§ 897. Disposition of investment in United States real property
(a)
General rule
(1)
Treatment as effectively connected with United States trade or business
For purposes of this title, gain or loss of a nonresident alien individual or a foreign corporation from the disposition of a United States real property interest shall be taken into account—
as if the taxpayer were engaged in a trade or business within the United States during the taxable year and as if such gain or loss were effectively connected with such trade or business.
(2)
Minimum tax on nonresident alien individuals
(A)
In general
In the case of any nonresident alien individual, the taxable excess for purposes of section
55
(b)(1)(A) shall not be less than the lesser of—
(c)
United States real property interest
For purposes of this section—
(1)
United States real property interest
(A)
In general
Except as provided in subparagraph (B), the term “United States real property interest” means—
(i)
an interest in real property (including an interest in a mine, well, or other natural deposit) located in the United States or the Virgin Islands, and
(ii)
any interest (other than an interest solely as a creditor) in any domestic corporation unless the taxpayer establishes (at such time and in such manner as the Secretary by regulations prescribes) that such corporation was at no time a United States real property holding corporation during the shorter of—
(B)
Exclusion for interest in certain corporations
The term “United States real property interest” does not include any interest in a corporation if—
(i)
as of the date of the disposition of such interest, such corporation did not hold any United States real property interests, and
(2)
United States real property holding corporation
The term “United States real property holding corporation” means any corporation if—
(3)
Exception for stock regularly traded on established securities markets
If any class of stock of a corporation is regularly traded on an established securities market, stock of such class shall be treated as a United States real property interest only in the case of a person who, at some time during the shorter of the periods described in paragraph (1)(A)(ii), held more than 5 percent of such class of stock.
(4)
Interests held by foreign corporations and by partnerships, trusts, and estates
For purposes of determining whether any corporation is a United States real property holding corporation—
(A)
Foreign corporations
Paragraph (1)(A)(ii) shall be applied by substituting “any corporation (whether foreign or domestic)” for “any domestic corporation”.
(B)
Interests held by partnerships, etc.
Under regulations prescribed by the Secretary, assets held by a partnership, trust, or estate shall be treated as held proportionately by its partners or beneficiaries. Any asset treated as held by a partner or beneficiary by reason of this subparagraph which is used or held for use by the partnership, trust, or estate in a trade or business shall be treated as so used or held by the partner or beneficiary. Any asset treated as held by a partner or beneficiary by reason of this subparagraph shall be so treated for purposes of applying this subparagraph successively to partnerships, trusts, or estates which are above the first partnership, trust, or estate in a chain thereof.
(5)
Treatment of controlling interests
(A)
In general
Under regulations, for purposes of determining whether any corporation is a United States real property holding corporation, if any corporation (hereinafter in this paragraph referred to as the “first corporation”) holds a controlling interest in a second corporation—
(i)
the stock which the first corporation holds in the second corporation shall not be taken into account,
(ii)
the first corporation shall be treated as holding a portion of each asset of the second corporation equal to the percentage of the fair market value of the stock of the second corporation represented by the stock held by the first corporation, and
(iii)
any asset treated as held by the first corporation by reason of clause (ii) which is used or held for use by the second corporation in a trade or business shall be treated as so used or held by the first corporation.
Any asset treated as held by the first corporation by reason of the preceding sentence shall be so treated for purposes of applying the preceding sentence successively to corporations which are above the first corporation in a chain of corporations.
(6)
Other special rules
(A)
Interest in real property
The term “interest in real property” includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon.
(B)
Real property includes associated personal property
The term “real property” includes movable walls, furnishings, and other personal property associated with the use of the real property.
(C)
Constructive ownership rules
For purposes of determining under paragraph (3) whether any person holds more than 5 percent of any class of stock and of determining under paragraph (5) whether a person holds a controlling interest in any corporation, section
318
(a) shall apply (except that paragraphs (2)(C) and (3)(C) of section
318
(a) shall be applied by substituting “5 percent” for “50 percent”).
(d)
Treatment of distributions by foreign corporations
(1)
In general
Except to the extent otherwise provided in regulations, notwithstanding any other provision of this chapter, gain shall be recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a United States real property interest in an amount equal to the excess of the fair market value of such interest (as of the time of the distribution) over its adjusted basis.
(e)
Coordination with nonrecognition provisions
(1)
In general
Except to the extent otherwise provided in subsection (d) and paragraph (2) of this subsection, any nonrecognition provision shall apply for purposes of this section to a transaction only in the case of an exchange of a United States real property interest for an interest the sale of which would be subject to taxation under this chapter.
(g)
Special rule for sales of interest in partnerships, trusts, and estates
Under regulations prescribed by the Secretary, the amount of any money, and the fair market value of any property, received by a nonresident alien individual or foreign corporation in exchange for all or part of its interest in a partnership, trust, or estate shall, to the extent attributable to United States real property interests, be considered as an amount received from the sale or exchange in the United States of such property.
(h)
Special rules for certain investment entities
For purposes of this section—
(1)
Look-through of distributions
Any distribution by a qualified investment entity to a nonresident alien individual, a foreign corporation, or other qualified investment entity shall, to the extent attributable to gain from sales or exchanges by the qualified investment entity of United States real property interests, be treated as gain recognized by such nonresident alien individual, foreign corporation, or other qualified investment entity from the sale or exchange of a United States real property interest. Notwithstanding the preceding sentence, any distribution by a qualified investment entity to a nonresident alien individual or a foreign corporation with respect to any class of stock which is regularly traded on an established securities market located in the United States shall not be treated as gain recognized from the sale or exchange of a United States real property interest if such individual or corporation did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of such distribution.
(2)
Sale of stock in domestically controlled entity not taxed
The term “United States real property interest” does not include any interest in a domestically controlled qualified investment entity.
(3)
Distributions by domestically controlled qualified investment entities
In the case of a domestically controlled qualified investment entity, rules similar to the rules of subsection (d) shall apply to the foreign ownership percentage of any gain.
(4)
Definitions
(A)
Qualified investment entity
(i)
In general
The term “qualified investment entity” means—
(II)
any regulated investment company which is a United States real property holding corporation or which would be a United States real property holding corporation if the exceptions provided in subsections (c)(3) and (h)(2) did not apply to interests in any real estate investment trust or regulated investment company.
(ii)
Termination
Clause (i)(II) shall not apply after December 31, 2011. Notwithstanding the preceding sentence, an entity described in clause (i)(II) shall be treated as a qualified investment entity for purposes of applying paragraphs (1) and (5) and section
1445 with respect to any distribution by the entity to a nonresident alien individual or a foreign corporation which is attributable directly or indirectly to a distribution to the entity from a real estate investment trust.
(B)
Domestically controlled
The term “domestically controlled qualified investment entity” means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.
(C)
Foreign ownership percentage
The term “foreign ownership percentage” means that percentage of the stock of the qualified investment entity which was held (directly or indirectly) by foreign persons at the time during the testing period during which the direct and indirect ownership of stock by foreign persons was greatest.
(D)
Testing period
The term “testing period” means whichever of the following periods is the shortest:
(i)
the period beginning on June 19, 1980, and ending on the date of the disposition or of the distribution, as the case may be,
(5)
Treatment of certain wash sale transactions
(A)
In general
If an interest in a domestically controlled qualified investment entity is disposed of in an applicable wash sale transaction, the taxpayer shall, for purposes of this section, be treated as having gain from the sale or exchange of a United States real property interest in an amount equal to the portion of the distribution described in subparagraph (B) with respect to such interest which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1).
(B)
Applicable wash sales transaction
For purposes of this paragraph—
(i)
In general
The term “applicable wash sales transaction” means any transaction (or series of transactions) under which a nonresident alien individual, foreign corporation, or qualified investment entity—
(I)
disposes of an interest in a domestically controlled qualified investment entity during the 30-day period preceding the ex-dividend date of a distribution which is to be made with respect to the interest and any portion of which, but for the disposition, would have been treated by the taxpayer as gain from the sale or exchange of a United States real property interest under paragraph (1), and
(II)
acquires, or enters into a contract or option to acquire, a substantially identical interest in such entity during the 61-day period beginning with the 1st day of the 30-day period described in subclause (I).
For purposes of subclause (II), a nonresident alien individual, foreign corporation, or qualified investment entity shall be treated as having acquired any interest acquired by a person related (within the meaning of section
267
(b) or
707
(b)(1)) to the individual, corporation, or entity, and any interest which such person has entered into any contract or option to acquire.
(ii)
Application to substitute dividend and similar payments
Subparagraph (A) shall apply to—
(II)
any other similar payment specified in regulations which the Secretary determines necessary to prevent avoidance of the purposes of this paragraph.
The portion of any such payment treated by the taxpayer as gain from the sale or exchange of a United States real property interest under subparagraph (A) by reason of this clause shall be equal to the portion of the distribution such payment is in lieu of which would have been so treated but for the transaction giving rise to such payment.
(iii)
Exception where distribution actually received
A transaction shall not be treated as an applicable wash sales transaction if the nonresident alien individual, foreign corporation, or qualified investment entity receives the distribution described in clause (i)(I) with respect to either the interest which was disposed of, or acquired, in the transaction.
(iv)
Exception for certain publicly traded stock
A transaction shall not be treated as an applicable wash sales transaction if it involves the disposition of any class of stock in a qualified investment entity which is regularly traded on an established securities market within the United States but only if the nonresident alien individual, foreign corporation, or qualified investment entity did not own more than 5 percent of such class of stock at any time during the 1-year period ending on the date of the distribution described in clause (i)(I).
(i)
Election by foreign corporation to be treated as domestic corporation
(1)
In general
If—
(2)
Revocation only with consent
Any election under paragraph (1), once made, may be revoked only with the consent of the Secretary.
(3)
Making of election
An election under paragraph (1) may be made only—
(A)
if all of the owners of all classes of interests (other than interests solely as a creditor) in the foreign corporation at the time of the election consent to the making of the election and agree that gain, if any, from the disposition of such interest after June 18, 1980, which would be taken into account under subsection (a) shall be taxable notwithstanding any provision to the contrary in a treaty to which the United States is a party, and
(B)
subject to such other conditions as the Secretary may prescribe by regulations with respect to the corporation or its shareholders.
In the case of a class of interest (other than an interest solely as a creditor) which is regularly traded on an established securities market, the consent described in subparagraph (A) need only be made by any person if such person held more than 5 percent of such class of interest at some time during the shorter of the periods described in subsection (c)(1)(A)(ii). The constructive ownership rules of subsection (c)(6)(C) shall apply in determining whether a person held more than 5 percent of a class of interest.
(4)
Exclusive method of claiming nondiscrimination
The election provided by paragraph (1) shall be the exclusive remedy for any person claiming discriminatory treatment with respect to this section, section
1145, and section
6039C.
(j)
Certain contributions to capital
Except to the extent otherwise provided in regulations, gain shall be recognized by a nonresident alien individual or foreign corporation on the transfer of a United States real property interest to a foreign corporation if the transfer is made as paid in surplus or as a contribution to capital, in the amount of the excess of—