Rev. Rul. 84-160

ISSUE

Whether section 897(e) of the Internal Revenue Code permits nonrecognition of tax in the fact situation set forth below.

FACTS

FX is a corporation organized under the laws of a foreign country (FC), which does not have an income tax treaty with the United States. FX holds 100 percent of the stock of corporation S, a domestic corporation. S is engaged in real estate development and has determined that it constitutes a U.S. real property holding corporation as defined in section 897(c)(2) of the Code. Therefore, the stock of S constitutes a U.S. real property interest pursuant to section 897(c)(1). For business purposes FX wishes to interpose a holding company between itself and S. Therefore, on December 1, 1984, in a transaction qualifying for nonrecognition under section 351, FX transfers all of the shares of S to H, a corporation newly organized in the United States, solely in exchange for the stock of H. Because the shares of S are the only assets of H, H constitutes a U.S. real property holding corporation as defined in section 897(c)(2).

LAW AND ANALYSIS

Under section 897(a) of the Code, a foreign corporation's gain or loss from the disposition of a U.S. real property interest is treated as if the foreign corporation were engaged in a trade or business within the United States and as if the gain or loss were effectively connected with the trade or business. Section 897 applies to dispositions made after June 18, 1980.

Section 897(e) of the Code provides that except to the extent otherwise provided in section 897(d) and section 897(e)(2), any nonrecognition provision shall apply for purposes of section 897 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, i.e., chapter 1 of the Code. Section 897(e)(2) provides that the Secretary shall prescribe regulations (which are necessary or appropriate to prevent the avoidance of Federal income taxes) providing the extent to which nonrecognition provisions shall, and shall not, apply for purposes of section 897, and the extent to which the transfers of property in reorganization and changes in interest in, or distributions from, a partnership, trust, or estate, shall be treated as sales of property at fair market value. Section 897(e)(3) defines the term `nonrecognition provision` as meaning any provision of this title, i.e., the Internal Revenue Code, for not recognizing gain or loss.

Section 897(e) of the Code provides that 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 chapter 1 of the Code. This provision is intended to preserve otherwise-available nonrecognition in cases where it is clear that gain inherent in a U.S. real property interest will remain subject to U.S. taxation. In the present case, FX has exchanged, in a transaction qualifying for nonrecognition under section 351, one U.S. real property interest for another U.S. real property interest, the sale of which will be clearly subject to U.S. taxation. Therefore, FX is entitled to receive nonrecognition treatment pursuant to section 897(e) of the Code.

HOLDING

In accordance with section 897(e) of the Code, in the above fact situation, the nonrecognition provision will apply for purposes of section 897.

See Rev. Proc. 84-73, page 10, this Bulletin, which states that an advance ruling or determination letter involving the application of a nonrecognition provision for purposes of section 897 of the Code will not ordinarily be issued by the Internal Revenue Service, unless the transaction clearly falls within the provision of section 897(e)(1).