4.61.12 Foreign Investment in Real Property Tax Act

Manual Transmittal

May 24, 2019


(1) This transmits revised IRM 4.61.12, International Program Audit Guidelines, Foreign Investment in Real Property Tax Act.

Material Changes

(1) Rewrote IRM to conform to new requirement to include internal control information at the beginning of the IRM.

  1. Title changed to Program Scope and Objectives

  2. Added new paragraphs (2) though (5) to describe audience, policy owner, program owner and primary stakeholders.

  3. Rearranged and added material to IRM, Background.

  4. Added new sub-sections IRM through IRM to include "Authority" , "Responsibilities" , "Acronyms" and "Related Resources" .

(2) Legal references updated.

(3) The term "international examiner" or "IE" was removed and replaced by "examiner"

(4) Exhibit 4.61.12-1, Withholding and Filing Requirements Under FIRPTA, has been redesigned and updated.

(5) Editorial corrections have been made throughout this IRM.

Effect on Other Documents

This IRM supersedes IRM 4.61.12, Foreign Investment in Real Property Tax Act, dated May 1, 2006.



Effective Date


John Cardone
Director, Withholding and International Individual Compliance Practice Area
Large Business and International Division

Program Scope and Objectives

  1. Purpose: This IRM provides guidance and technical information for the Foreign Investment in Real Property Tax Act.

  2. Audience: The primary users of this IRM are employees, management and executives of the WIIC Practice Area in LB&I.

  3. Policy Owner: The WIIC director develops policies governing the WIIC Practice Area. .

  4. Program Owner: The WIIC director manages and administers the WIIC Practice Area.

  5. Primary Stakeholders: IRS examiners, Wage and Investment (W&I) Division, Ogden Accounts Management.


  1. This IRM was developed to provide guidance to WIIC personnel tasked with enforcing the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA). This IRM section has been updated several times most recently in 2002 and 2006 for tax law changes, updated guidance and terminology changes.


  1. FIRPTA established IRC 897. FIRPTA was enacted to treat foreign and domestic investment in U.S. real property more comparably.

  2. The development, implementation and oversight of the international individual compliance strategies and program initiatives are the prerogative of the WIIC director.


  1. The Director, WIIC is responsible for the development, implementation and oversight of the withholding and international individual compliance strategies and program initiatives.

  2. Ogden Accounts Management processes FIRPTA compliance. W&I electronically stores FIRPTA compliance. IRS examiners audit FIRPTA-related cases.


  1. Commonly used acronyms are listed below.

    Acronym Definition
    FIRPTA Foreign Investment in Real Property Tax Act
    PN Practice Network
    REIT Real Estate Investment Trust
    USRPHC United States Real Property Holding Company
    USRPI United States Real Property Interest
    W&I Wage and Investment
    WIIC Withholding and International Individual Compliance

Related Resources

  1. For information regarding the WIIC Practice Area international individual compliance strategies and program initiatives, refer to WIIC website:https://irssource.web.irs.gov/LBI/Lists/LBI_Programs/WIIC.aspx.

  2. For additional information regarding the Practice Networks (PN) structure, members and their respective roles and responsibilities, visit the PN SharePoint at:https://organization.ds.irsnet.gov/sites/LBIINTL/SitePages/default.aspx

  3. For information regarding the LB&I examination process, see IRM 4.46, LB&I Examination Process.

  4. For information regarding the basic procedures, guidelines and requirements for use by revenue agents and tax auditors in conducting income tax examinations, see IRM 4.10, Examination of Returns.

Overview of IRC 897

  1. IRC 897 applies to foreign persons who dispose of U.S. real property interests after June 18, 1980.

  2. IRC 897 treats any gain from disposition as income effectively connected with a U.S. trade or business.

  3. IRC 897 broadly defines the term "U.S. real property interest" (USRPI) to include the following:

    1. An interest in real property located in the United States or the Virgin Islands

    2. An interest in a domestic corporation unless the taxpayer establishes that the domestic corporation was not a U.S. real property holding corporation (USRPHC) for a certain period. (See IRM below.)

  4. The definition of USRPI includes any interest, except an interest solely as a creditor. USRPI also includes associated personal property.

  5. A USRPI includes an interest in the following:

    • Land and unsevered natural products of the land

    • Improvements and personal property associated with the use of real property

    • Standing timber

    • Growing crops

    • Mines

    • Wells and other natural deposits before extraction

    • Buildings

    • Swimming pools

    • Fences

    • Advertising displays

    • Oil and gas pipelines

    • Permanently installed telephone and television cables

    • Leaseholds

    • Options

  6. Dispositions of interests in pass-through entities are taxed under IRC 897(a) to the extent the gains are attributable to USRPIs held by the entities. These entities include partnerships, trusts, and estates. Gains or losses pass through to partners or beneficiaries.

  7. The regulations under IRC 897 broadly define the term "disposition." Any transfer considered a disposition under any section of the code and regulations is considered a disposition under IRC 897. Under certain circumstances, transfers otherwise qualifying for nonrecognition treatment may be taxed under IRC 897. Dispositions may include the following:

    1. Sales

    2. Gifts in which the adjusted basis of property transferred is less than the liabilities transferred

    3. Like-kind exchanges

    4. Changes in an interest in a partnership, trust or estate

    5. Corporate reorganizations, mergers or liquidations

    6. Foreclosures

    7. Involuntary conversions

  8. Effective January 1, 1985, IRC 1445 imposes a withholding obligation for dispositions of a USRPIs. IRC 1461 makes the transferee liable for the tax that must be deducted and withheld under IRC 1445.

Withholding Certificates

  1. IRC 1445 and applicable regulations authorize the Service to reduce or eliminate the withholding amount. Rev. Proc. 2000-35 provides procedures for obtaining a withholding certificate.

  2. A withholding certificate only adjusts a withholding obligation to correspond with the probable tax liability arising from a transfer. It does not resolve substantive issues that may arise concerning the transfer.

  3. If the application for a withholding certificate is submitted to the Service on or before the date of transfer, and the application is pending, the transferee need not pay over the amount required to be withheld immediately. Such a transferee must pay by the 20th day after the Service mails a copy of the withholding certificate or a denial.

  4. Examiners should do the following when examining dispositions of USRPIs:

    1. Request the taxpayer to provide withholding certificates relating to dispositions of USRPIs.

    2. Review the transaction as reported on the application for the withholding certificate and as reported on the tax return. Verify that the two descriptions match. If they do not match, determine whether a transferor’s or a transferee’s agent knew that a false affidavit was submitted to obtain a withholding certificate. In this case, the agent may be liable for the proper withholding amount to the extent of the agent’s compensation. The transferor is also liable for the proper withholding amount.

    3. The FIRPTA database, a sub-application of the INTLWebApps system, is available for researching information related to filed withholding certificates and FIRPTA tax returns. Examiners can request this information, if needed.

IRC 897(i) Election

  1. IRC 897(i) allows foreign corporations to be taxed as domestic corporations for FIRPTA purposes only. To make an IRC 897(i) election, a foreign corporation must:

    1. Own a USRPI

    2. Qualify as a USRPHC upon making the election

    3. Be entitled to nondiscriminatory treatment of its USRPI under a tax treaty

    4. Submit the election in proper form

  2. Under IRC 897(i) the electing foreign corporation is treated as a USRPHC. Its stock is therefore a USRPI and subject to FIRPTA on its disposition.

  3. While examining the Form 1120F ( U.S. Income Tax Return of a Foreign Corporation), the examiner should do the following:

    1. Request the official copy of the letter acknowledging the election, pursuant to IRC 897(i),

    2. Verify that a treaty applies. If so, verify that the foreign corporation qualifies for nondiscriminatory treatment under the treaty.

    3. Request a copy of the acknowledgment from the transferee.

    4. Verify that nonrecognition transactions under Subchapter C were properly carried out. Review the closing documents. Interviews with individuals who were present at the closing may be conducted with proper approval.

  4. The examiner should review the tax return for attachments required by Reg 1.897–5T(d)(1)(iii) and Notice 89–57. These attachments must include the following:

    1. A statement that the distribution was subject to IRC 897

    2. A description of the property

    3. The distributor’s adjusted basis in the USRPI

    4. A statement providing the name, address and TIN of the distributee

    5. A declaration by the distributee that it will be subject to tax on a subsequent disposition of the USRPI


  1. To decide if FIRPTA applies, the examiner should determine whether a domestic corporation is a USRPHC. If a domestic corporation is a USRPHC (or was one in the preceding five- year period), its stock is a USRPI.

  2. A USRPHC is a domestic corporation whose USRPI percentage equaled 50 percent or more anytime within the preceding five-year period. In general, the formula is:

        Fair market value (FMV) of USRPI
    USRPHC Percentage = FMV of USRPI + FMV of Foreign Real Property + FMV of Trade or Business Assets
  3. Note:

    Fair market value (FMV) of real property is the gross value reduced by the outstanding liability secured by property. Gross value (GV) is the price that a willing seller would charge a willing buyer.

  4. A foreign corporation is generally a USRPHC only for purposes of determining whether a corporation owning interests directly in the foreign corporation is a USRPHC. [See Reg. 1.897–2(e)(1).]

  5. Trade or business assets are assets other than USRPIs that are:

    1. Related to a trade or business

    2. Used in a trade or business

    3. Held for use in a trade or business.


    Future trade or business needs are not relevant.

  6. A corporation is presumed not to be a USRPHC when the book value of its USRPIs is 25 percent or less than the book value of its assets on the determination date. Book value is the value carried on the corporation’s financial statements as determined by Generally Accepted Accounting Principles(GAAP).

  7. Look-through rules apply to the determination of USRPHC status. They are as follows:

    1. The corporation is considered to own a proportionate share of assets held through the following: A domestic or foreign corporation in which it owns a controlling interest; A partnership; A trust; An estate.

    2. If the corporation owns stock in a foreign corporation, that stock is a USRPI only if the foreign corporation would qualify as a USRPHC if it were viewed as a domestic corporation.

  8. Dates for determining USRPHC status are as follows:

    1. Last date of the taxable year

    2. Date a USRPI is acquired

    3. Disposal date of foreign real property

    4. Disposal date of a trade or business asset

    5. Date a lower tier entity performs an action described above

  9. USRPHC status may be terminated by either of two ways.

    1. On a determination date in which the USRPHC status formula falls below 50 percent. However, the interests in the corporation will remain tainted for five years, or if

    2. The following two conditions are met: 1.) No USRPI’s are owned and 2.) all USRPIs owned directly or indirectly within the preceding five years were disposed of in transactions in which the full amount of the gain was recognized or ceased to be USRPI. [See Reg. 1.897–2(f)(2).]

  10. To avoid FIRPTA, a foreign person disposing of interest in a domestic corporation must establish non-USRPHC status as of the disposition date. This is done by:

    1. Obtaining a statement from the corporation that the interest disposed of was not a USRPI by the due date of the tax return. A signed copy must be sent to the Service by the corporation, or

    2. Obtaining a determination from the Service that the interest was not a USRPI. This can be requested if the following occurs [See Reg. 1.897–2(g)]: (1) The foreign person requests a statement from the corporation as to the status of its interest no later than 90 days before the due date, including any extensions, of the tax return, and . (2) The domestic corporation fails to respond to such request within 30 days of delivery.

  11. FIRPTA may apply at the shareholder level to any distribution made by a domestic corporation that is a USRPHC. FIRPTA will apply at the corporate level to distributions of USRPIs by a foreign corporation.

  12. Dividends received by foreign shareholders are subject to tax under other Code provisions, accordingly FIRPTA is not applicable. The effect of Code provisions may be modified by treaty and as modified are not altered by the corporation’s USRPHC status.

  13. A foreign shareholder may receive a nonliquidating capital gain distribution from a USRPHC if the value of the distribution exceeds the foreign shareholder’s adjusted basis in its stock. The gain may be subject to FIRPTA tax.

  14. A foreign shareholder receiving a liquidating distribution from a USRPHC is deemed to have disposed of its stock. The resulting gain is subject to FIRPTA tax unless the foreign shareholder is a corporation, and the liquidation is an IRC 332(a) liquidation. [See Reg. 1.897–5T(b)(3)(iv)(A).]

  15. The examiner should request all books and records relating to the determination of USRPHC status. This may include (but is not limited to) the following:

    1. Listings and valuations of USRPI, other real property, and trade or business assets

    2. Agreements relating to loans or notes secured by USRPIs and trade or business assets

    3. USRPHC status computations made by the taxpayer on the required determination dates

    4. Listings and valuations of assets owned by entities in which there is (was) a controlling interest

    5. All guidelines, questionnaires,. preform studies, reports, analysis, memoranda and other similar documents,

    6. All correspondence, facsimiles, and other documents.

  16. The examiner should remain aware of the five-year taint that USRPHC status may entail. Preceding years’ USRPHC status may, therefore, affect the taxation of current distributions.

Distributions by Foreign Corporations

  1. When property distributed by a foreign corporation is a USRPI, FIRPTA applies to the foreign corporation, not to the shareholder.

  2. If a foreign corporation disposes of a USRPI, the examiner should consider the importance of the following:

    1. Contracts of sale

    2. Closing documents

    3. Description of all consideration received

    4. Copies of any notes received as consideration

    5. Names and addresses of shareholders

    6. Number of shares of stock held by each shareholder

    7. Application to the Service for reduced withholding certificate(s) including supporting documents

    8. Copy(ies) of the issued reduced withholding certificate(s)

    9. Documents sent to the Service relating to IRC 897(i) election

    10. Copy of IRS acknowledgment of IRC 897(i) election

    11. Affidavit of nonforeign status given to the buyer

    12. Documents supporting the corporation’s nontaxable treatment of the transaction

    13. Names and addresses of all compensated agents involved with the transaction—these may include real estate brokers, lawyers, accountants and others

    14. Documents substantiating basis

    15. Settlement provider and local courthouse records relating to the transaction

    16. Any other documents deemed necessary. (Also see item 15 (e) and (f) of above).

  3. If a foreign corporation distributes a USRPI to its shareholders, it should recognize gain unless:

    1. the distributee is a foreign corporation; and

    2. the distribution is a liquidating distribution under IRC 332(c). The gain is equal to the fair market value of the distributed USRPI minus the foreign corporation’s basis in the USRPI. [See Reg. 1.897–5T(c)(2).]

    3. For liquidating distributions under IRC 332, see generally Notice 2006-46.

Disposition of USRPI by Foreign Partners

  1. Partnerships with foreign partners have three types of transactions that trigger FIRPTA consequences:

    1. Dispositions of USRPIs by the partnership (see (2) below),

    2. Dispositions of partnership interests by foreign partners, (see (3) below), and

    3. Contributions to and distributions by the partnership (see (4) below).

  2. Dispositions of USRPIs by the partnership—A foreign partner’s share of gain or loss from a partnership disposition of a USRPI is treated as a direct disposition of the USRPI by the foreign partner.

  3. Dispositions of partnership interests by foreign partners—

    1. Under IRC 897(g), gain or loss is recognized on the disposition of an interest in a partnership or to the extent attributable to a USRPI. (See Notice 88–72, 1988–2 C.B. 383 and Reg. 1.897–7).

    2. Reg. 1 .897–7T, effective for transfers after June 6,1988, treats certain partnership interests as USRPIs for purposes of IRC 1445. A partnership interest is a USRPI if it meets the "50/90" test, which means: directly or indirectly, 50 percent or more of the value of gross partnership assets consists of USRPIs; directly or indirectly, 90 percent or more of the value of gross partnership assets consists of the following: USRPIs or Cash and cash equivalents


    IRC 897(g) treats a partnership interest as a USRPI only to the extent the gain on the disposition is attributable to USRPI. IRC 897(g) does not treat a partnership interest as a USRPI to the extent the gain on the disposition is attributable to cash, cash equivalents or other property. However, FIRPTA may require withholding tax on the total amount realized.

  4. Contributions to and distributions by a partnership— Contributions to and distributions by partnerships are normally not taxable events. Non-recognition may allow avoidance of IRC 897. IRC 897(e)(2)(b)(ii) authorizes the Service to issue anti-avoidance regulations. Additionally, under IRC 897(g) if money or property is exchanged for "all or part" of a foreign partner’s interest in a partnership gain or loss is recognized to the extent attributable to a USRPI. Under Reg. 1 .897–6T, the exchange of a USRPI for an interest in a partnership will receive non-recognition treatment pursuant to Section 721 only to the extent that a disposition of the partnership interest will be subject to U.S. taxation under Section 897(g).

  5. FIRPTA withholding rules in the partnership context.

    1. IRC 1445(e) and regulations thereunder establish special withholding rules relating to the following: Domestic partnerships; Buyers of interests in partnerships

    2. If the foreign partner does not owe U.S. tax, an amount withheld under IRC 1445 may be refunded. If the domestic partnership fails to meet withholding tax obligations, the Service can do the following: Assert withholding tax liability against the partnership, and charge interest on the delay

    3. IRC 1445 establishes five exemptions from withholding tax. Only the following two are likely to apply to dispositions by a partnership with foreign partners to non-partners. (1) The seller provides a nonforeign affidavit or (2) the seller receives a qualifying statement from the Service.

    4. Withholding tax under IRC 1445 is reported on Form 8288 (U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests).

  6. Disposition of a partnership interest may result in the following consequences:

    1. An IRC 1445 withholding tax based on the amount realized on the disposition [See IRC 1445(e)(5) and Reg. 1.1445–11T].

    2. An IRC 897 gain which is based on the extent the foreign partner’s disposition of the interest is attributable to a USRPI. [See Reg. 1.897–7T.] The IRC 1445 withholding tax, therefore, may be based on an amount in excess of the IRC 897(a) amount.

  7. IRC 1446 imposes a withholding obligation on all partnerships (except those treated as corporations under IRC 7704 ) that have "effectively connected income" allocable to a foreign partner. IRC 1446 requires withholding at the time the income is earned and regardless of whether distributions are actually made to foreign partners. "Effectively connected taxable income" includes gains or losses from dispositions of USRPIs. See Treas. Reg. 1.1446-2(b)(2)(ii). IRC 1446 withholding generally preempts the IRC 1445 withholding rules for domestic partnerships. See Treas. Reg. 1.1446-3(c)(2)(i). The tax is reported on Form 8804, Annual Return for Partnership Withholding Tax (Section 1446).

  8. A foreign partnership is a foreign person for purposes of FIRPTA withholding. The buyer of a USRPI from a foreign partnership must withhold 15 percent of the amount realized. The foreign partnership is then allowed to credit the amount withheld under IRC 1445 against its IRC 1446 withholding liability for the year only to the extent such amount is allocable to foreign partners. See Treas. Reg. 1.1446-3(c)(2)(ii).

Real Estate Investment Trusts

  1. A real estate investment trust (REIT) is a conduit entity. In general, it is not taxed on ordinary income and capital gains distributed to its owners if it distributes 95 percent of such income. REIT is taxed at corporate rates. REIT is entitled to a dividend paid deduction. Shareholders treat a dividend from a REIT as either a capital gain or ordinary dividend, depending on the REIT’s designation.

  2. IRC 897(h) provides rules that apply to distributions made by REITs to foreign shareholders. Foreign shareholders must treat the distribution as an IRC 897 gain to the extent the distribution is attributable to gain realized by the REIT from the sale or exchange of a USRPI. Solely for purposes of IRC 1445 withholding, the largest amount of a post-March 7,1991 distribution that could be designated as a capital gain dividend under IRC 857(b)(3)(c) will be treated as actually designated capital gain dividend.

  3. Under IRC 897(c)(1), a REIT normally qualifies as a USRPHC, and an interest in a REIT is generally a USRPI, however, under IRC 897(h)(2) an interest in a domestically controlled REIT is not a USRPI. Therefore, a foreign shareholder disposing of REIT stock generally must recognize gain from the disposition of a non-domestically controlled REIT under IRC 897.

  4. To determine whether IRC 897 and IRC 1445 apply to a distribution from a REIT, the examiner should review the following:

    1. Form 1120 - REIT,U.S. Income Tax Return for Real Estate Investment Trusts

    2. Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

    3. Form 1042-S Foreign Person’s U.S. Source Income Subject to Withholding

    4. The list of shareholders on the books of the REIT

    5. Applicable information reporting forms sent to the REIT shareholders

  5. Some U.S. tax treaties provide specific rules for certain REIT distributions. In such circumstances, these will override any code provisions.

Examining Nonrecognition Transactions

  1. IRC 1001 provides rules for determining gain on the sale or other disposition of property. Gain is equal to the amount realized minus the adjusted basis of the property. The amount realized is the sum of the following:

    1. Money received

    2. Fair market value of property received

  2. Gain on the disposition of property is fully taxable unless the Code provides an exception. The following are among the provisions of the Code that provide exceptions from gain recognition:

    1. IRC 368 (reorganizations)

    2. IRC 351 (transfers)

    3. IRC 332 (liquidations)

    4. IRC 355 (spin-offs, split-offs and split-ups)

    5. IRC 1031 (like-kind exchanges)

    6. IRC 1033 (involuntary conversions)

    7. Former IRC 1034 (rollover of gain on the sale of a principal residence taking place before May 6,1997)

  3. IRC 897 provides additional requirements for nonrecognition treatment. IRC 897(d) provides that a foreign corporation must generally recognize gain on a distribution of a USRPI. This rule applies also to a distribution in liquidation or redemption. Gain need not be recognized if:

    1. The distribute would be subject to U.S. taxation on a subsequent disposition of the USRPI, and the distribute receives no step-up in the basis of the USRPI, or

    2. Regulation under IRC section 897(e)(2) is applicable.

  4. Under IRC 897(e), the non-recognition provisions generally apply to the sale or exchange of a USRPI only if it is exchanged for an interest that would be subject to the U.S. taxation. [See Reg. 1.897–5T and 6T for implementing regulations.]

  5. Nonresident aliens are generally not subject to tax on U.S. source capital gains. Their capital gains are taxed only if the gains are effectively connected income or they have been present in the United States for 183 days or more during the taxable year in which the property is sold or exchanged. USRPIs are generally capital assets. Consequently, absent FIRPTA, the dispositions of USRPIs would generally not be subject to tax.

  6. Absent anti-abuse rules, foreign corporations could avoid FIRPTA by exchanging USRPIs for non-USRPIs or stock. Subsequent exchanges would not be subject to tax unless the property received is:

    1. Identified as a USRPI

    2. Subject to FIRPTA rules

  7. Foreign corporations may attempt to purge a USRPI’s FIRPTA taint by exchanging a USRPI for non-USRPI. IRC 897(d) and IRC 897(e) are aimed at preventing this.

  8. Examiners should review tax returns for nonrecognition transactions. Generally, taxpayers must file information statements with the tax return when they claim nonrecognition treatment.

  9. Many foreign corporations used nonrecognition provisions to domesticate in 1986 and 1987. This was motivated by unfavorable changes in tax laws that became effective after 1986. Examiners should check foreign-owned domestic corporations for previous reorganizations. Examiners should check domestic corporations owning real property for foreign ownership. Although the statute of limitations may have expired, tax attributes can still be adjusted. This includes the basis of property and net operating losses.

  10. The nonrecognition provisions of Subchapter C are very stringent. Failure to meet requirements can result in gain recognition to the transferor. It can also result in withholding at the source. Nonrecognition transactions must also meet FIRPTA requirements to avoid gain recognition and withholding.

  11. Reorganizations qualify for nonrecognition treatment only if they meet the following requirements:

    1. Continuity of interest

    2. Continuity of business enterprise

    3. Business purpose

  12. Distributions of property to persons not party to reorganizations do not qualify for nonrecognition treatment. Additionally, qualifying for nonrecognition treatment under FIRPTA requires the following:

    1. A USRPI can only be exchanged for another USRPI.

    2. Taxability of subsequent distributions must be maintained.

  13. IRC 897(e)(1) applies to the exchange of a USRPI by a foreign corporation for stock of another foreign corporation pursuant to certain reorganizations. These reorganizations include reorganizations under IRC 368(a)(1)(B), (C), (D) or (F). These reorganizations are generally taxable under FIRPTA if the foreign corporation did not make an IRC 897(i) election. [See Reg. 1.897–6T for exceptions to gain recognition for certain foreign to foreign exchanges of a USRPI for a non USRPI.]

  14. To qualify for nonrecognition treatment, Type A, B, C, D, F and G reorganizations must pass muster under both Subchapter C and FIRPTA.

  15. IRC 351 transfers of USRPIs for foreign corporation stock generally do not qualify for nonrecognition treatment unless:

    1. The foreign corporation makes an IRC 897(i) election.

    2. The transfer meets the requirements of Reg. 1.897–6T

  16. IRC 351 transfers of USRPIs for domestic corporation stock qualify for nonrecognition treatment if:

    1. There is no step-up in basis.

    2. The stock received by the foreign transferrer is a USRPI which would be subject to tax or disposition, and

    3. The filing requirements of Reg. 1.897–5T(d)(iii) are met.

Interests in Natural Resources

  1. Under FIRPTA, an interest in a "mine, well or other natural deposit" located in the United States is a USRPI. Examiners may encounter the following types of interests:

  2. Oil and Gas Interests:

    1. Mineral Fee Interests. Mineral fee interests are direct interests in oil and gas underlying particular tracts of land. They are frequently severed from the rights to the surface of the land. In these situations, mineral fee interest owners have implied rights to use the surface of the land to develop and produce the underlying oil and gas.

    2. Operating Interests. Operating or working interests are also direct ownership interests in the oil and gas. Operating or working interests are burdened with the cost of developing and operating the property.

  3. Nonoperating Interests:

    1. Landowner’s Royalty Interests. A landowner’s royalty interest: (1) Entitles the owner to a specified fraction of the property’s total production; (2) Is not burdened with the cost of developing and operating the property; (3) Is created by the mineral fee owner’s assigning or reserving the interest.

    2. Overriding Royalty Interests. An overriding royalty interest: (1) Is a right relating to oil and gas in place; (2) Entitles the owner to a specified fraction of the property’s total production; (3) Does not burden the owner with the cost of developing and operating the property; (4) Is created out of an operating interest and ends with the operating interest.

  4. Net Profits Interests. A net profits interest is a right relating to oil and gas in place. It entitles the owner to a share of the property’s total production. This share is measured by a specified percentage of the net profits from the property. [See Rev. Rul. 75–182.] The interest is burdened by specified development and operating expenses. This expense burden is limited to its share of the net profits. The owner is not required to pay, advance, or otherwise be liable for such expenses. A net profits interest is created out of an operating interest. Thus, its term usually ends with that of the operating interest to which it relates.

  5. Production Payment. A production payment is a right with respect to oil and gas in place that entitles the owner to a specified fraction, in kind or in value, of the total production from the property, free of development and operating expenses. The interest is for a limited period of time or until a specified sum of money (either set forth precisely or determined by a formula) or a specified amount of oil and gas has been received. A production payment secured by a mortgage is not an economic interest in oil and gas in place.

  6. All of the interests above are USRPIs except for the production payment interest. The production payment interest is a USRPI if it conveys a right to share in the appreciation in value of the property. Examiners should review the production payment interest to determine whether it is a USRPI. In doing so, examiners should inspect the following:

    1. Purchase agreement contract,

    2. Partnership agreement,

    3. Trust agreement, and

    4. Any other document(s) pertaining to this transaction

  7. If a production payment interest is a USRPI, its disposition is subject to FIRPTA.

Loans Treated as USRPIs

  1. Examiners should review debt instruments held by foreign taxpayers. Debt instruments may have contingent interest features. These features may provide for interest if U.S. real property appreciates in value. Under FIRPTA, these types of debt instruments (called shared appreciation loans) qualify as USRPIs. Therefore, dispositions of these debt instruments are taxable under IRC 897. [See Reg. 1.897–1(d).]

  2. Examiners should review debt instruments with contingent interest features. Taxpayers may attempt to use debt instruments with contingent interest features to avoid IRC 897. In such an arrangement, a foreign taxpayer makes a loan to a domestic borrower. It does so rather than obtain a direct interest in a USRPI. The USRPI is owned by a domestic borrower who is the debtor with respect to the shared appreciation loan. The domestic borrower realizes a gain on the sale of the property. Part of the gain is paid to the foreign lender as contingent interest in satisfaction of a debt instrument. The "contingent interest" received by the foreign taxpayer is gain subject to taxation under IRC 897(a). [See also IRC 871(h)(4) for the exclusion of contingent interest from portfolio debt exception.]

  3. Examiners should review the debt instrument and related documents for the following:

    1. Contingent interest features

    2. Connection with a USRPI

    3. Terms of the debt instrument. Examiners should determine whether the terms would normally be negotiated at arm’s length

  4. Examiners should examine the relationships of the parties involved for any activities relating to the USRPI.

  5. Examiners should determine how payments are made on the debt instrument and whether the payments are reported consistently from year to year.

  6. Examiners should contact the Office of Associate Chief Counsel (International) if they encounter problems in this area.

Capitalization of Expenses

  1. Examiners should scrutinize the basis of USRPIs disposed of by foreign taxpayers.

  2. Foreign taxpayers should reduce the basis of USRPIs by depreciation allowable, not depreciation taken.

  3. Nonresident aliens or foreign corporations may earn gross income from the rental of U.S. real property. If not effectively connected to a U.S. trade or business, the income is subject to 30 percent tax. Under IRC 871(d), nonresident aliens who derive gross income from U.S. real property that is not "effectively connected income" may elect to treat such income as if it were "effectively connected income." Likewise, under IRC 882(d), foreign corporations who derive gross income from U.S. real property that is not "effectively connected income" may elect to treat such income as if it were "effectively connected income." This election allows deductions if and to the extent related to the "effectively connected income."

  4. Under IRC 874, nonresident aliens must file a return to take any deductions.

  5. Foreign taxpayers who have made an election to treat income from real property as effectively connected income may receive a positive basis adjustment for carrying charges such as:

    1. Real estate taxes

    2. Mortgage interest

    3. Capitalized under IRC 266. To be capitalized, the items must not have been deducted.

    4. A nonresident alien must file a return to take any deductions under IRC 874.

  6. Real estate taxes, mortgage interest or other carrying charges are generally not connected with "effectively connected income" , unless an election under IRC 874(d) or IRC 882(d) is made. Foreign persons cannot make IRC 871(d) or IRC 882(d) elections for a taxable year when no income is derived from the property. Consequently, foreign persons are not allowed deductions of expenses from U.S. real property that are not otherwise "effectively connected" for such taxable year. Because the expenses are not otherwise deductible, they cannot be capitalized. [See Rev. Rul. 91–7.]

Withholding and Filing Requirements Under FIRPTA

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Sources of FIRPTA Transactions

Several sources of information relating to FIRPTA transactions are available. The listing that follows is not all inclusive.

Application for Withholding Certificates and FIRPTA tax returns

All withholding certificate applications and FIRPTA tax returns are filed at the Philadelphia Service Center (PSC). The PSC maintains a FIRPTA data base that is available to all examiners. This data base includes the following information:

  1. All information contained on Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests

  2. All information contained on Form 8288–A, Statement of Withholding on Dispositions by Foreign Persons of U. S. Real Property Interests

  3. Information contained on Form 8288–B, Application for Withholding Certificate for disposition by Foreign Persons of U.S. Real Property Interests. This includes the following information:

    1. Names, addresses, and taxpayer identification numbers (TINs) of transferors

    2. Names, addresses, and TINs of transferees

    3. Names, addresses, and TINs of withholding agents

    4. Amounts realized

    5. Amounts withheld

    6. Dates of transfer


  1. Lexis/Nexis provides helpful information in its "Assets" and "Market" libraries. The "Assets" library contains the following information:

    1. Asset ownership

    2. Property addresses

    3. Individual’s mailing address

    4. Assessed valuations

    5. Current market values

    6. Recent property sales and deed transfers

  2. The "Market" library contains the following information:

    1. Sales of assets from parents to subsidiaries

    2. Sales of assets from subsidiaries to parents

    3. Mergers

    4. Divestitures

The Directory of Foreign Investment in the U.S.: Real Estate and Business

The business section of public libraries may have this directory. The directory lists more than 1,200 real estate properties and 10,000 key companies owned by foreign investors. The directory provides the following information:

  1. Company names

  2. Company addresses

  3. Asset descriptions

  4. Names of the owners of assets

  5. Percentage of ownership, in some cases

  6. Names of sellers

  7. Selling prices

  8. Other useful information

U.S. Department of Agriculture

  1. The U.S. Department of Agriculture requires the filing of Form ASCS–153, Agriculture Foreign Investment Disclosure Act Report, with local Agricultural Stabilization and Conservation Service (ASCS) offices. Foreign persons with 10 percent or more ownership in U.S. agricultural property (e.g., crop, pasture, forest, timber, etc.) are required to file this form. This form provides the following information:

    1. Names and addresses of transferors

    2. Names and addresses of transferees

    3. Names and addresses of attorneys executing transactions

    4. Description of properties transferred,

    5. Purchase prices

    6. Transfer dates

    7. Other useful information

  2. Each state has a Department of Agricultural which also maintains this type of information. Since the information is public record, it is easily accessible. Examiners can call the ASCS offices or the individual state's Department of Agriculture to request the information.

Other Government Agencies

Examiners can call the General Accounting Office (GAO) and order a document numbered GAO/NSIAD–90–25BR. This document is entitled Foreign Investment: Federal Data Collection on Foreign Investment in the United States. The book is free of charge. It identifies various Federal departments that maintain information about foreign investment in the United States. These Federal departments include Commerce, Energy, and Defense. The type of information maintained varies depending on the Federal department. Some information maintained may be related to foreign entities and transactions involving foreign persons. Some information is available to the public.

The Record and Guide Quarterly

  1. Real Estate Data, Inc. headquartered in Miami, Florida publishes this guide. This publication contains the following information:

    1. Addresses of properties

    2. Block and lot numbers

    3. Names and addresses of buyers

    4. Names and addresses of sellers

    5. Transaction dates

    6. Consideration involved in transactions

    7. Dates of prior transactions

    8. Consideration involved in prior transactions

State and Local Tax Authorities

  1. States and counties maintain records of all real property transactions in their jurisdictions. These records are available to the public and accessible in state and county offices. These records may include the following information:

    1. Names and addresses of owners

    2. Dates properties were sold

    3. Names and addresses of sellers

    4. Sales prices

    5. Descriptions of properties

    6. Other helpful information

Other Possible Sources

  1. A review of the following sources may uncover information relating to sales of USRPIs by foreign persons:

    1. Real estate brokers

    2. Trade associations

    3. Trade journals

    4. Newspaper articles

    5. Other