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Modification to IRS Guidance May Increase Foreign Investment in Real Estate

NOV. 16, 2017

Modification to IRS Guidance May Increase Foreign Investment in Real Estate

DATED NOV. 16, 2017
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November 16, 2017

Assistant Secretary David Kautter
Assistant Secretary of the United States Treasury for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

Re: Section 2 of Notice 2007-55

Dear Assistant Secretary Kautter,

Thank you so much for taking time to meet with us on Thursday, November 2nd, about Section 2 of Notice 2007-55. We appreciated the opportunity to discuss the October 10th letter from 32 members of the Ways & Means Committee requesting that Treasury withdraw Section 2 of the Notice (attached), as well as share our concerns about the Notice and to hear your thoughts on the matter. It was a pleasure to have such an engaging and productive discussion with you and the other Treasury members.

As we discussed at our meeting, the Code treats a liquidating distribution as a sale of stock. In 2015, the Protecting Americans from Tax Hikes Act clarified the FIRPTA cleansing rule to ensure that foreign shareholders could not escape FIRPTA tax when a REIT liquidated and such shareholders were deemed to sell their REIT stock. We understand and appreciate the Treasury Department's concerns. However, consistent with 2015 Path Act amendment prohibiting a REIT from using the cleansing rule and with the other provisions of the Code, the potential abuse that Section 2 was originally issued to prevent is no longer possible. Consequently, we believe that a foreign shareholder should not be subject to FIRPTA tax on a REIT liquidating distribution where such foreign shareholder would not otherwise be subject to FIRPTA tax on sale of REIT stock.

In the past few days, a follow-up idea occurred to us for a different approach that we would like to share. We would respectfully request that you consider clarifying Section 2 of the Notice by making the following modification:

In light of the amendment made to section 897(c)(1)(B) by the Protecting Americans from Tax Hikes Act of 2015, Section 2 of Notice 2007-55 shall not apply to foreign persons who would not be subject to tax on the sale of their shares of REIT stock. For example, foreign shareholders of a domestically controlled REIT who receive a liquidating distribution from a REIT will be treated as if they had sold their REIT stock.

This modification to Section 2 of the Notice would provide greater parity and certainty to investors and would trigger a significant infusion of foreign capital into U.S. infrastructure and the U.S. commercial real estate market, creating much needed jobs and strengthening to the U.S. economy.

Thank you again for your time and your consideration of this matter. If you need anything else, please do not hesitate to reach out. Thank you so much.

Regards,

Peter Lowy
Westfield Corporation
Century City, CA


October 10, 2017

The Honorable Steven Mnuchin
Secretary, U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

RE: Requested Withdrawal of Section Two of IRS Notice 2007-55

Dear Secretary Mnuchin:

As the Department of the Treasury undergoes its review of Federal regulations to identify ways to reduce tax complexity and burdens while spurring economic growth, we respectfully request that the Department withdraw Section Two of IRS Notice 2007-55 (the “IRS Notice”) pertaining to the treatment of liquidating distributions of a real estate investment trust (REIT). This provision subjects a liquidating distribution made by a REIT to a foreign taxpayer (which is essentially the sale of shares of stock in the REIT) to a punitive tax that is not levied on other similar types of investments. In our view, repealing the IRS Notice will restore the intent of Congress with respect to the tax law governing liquidations, provide parity to investors, and increase direct foreign investment in U.S. commercial real estate and infrastructure in every corner of the nation.

In writing the Foreign Investment in Real Property Tax Act (FIRPTA), Congress intended that liquidating distributions by REITs, as with the liquidating distributions of any other corporation, be treated as sales of stock. Prior to the issuance of the IRS Notice, foreign shareholders relied on well-established U.S. tax law providing that REIT liquidating distributions were treated as sales of stock. The Internal Revenue Code specifically states that amounts received by a shareholder in a distribution in complete liquidation of a corporation “shall” be treated as in full payment in exchange for the shareholder's stock. The IRS Notice upended established tax law by stating that liquidating distributions made by a REIT to foreign investors should be treated, to the extent attributable to gain with respect to U.S. real property, as capital gain distributions subject to FIRPTA tax. Domestic investors continue to be treated as engaging in the sale of shares of stock. Indeed, following an earlier detailed submission requesting withdrawal of the IRS Notice, on June 16, 2015, the Tax Section of the American Bar Association asked the IRS again to withdraw the IRS Notice.

The IRS Notice creates winners and losers in the tax code by subjecting foreign investment in U.S. real property to a much higher tax burden than foreign investment in any other class of assets. For example, if a foreign taxpayer receives a liquidating distribution from a domestic REIT, that distribution is treated as the sale of real estate subject to the FIRPTA tax penalty. But if that same taxpayer sold their shares of stock in a domestic REIT or received a liquidating distribution from any other type of domestic corporation, it would not be subject to U.S. tax. The result of this unequitable tax burden is that foreign investors hold only five percent of U.S. commercial real estate by value — an extremely low number compared to other classes of U.S. assets.

Ultimately, the IRS Notice has created a significant impediment to foreign investment in U.S. commercial real estate and infrastructure, holding back our country's growth at a time when new infusions of capital are necessary. In 2015, Congress made minor reforms to the FIRPTA statute, easing some of the tax burden for foreign investors, and these small changes are estimated to have injected billions of dollars in foreign investment into the U.S. real estate market. Capital investment spiked not only in places like Manhattan but nationwide. In 2016, the first year these FIRPTA changes were on the books, foreign capital investment spiked in cities such as Charlotte, Nashville and Memphis. With this surge of investment came jobs in the construction, development and service-related industries. While this jolt of foreign investment is a positive result, it is estimated that an additional $2.8 trillion of global capital that could be invested in the U.S. real estate market, including in critically-needed investment in infrastructure, continues to sit on the sidelines because of the punitive FIRPTA tax imposed by the IRS Notice.

As even the minor easing of the FIRPTA tax burden led to a surge in investment and new job creation, we respectfully request that you withdraw the IRS Notice and reinstate the IRS's previous treatment of REIT liquidating distributions as sales of stock. We appreciate your consideration of this request.

Sincerely,

Patrick J. Tiberi
Member of Congress

Joseph Crowley
Member of Congress

Sam Johnson
Member of Congress

Sander M. Levin
Member of Congress

Devin Nunes
Member of Congress

Mike Thompson
Member of Congress

Dave Reichert
Member of Congress

John B. Larson
Member of Congress

Peter Roskam
Member of Congress

Earl Blumenauer
Member of Congress

Vern Buchanan
Member of Congress

Ron Kind
Member of Congress

Adrian Smith
Member of Congress

Bill Pascrell, Jr.
Member of Congress

Lynn Jenkins
Member of Congress

Danny K. Davis
Member of Congress

Erik Paulsen
Member of Congress

Linda T. Sanchez
Member of Congress

Kenny Marchant
Member of Congress

Brian Higgins
Member of Congress

Tom Reed
Member of Congress

Judy Chu
Member of Congress

Mike Kelly
Member of Congress

Pat Meehan
Member of Congress

Kristi Noem
Member of Congress

George Holding
Member of Congress

Jason Smith
Member of Congress

Tom Rice
Member of Congress

David Schweikert
Member of Congress

Jackie Walorski
Member of Congress

Carlos Curbelo
Member of Congress

Mike Bishop
Member of Congress

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