Under Notice 2007-55, discussed below, the IRS stated in part that it would challenge any assertion by a taxpayer that Code Sec. However, for the reasons set forth below, many tax professionals believe that Notice 2007-55 incorrectly interprets Code Sec.
person by a REIT (whether or not domestically controlled) attributable to a sale or exchange by the REIT of a USRPI will be treated as gain recognized by the non-U. person from the sale of a USRPI, which will be subject to FIRPTA tax.
For the new anti-avoidance rules to apply, the company being wound up must firstly be a close company and the individual must have held at least a 5% interest in the company (ordinary share capital and voting rights).
A further condition is that the individual (or connected person) continues to carry on the same (or a similar) trade or activity to that of the wound-up company, within the two years following the distribution.
Therefore, the use of “net capital gain” in the Congressional Report would suggest that Congress did not intend for Code Sec. The accompanying 2003 Senate Report to the amendment to Code Sec. 897(h)(1) was not intended to apply to liquidating distributions from DCRs. 897(h)(1), a distribution by a qualified investment entity with respect to any publicly traded class of stock is not treated as gain recognized from the sale or exchange of a USRPI if the non-U. shareholder owned 5% or less of such class of stock during the one-year period ending on the date of such distribution (the “5% Exception”).
897(h)(1) suggests an intent to treat liquidating distributions from DCRs as exempt from U. 897(h)(1) suggests that Congress viewed capital gain dividends, rather than liquidating distributions, as the tax base for Code Sec. The Congressional Report accompanying the original FIRPTA legislation states that, under Code Sec. The rule does not, however, permit any liquidating distributions to be treated as “capital gain dividends.” This complies with the general treatment of liquidating distributions under Subchapter C of the Code as an amount paid by a liquidating corporation to its shareholders in exchange for their stock rather than a dividend.
As such, Notice 2007-55 creates an inherent conflict in interpretation of the two sections. 897(h)(1) should be read in a manner that would remove any inherent inconsistency in interpretation by treating the liquidation (, deemed sale) of a non-U. shareholders shares in a DCR as outside the scope of Code Sec. 897(h)(1), it would have presumably used a similar qualifier to specify their inclusion. 1445 and the applicable regulations under it also support the inference that liquidating distributions from a DCR should be exempt from U.
897(h)(1) through the specific language of Code Sec.
102–486 substituted “, section 751” for “and section 751” and inserted before period at end “, and section 737 (relating to recognition of precontribution gain in case of certain distributions)”.
It is not guaranteed to be accurate or up-to-date, though we do refresh the database weekly.
Some are clearly wrong, but we have made no attempt to correct them, as we have no way guess correctly in all cases, and do not wish to add to the confusion. This list is taken from the Parallel Table of Authorities and Rules provided by GPO [Government Printing Office].
897(h)(2) specifically excepts from this rule the sale of stock in a DCR. The use of the term “amount realized” would suggest that a non-U. shareholder that has its shares liquidated is treated as having made a sale of such shares to the distributing corporation in line with principles under Subchapter C of the Code. 1445(e)(6), dealing with distributions from REITs, authorizes a REIT to withhold on the portion of a distribution treated as gain from the sale of a USRPI under Code Sec.
As previously noted, a liquidating distribution is deemed to be a sale of stock in the liquidating corporation by the shareholder under Subchapter C of the Code. 897(h)(1) also indicates an intent to exclude liquidating distributions from a DCR from the term “distribution” under Code Sec. Specifically, Code section 897(d)(1) contains the qualifier “including a distribution in liquidation or redemption” after the word “distribution.” However, no such qualifying language exists under Code Sec. If Congress intended to include liquidating distributions in Code Sec.
In interpreting the language of a statute, “[a] basic rule of statutory construction is that a statute should not be read to create an internal inconsistency.” Although Code Sec. A similar conclusion can be drawn from the language of Treas. The treasury regulation states that the amount subject to withholding is the amount which the REIT has designated as a “capital gain dividend.” The treasury regulation makes no reference to withholding on any amounts from a liquidating distribution, nor do the preambles to the temporary or final regulations make any reference to distributions outside of those designated as “capital gain dividends.” Therefore, “the measure of withholding (and, by inference, the measure of the foreign shareholder’s substantive tax liability) adopted by Treas. 897(h)(1) is applied to liquidating distributions from DCRs to non-U. shareholders, such shareholders could avoid the tax by selling their shares to a domestic buyer prior to the liquidation free of FIRPTA tax under Code Sec. Conversely, if such a DCR were to sell its underlying property to the buyer and then distribute the sales proceeds to a non-U. shareholder in complete liquidation of the REIT, such distributions would be taxable under Code Sec.