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Thursday, May 25, 2006

NONRECOGNITION TRANSFERS OF U.S. REAL PROPERTY INTERESTS

The U.S. taxes foreign persons on the disposition of U.S. real property interests (even though foreign persons are generally not otherwise taxable by the U.S. on their capital gains). Note that a U.S. real property interest is not just real property in its traditional sense, but can include interests in corporations and partnerships that own substantial U.S. real property.

Under complex regulations, foreign taxpayers engaged in some dispositions that bring ownership of the U.S. real property interest into the U.S., or that are engaged in certain "foreign-to-foreign" transactions, may be able to avoid current taxable gains. In Notice 2006-46, the IRS has announced its intention to modify applicable regulations and notices to somewhat liberalize these areas, including to coordinate them with new foreign merger rules under the corporate reorganization provisions. More particularly, the changes that will be forthcoming include:

-revising the rules relating to inbound asset reorganizations that are type ‘C’, ‘D’, and ‘F’ reorganizations, and to take into account the expanded types of statutory mergers and consolidations that now qualify as ‘A’ reorganizations;

-revising the rules to take into account foreign-to-foreign statutory mergers and consolidations and to create two additional exceptions that provide a foreign corporation with nonrecognition treatment on its transfer of a USRPI in certain foreign-to-foreign asset reorganizations;

-eliminating certain requirements for nonrecognition that currently exist; and

-modifying certain look back periods that are considered for imposing taxes and accrued interest on prior dispositions of the stock of foreign corporations.
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