2014-03-18
Last week the IRS published PLR 201411006, where a foreign parent operated two different consolidated groups in the U.S. and proposed a series of transactions which would combine the two consolidated groups into one. The IRS applied the allocation of basis rules under Code §358 to the transaction.
One of the first transactions involved making entity classification ("check-the-box") elections for the foreign holding corporations to treat them as disregarded entities, which would trigger a deemed liquidation of those entities. Treas. Reg. §301.7701-3(g)(1)(iii). These deemed liquidations and subsequent transactions would involve distributions of U.S. corporations.
Not mentioned in the PLR, and often overlooked by foreign shareholders of U.S. corporations, are the requirements of the Foreign Investment in Real Property Act ("FIRPTA"). Under FIRPTA, a U.S. corporation is presumed to be a U.S. real property holding corporation ("USRPHC"), and therefore U.S. real property interest ("USRPI"). Code §897(c)(1)(A)(ii). The presumption can be rebutted if the transferor receives a statement from the U.S. corporation that it is not a USRPI. Treas. Reg. §1.897–2(g)(1)(i)(A). The U.S. corporation must also notify the IRS that a foreign shareholder made the USRPI inquiry. Treas. Reg. §1.897–2(h)(2). Distributions of USRPIs by foreign corporations can trigger a requirement to withhold 10% withholding under Code §1445(a).
An image of the chart is shown below and the chart can be viewed as a PDF file here: PLR 201411006.
We will shortly add this chart to andrewmitchel.com, where you can find hundreds of similar situational charts.
