power made available to Corp B. Corp B provides its
own software to run on Corp A’s servers. Depending
on utilization levels, the servers accessed by Corp B
may also be used simultaneously by other customers.
The computing capacity provided to Corp B can be
sourced from a variety of servers in one or more of
Corp A’s data centers, and Corp A determines how its
computing resources are allocated among customers.
Corp A agrees to keep the servers operational, includ-
ing by performing physical maintenance and repair,
and may replace any server with another server of
comparable functionality. Corp A agrees to provide
Corp B with a payment credit for server downtime.
Corp B has no ability to physically alter any server.
(ii) Analysis. (A) The computing capacity trans-
action between Corp A and Corp B is a cloud trans-
action described in paragraph (b) of this section
because Corp B obtains a non-de minimis right to
on-demand network access to computer hardware of
Corp A.
(B) Corp B has neither physical possession of
nor control of the servers, beyond Corp B’s right to
access and use the servers. Corp A may replace any
server with a functionally comparable server. The
servers are a component of an integrated operation
in which Corp A has other responsibilities, includ-
ing maintaining the servers. The transaction does
not provide Corp B with a significant economic or
possessory interest in the servers. The agreement
provides that Corp A will provide Corp B with a pay-
ment credit for server downtime, such that Corp A
bears risk of substantially diminished receipts in the
event of contract nonperformance. The servers may,
depending on utilization levels, be used by Corp A
to provide significant computing capacity to entities
unrelated to Corp B. Corp A is compensated accord-
ing to the level of Corp B’s use (that is, the amount
of computing power made available) and not solely
based on the passage of time. Taking into account all
of the relevant factors, the transaction between Corp
A and Corp B is classified as the provision of ser-
vices under paragraph (c) of this section.
(2) Example 2: Computing capacity on dedicat-
ed servers—(i) Facts. The facts are the same as in
paragraph (d)(1)(i) of this section (the facts in Exam-
ple 1), except that, in order to offer more security to
Corp B, Corp A provides Corp B computing capacity
exclusively through designated servers, which are
owned by Corp A and located at Corp A’s facilities.
Corp A agrees not to use a designated server for any
other customer for the duration of its arrangement
with Corp B. Corp A’s compensation reflects a sub-
stantial return for maintaining the servers in addition
to the rental value of the servers.
(ii) Analysis. (A) As in paragraph (d)(1) of this
section, the transaction between Corp A and Corp B
is a cloud transaction described in paragraph (b) of
this section because Corp B obtains a non-de mini-
mis right to on-demand network access to computer
hardware resources of Corp A.
(B) The fact that Corp A provides computing
capacity to Corp B through designated servers in-
dicates that such servers are not used concurrently
by other Corp A customers. However, Corp A retains
physical possession of the servers. In addition, Corp
A’s sole responsibility for maintaining the servers,
and its sole right to replace or physically alter the
servers, indicate that Corp A controls the servers.
Although Corp B obtains the exclusive right to use
certain servers, Corp B does not have a significant
economic or possessory interest in the servers be-
cause, among other things, Corp A retains the right to
replace the servers, Corp A bears the risk of damage
to the servers, and Corp B does not share in cost sav-
ings associated with the servers because the fee paid
by Corp B to Corp A does not vary based on Corp
A’s costs. The compensation to Corp A substantial-
ly exceeds the rental value of the servers. The other
relevant factors are analyzed in the same manner as
paragraph (d)(1) of this section. Taking into account
all of these factors, the transaction between Corp A
and Corp B is classified as a provision of services
under paragraph (c) of this section.
(3) Example 3: Access to software development
platform and website hosting—(i) Facts. Corp A pro-
vides Corp B a software platform that Corp B uses to
develop and deploy websites with a range of features,
including blogs, message boards, and other collabo-
rative knowledge bases. The software development
platform consists of an operating system, web server
software, scripting languages, libraries, tools, and
back-end relational database software and allows
Corp B to use in its websites certain visual elements
subject to copyrights held by Corp A. The software
development platform is hosted on servers owned by
Corp A and located at Corp A’s facilities. Corp B’s
finished websites are also hosted on Corp A’s servers.
The software development platform and servers are
also used concurrently to provide similar functional-
ity to Corp A customers unrelated to Corp B. Corp
B accesses the software development platform via a
standard web browser. Corp B has no ability to alter
the software code. A small amount of scripting code
is downloaded onto Corp B’s computers to facilitate
secure logins and access to the software development
platform. All other functions of the software devel-
opment platform execute on Corp A’s servers, and no
portion of the core software code is ever downloaded
by Corp B or Corp B’s customers. Corp A is solely
responsible for maintaining the servers and software
development platform, including ensuring continued
functionality and compatibility with Corp B’s brows-
er, providing updates and fixes to the software for the
duration of the contract with Corp B, and replacing
or upgrading the servers or software at any time with
a functionally similar version. Corp B pays Corp A
a monthly fee for the platform and website hosting
that takes into account the storage requirements of
Corp B’s websites and the amount of website traffic
supported, but there is no stand-alone fee for use of
the software development platform. Corp B agrees to
pay for Corp A’s website hosting services for a min-
imum period, after which Corp B may continue to
pay for Corp A’s website hosting services or transfer
its developed websites to a different hosting provid-
er. Corp A agrees to provide Corp B with a payment
credit for server downtime.
(ii) Analysis. (A) Corp A’s provision to Corp B of
access to the software platform is a cloud transaction
described in paragraph (b) of this section because
Corp B obtains a non-de minimis right to on-demand
network access to computer hardware and software
resources of Corp A. Corp A’s hosting of Corp B’s
finished websites is part of the provision of access to
the software platform and hardware.
(B) Corp B does not have physical possession of
the software platform or servers. Although Corp B
uses Corp A’s platform to develop and deploy web-
sites, Corp B does not maintain the software platform
or the servers on which it is hosted, and Corp B can-
not alter the software platform. Accordingly, Corp B
does not control the software platform or the servers.
Corp A maintains the right to replace or upgrade the
software platform and servers with functionally sim-
ilar versions. The servers and software platform are
components of an integrated operation in which Corp
A has various responsibilities, including maintaining
the servers and updating the software. Corp B does
not have a significant economic or possessory inter-
est in Corp A’s software platform or servers. Corp B
may lose revenue with respect to the websites that
it deploys on Corp A’s servers when the servers are
down; nonetheless, Corp A bears the risk of substan-
tially diminished receipts in the event of contract
nonperformance because Corp A will provide Corp
B with a payment credit for server downtime. Corp A
provides access to the servers and platform to Corp
B and other customers concurrently. Corp A is com-
pensated based on Corp B’s level of use (that is, the
amount of computing resources provided) and not
solely by the passage of time. Taking into account
all of the factors, the transaction between Corp A and
Corp B is classified as a provision of services under
paragraph (c) of this section.
(C) Although the download of a small amount
of scripting code to facilitate logins and access to
the software platform would otherwise constitute a
transfer of a computer program, instead of a cloud
transaction under paragraph (b) of this section, the
download is de minimis in the context of the over-
all arrangement, and therefore, under paragraph (c)
(3) of this section, there is no separate classification
of the download. Similarly, the fact that Corp B re-
ceives rights to publicly display certain copyrighted

September 3, 2019 692 Bulletin No. 2019–36
visual elements resulting from Corp A’s software
development platform on Corp B’s own websites,
which would otherwise constitute a transfer of copy-
right rights under §1.861-18, instead of a cloud trans-
action under paragraph (b) of this section, does not
require separate classification because the right to
use such elements is also de minimis. Thus, under
paragraph (c) of this section, the entire arrangement
is classified as a service.
(4) Example 4: Access to software—(i) Facts.
The facts are the same as in paragraph (d)(3)(i) of this
section (the facts in Example 3), except that, instead
of providing website development software, Corp
A provides Corp B access to customer relationship
management software under several options such as
“entry-level,” “mid-level,” and “advanced-level,”
via a standard web browser, which Corp A hosts on
its servers for a monthly subscription fee. Corp B
has no ability to alter the software code, and Corp
A agrees to make available new versions of the soft-
ware as they are developed for the duration of Corp
B’s contract, and to ensure servers’ uptime in accor-
dance with the service level agreement.
(ii) Analysis. (A) As in paragraph (d)(3) of this
section, the transaction between Corp A and Corp B
is a cloud transaction described in paragraph (b) of
this section because Corp B obtains a non-de mini-
mis right to on-demand network access to computer
hardware and software resources of Corp A.
(B) The relevant factors are analyzed in the same
manner as in paragraph (d)(3) of this section, except
that compensation due to Corp A is determined based
on the option chosen and the passage of time rath-
er than a measure of computing resources utilized.
Although as a general matter compensation based
on the passage of time is more indicative of a lease
than a service transaction, that factor is outweighed
by the other factors, which support classification as
a service transaction. Taking into account all of the
factors, the transaction between Corp A and Corp B
is classified as a provision of services under para-
graph (c) of this section.
(5) Example 5: Downloaded software subject to
§1.861-18—(i) Facts. Corp A provides software for
download to Corp B that enables Corp B to create
a scalable, shared pool of computing resources over
Corp B’s own network for use by Corp B’s employ-
ees. Corp B downloads the software, which runs
solely on Corp B’s servers. Corp A provides Corp
B with free updates for download as they become
available. Corp B pays Corp A an annual fee, and,
upon termination of the arrangement, an electronic
lock is activated that prevents Corp B from further
using the software.
(ii) Analysis. Under paragraph (b) of this sec-
tion, the download of software for use with Corp B’s
computer hardware does not constitute on-demand
network access by Corp B to Corp A’s software. Ac-
cordingly, the transaction between Corp A and Corp
B is not a cloud transaction described in paragraph
(b) of this section. Because the transaction involves
the transfer of digital content as defined in §1.861-
18(a)(3), it is classified under §1.861-18.
(6) Example 6: Access to online software via
an application—(i) Facts. Corp A provides Corp
B word processing, spreadsheet, and presentation
software and allows employees of Corp B to access
the software over the Internet through a web brows-
er or an application (“app”). In order to access the
software from a mobile device, Corp B’s employees
usually download Corp A’s app onto their devices.
To access the full functionality of the app, the device
must be connected to the Internet. Only a limited
number of features on the app are available without
an Internet connection. Corp B has no ability to alter
the software code. The software is hosted on servers
owned by Corp A and located at Corp A’s facilities
and is used concurrently by other Corp A customers.
Corp A is solely responsible for maintaining and re-
pairing the servers and software, and ensuring con-
tinued functionality and compatibility with Corp B’s
employees’ devices and providing updates and fixes
to the software (including the app) for the duration
of the contract with Corp B. Corp B pays a monthly
fee based on the number of employees with access to
the software. Upon termination of the arrangement,
Corp A activates an electronic lock preventing Corp
B’s employees from further utilizing the app, and
Corp B’s employees are no longer able to access the
software via a web browser.
(ii) Analysis. (A) Corp A’s provision to Corp B
of a non-de minimis right to on-demand network
access to Corp A’s computer hardware and software
resources for the purpose of fully utilizing Corp A’s
software is a cloud transaction described in para-
graph (b) of this section.
(B) Corp B has neither physical possession of nor
control over Corp A’s word processing, spreadsheet,
and presentation software or computer hardware.
Additionally, the servers and software are part of
an integrated operation in which Corp A maintains
the servers and updates the software. Corp A makes
available its word processing, spreadsheet, and pre-
sentation software and servers to Corp B and oth-
er customers concurrently. Corp A’s compensation,
though based in part on the passage of time, is also
determined by reference to Corp B’s level of use
(that is, the number of Corp B employees with ac-
cess to the software). Taking into account all of the
factors, the transaction between Corp A and Corp B
is classified as the provision of services under para-
graph (c) of this section.
(C) The provision of the app to Corp B’s em-
ployees by download onto their devices would be a
transfer of a computer program rather than a cloud
transaction subject to paragraph (b) of this section.
However, under paragraph (c)(3) of this section, it is
necessary to consider whether that transfer is de mi-
nimis in the context of the overall arrangement and
in light of the surrounding facts and circumstances.
Here, the significance of the download of the app by
Corp B’s employees is limited by the fact that the
device running the app must be connected to Corp
A’s servers via the Internet to enable most of the
app’s core functions. The software that enables such
functionality remains on Corp A’s servers and is ac-
cessed through an on-demand network by Corp B’s
employees. Therefore, the download of the app is de
minimis, and under paragraph (c)(3) of this section,
the entire arrangement is classified as a service.
(7) Example 7: Access to offline software with
limited online functions—(i) Facts. Corp A provides
Corp B word processing, spreadsheet, and presenta-
tion software that is functionally similar to the soft-
ware in paragraph (d)(6) of this section (Example
6). The software is made available for access over
the Internet but only to download the software onto
a computer or onto a mobile device in the form of
an app. The downloaded software contains all the
core functions of the software. Employees of Corp
B can use the software on their computers or mo-
bile devices regardless of whether their computer or
mobile device is online. When online, the software
provides a few ancillary functions that are not avail-
able offline, such as access to document templates
and data collection for diagnosing problems with the
software. Whether working online or offline, Corp
B employees can store their files only on their own
computer or mobile device, and not on Corp A’s data
storage servers. Because the software provides near
full functionality without access to Corp A’s servers,
it requires more computing resources on employees’
computers and devices than the app in paragraph
(d)(6) of this section. Corp B’s employees can also
download updates to the software as part of the
monthly fee arrangement. Upon termination of the
arrangement, an electronic lock is activated so that
the software can no longer be accessed.
(ii) Analysis. The provision of the software con-
stitutes a lease of a copyrighted article under §1.861-
18. See §1.861-18(h)(4). The access to the online
ancillary functions otherwise would constitute a
cloud transaction under paragraph (b) of this section,
but the access to these functions is de minimis in
the context of the overall arrangement, considering
that the core functions are available offline through
the downloaded software. Because there is no cloud
transaction described in paragraph (b) of this section,
this section does not apply.
(8) Example 8: Data storage, separate from ac-
cess to offline software—(i) Facts. The facts are the
same as in paragraph (d)(7)(i) of this section (the
facts in Example 7), except that Corp A also provides
data storage to Corp B on Corp A’s server systems in
exchange for a monthly fee based on the amount of
data storage used by Corp B. Under the data storage
terms, Corp B employees may store files created by
Corp B employees using Corp A’s software or other
software. Although Corp A’s word processing soft-
ware is compatible with Corp A’s data storage sys-
tems, the core functionality of Corp A’s software is
not dependent on Corp B’s purchase of the storage
plan. Depending on utilization levels, the server sys-
tems providing data storage to Corp B may also be
used simultaneously for other customers. The data
storage provided to Corp B can be sourced from a
variety of server systems in one or more of Corp A’s
data centers, and Corp A determines how its comput-
ing resources are allocated among customers. Corp
A agrees to keep the server systems operational,
including by performing physical maintenance and
repair, and may replace any server system with an-
other one of comparable functionality. Corp A agrees
to provide Corp B with a payment credit for server
downtime. Corp B has no ability to physically alter
the server systems.
(ii) Analysis. (A) Corp A’s provision of software
and data storage capacity constitute separate trans-
actions, and neither is de minimis. Therefore, under
paragraph (c)(3) of this section, the transactions are
classified separately.
(B) As in paragraph (d)(7), Corp B’s download
of fully functional software, along with on-demand
network access to certain limited online features,

Bulletin No. 2019–36 693 September 3, 2019
does not constitute a cloud transaction, but rather
constitutes a lease of a copyrighted article under
§1.861-18.
(C) Corp A’s provision of data storage constitutes
a cloud transaction because Corp B obtains a non-de
minimis right to on-demand network access to com-
puter hardware of Corp A.
(D) Corp B has neither physical possession of nor
control of the server systems, beyond Corp B’s right
to access and use the servers. Corp A may replace
any server with a functionally comparable server.
The server systems are a component of an integrated
operation in which Corp A has other responsibilities,
including maintaining the server systems. The trans-
action does not provide Corp B with a significant
economic or possessory interest in the servers. The
servers may, depending on utilization levels, be used
by Corp A to provide significant services to entities
unrelated to Corp B. Corp A is compensated accord-
ing to the level of Corp B’s use (that is, the amount
of data storage used by Corp B) and not solely based
on the passage of time. Because Corp A will provide
Corp B with a payment credit for server downtime,
Corp A bears risk of substantially diminished receipts
in the event of contract nonperformance. Taking into
account all of these factors, the transaction for data
storage is classified as a provision of services under
paragraph (c) of this section.
(9) Example 9: Streaming digital content us-
ing third-party servers—(i) Facts. Corp A streams
digital content in the form of videos and music
to end-users from servers located in data centers
owned and operated by Data Center Operator. Data
Center Operator’s content delivery network facility
services multiple customers. Each end-user uses a
computer or other electronic device to access un-
limited streaming video and music in exchange
for payment of a flat monthly fee to Corp A. The
end-user may select from among the available con-
tent the particular video or song to be streamed.
Corp A continually updates its content catalog,
replacing content with higher quality versions and
adding new content at no additional charge to the
end-user. Content that is streamed to the end-user
is not stored locally on the end-user’s computer or
other electronic device and therefore can be played
only while the end-user’s computer or other elec-
tronic device is connected to the Internet. Corp
A pays Data Center Operator a fee based on the
amount of data storage used and computing power
made available in connection with Corp A’s content
streaming. The storage and computing power pro-
vided to Corp A can be sourced from a variety of
servers in one or more of Data Center Operator’s
facilities, and Data Center Operator determines
how computing resources are allocated among its
customers. Data Center Operator covenants to keep
the servers operational, including performing phys-
ical maintenance and repair. Corp A has no right or
ability to physically alter the servers.
(ii) Analysis. (A) The relevant factors for classi-
fying the transaction between Corp A and Data Cen-
ter Operator are analyzed in the same manner as the
computing capacity and data storage transactions in
paragraphs (d)(1) and (8) of this section (Example
1 and Example 8), respectively, such that the trans-
action between Corp A and Data Center Operator is
classified as a provision of services by Data Center
Operator to Corp A under paragraph (c) of this sec-
tion.
(B) A transaction between Corp A and an end-us-
er is a cloud transaction described in paragraph (b)
of this section because the end-user obtains a non-de
minimis right to on-demand network access to digi-
tal content of Corp A.
(C) An end-user has neither physical possession
of nor control of the digital content. Additionally,
Corp A has the right to determine the digital content
used in the cloud transaction and retains the right
to modify its selection of digital content. Digital
content accessed by end-users is a component of
an integrated operation in which Corp A’s other re-
sponsibilities include maintaining and updating its
content catalog. Corp A’s end-users do not obtain a
significant economic or possessory interest in any
of the digital content in Corp A’s catalog. The dig-
ital content provided by Corp A may be accessed
concurrently by multiple unrelated end-users. Al-
though, as a general matter, compensation based on
the passage of time is more indicative of a lease
than a service transaction, that factor is outweighed
by the other factors, which support a services clas-
sification. Taking into account all of the factors, a
transaction between an end-user and Corp A is clas-
sified as a provision of services under paragraph (c)
of this section.
(10) Example 10: Downloaded digital content
subject to §1.861-18—(i) Facts. Corp A offers dig-
ital content in the form of videos and music solely
for download onto end-users’ computers or other
electronic devices for a fee. Once downloaded, the
end-user accesses the videos and songs from the
end-user’s computer or other electronic device,
which does not need to be connected to the Internet
in order to play the content. The end-user owes no
additional payment to Corp A for the ability to play
the content in the future.
(ii) Analysis. Under paragraph (b) of this section,
the download of digital content onto an end-user’s
computer for storage and use on that computer does
not constitute on-demand network access by the
end-user to the digital content of Corp A. Accord-
ingly, the transaction between the end-user and Corp
A is not a cloud transaction described in paragraph
(b) of this section, and this section does not apply
to the transaction. Because the transaction involves
the transfer of digital content as defined in §1.861-
18(a)(3), it will be classified under §1.861-18. See
§1.861-18(h)(21).
(11) Example 11: Access to online database—
(i) Facts. Corp A offers an online database of in-
dustry-specific materials. End-users access the ma-
terials through Corp A’s website, which aggregates
and organizes information topically and hosts a
proprietary search engine. Corp A hosts the web-
site and database on its own servers and provides
multiple end-users access to the website and data-
base concurrently. Corp A is solely responsible for
maintaining and replacing the servers, website, and
database (including adding or updating materials
in the database). End-users have no ability to alter
the servers, website, or database. Most materials in
Corp A’s database are publicly available by other
means, but Corp A’s website offers an efficient way
to locate and obtain the information on demand.
Certain materials in Corp A’s database constitute
digital content within the meaning of §1.861-18(a)
(3), and Corp A pays the copyright owners a license
fee for using them. Each end-user may down-
load any of the materials to its own computer and
keep such materials without further payment. The
end-user pays Corp A a fee based on the number of
searches or the amount of time spent on the web-
site, and such fee is not dependent on the amount of
materials the end-user downloads. The fee that the
end-user pays is substantially higher than the stand-
alone charge for accessing the same digital content
outside of Corp A’s system.
(ii) Analysis. (A) Corp A’s provision to an end-us-
er of access to Corp A’s website and online database
is a cloud transaction described in paragraph (b) of
this section because the end-user obtains a non-de
minimis right to on-demand access to Corp A’s com-
puter hardware and software resources.
(B) An end-user’s downloading of the digital
content would be classified as a sale of copyrighted
articles under §1.861-18. Nonetheless, taking into
account the entire arrangement, including that the
primary benefit to the end-user is access to Corp A’s
database and its proprietary search engine, and that
the stand-alone charge for accessing the digital con-
tent would be substantially less than the fee Corp A
charges, the downloads are de minimis. According-
ly, under paragraph (c)(3) of this section, there is no
separate classification of the downloads.
(C) The end-user has neither physical posses-
sion of nor control of the database, software, or the
servers that host the database or software. Corp A
retains the right to replace its servers and update its
software and database. The database, software, and
servers are part of an integrated operation in which
Corp A is responsible for curating the database, up-
dating the software, and maintaining the servers.
Corp A provides each end-user on-demand network
access to its software and online database concur-
rently with other end-users. Certain end-users pay
Corp A a fee based on time spent on Corp A’s web-
site, which could be construed as compensation
based on the passage of time and thus be more in-
dicative of a lease than a service transaction. How-
ever, the fee that the end-user pays is substantially
higher than the stand-alone charge for accessing
the same digital content outside of Corp A’s sys-
tem. Accordingly, on balance, the fee arrangement
supports the classification of the transaction as a
service transaction. Taking into account all of these
factors, the arrangement between end-users and
Corp A is treated as the provision of services under
paragraph (c) of this section.
(e) Effective/applicability date. This
section applies to cloud transactions oc-
curring pursuant to contracts entered into
in taxable years beginning on or after the
date of publication of a Treasury decision
adopting these rules as final regulations in
the Federal Register.
(f) Change in method of accounting
required by this section. In order to com-
ply with this section, a taxpayer engag-

September 3, 2019 694 Bulletin No. 2019–36
ing in a cloud transaction pursuant to a
contract entered into on or after the date
described in paragraph (e) of this section
may be required to change its method of
accounting. If so required, the taxpayer
must secure the consent of the Commis-
sioner in accordance with the require-
ments of §1.446-1(e) and the applicable
administrative procedures for obtain-
ing the Commissioner’s consent under
section 446(e) for voluntary changes in
methods of accounting.
§1.937-3 [Amended]
Par. 5. Section 1.937-3 is amended by
removing Examples 4 and 5 from para-
graph (e).
Kirsten Wielobob,
Deputy Commissioner for Services
and Enforcement
(Filed by the Office of the Federal Register on Au-
gust 9, 2019, 4:15 p.m., and published in the issue
of the Federal Register for August 14, 2019, 84 F.R.
40317)

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that
the same principle also applies to B, the
earlier ruling is amplified. (Compare with
modified, below).
Clarified is used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion. It
is not used where a position in a prior rul-
ing is being changed.
Distinguished describes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modified is used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
with amplified and clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transactions.
This term is most commonly used in a ruling
that lists previously published rulings that
are obsoleted because of changes in laws or
regulations. A ruling may also be obsoleted
because the substance has been included in
regulations subsequently adopted.
Revoked describes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a
period of time in separate rulings. If the
new ruling does more than restate the sub-
stance of a prior ruling, a combination of
terms is used. For example, modified and
superseded describes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previous-
ly published ruling in a new ruling that is
self contained. In this case, the previously
published ruling is first modified and then,
as modified, is superseded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names
in subsequent rulings. After the original
ruling has been supplemented several
times, a new ruling may be published that
includes the list in the original ruling and
the additions, and supersedes all prior rul-
ings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cas-
es in litigation, or the outcome of a Ser-
vice study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI
—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Bulletin No. 2019–36 i September 3, 2019

Numerical Finding List
1
Bulletin 2019–36
Announcements:
2019-07, 2019-27 I.R.B. 62
2019-08, 2019-32 I.R.B. 621
Notices:
2019-12, 2019-27 I.R.B. 57
2019-40, 2019-27 I.R.B. 59
2019-41, 2019-28 I.R.B. 256
2019-42, 2019-29 I.R.B. 352
2019-27, 2019-31 I.R.B. 484
2019-43, 2019-31 I.R.B. 487
2019-24, 2019-31 I.R.B. 489
2019-45, 2019-32 I.R.B. 593
2019-48, 2019-36 I.R.B. 678
Proposed Regulations:
REG-105476-18, 2019-27 I.R.B. 63
REG-106282-18, 2019-28 I.R.B. 259
REG-101828-19, 2019-29 I.R.B. 412
REG-106877-18, 2019-30 I.R.B. 441
REG-121508-18, 2019-30 I.R.B. 456
REG-105474-18, 2019-31 I.R.B. 493
REG-118425-18, 2019-31 I.R.B. 539
REG-130700-14, 2019-36 I.R.B. 681
Revenue Rulings:
2019-16, 2019-28 I.R.B. 96
2019-17, 2019-32 I.R.B. 583
2019-18, 2019-35 I.R.B. 668
2019-19, 2019-36 I.R.B. 674
2019-20, 2019-36 I.R.B. 675
Revenue Procedures:
2019-24, 2019-29 I.R.B. 353
2019-28, 2019-32 I.R.B. 596
2019-29, 2019-32 I.R.B. 620
2019-30, 2019-33 I.R.B. 638
2019-31, 2019-33 I.R.B. 643
2019-32, 2019-33 I.R.B. 659
2019-33, 2019-34 I.R.B. 662
2019-34, 2019-35 I.R.B. 669
Treasury Decisions:
9863, 2019-27 I.R.B. 1
9864, 2019-27 I.R.B. 6
9865, 2019-27 I.R.B. 27
9867, 2019-28 I.R.B. 98
9868, 2019-28 I.R.B. 252
9866, 2019-29 I.R.B. 261
9861, 2019-30 I.R.B. 433
9869, 2019-30 I.R.B. 438
Treasury Decisions:—Continued
9862, 2019-31 I.R.B. 477
9872, 2019-32 I.R.B. 585
9871, 2019-33 I.R.B. 624
9873, 2019-33 I.R.B. 630
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.
September 3, 2019 ii Bulletin No. 2019–36

Bulletin No. 2019–36 iii September 3, 2019
Finding List of Current Actions on
Previously Published Items
1
Bulletin 2019–36
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2018–27 through 2018–52 is in Internal Revenue Bulletin
2018–52, dated December 27, 2018.

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