tax notes international - Tuck School of Business - Dartmouth College

the partnership are traded on an established securities
market; or (2) interests of the partnership are readily
tradable on a secondary market (or the substantial
equivalent thereof). The section 7704 regulations provide
that transfers under a closed end redemption plan
are disregarded in determining whether interests in a
partnership are readily tradable on a secondary market
or the substantial equivalent thereof.
Interests in X are not traded on an established securities
market. The repurchase program and the rights of
B shareholders to sell their B shares to X each year
qualify as closed end redemption plans under section
7704 regulations. Therefore, the redemptions under
those plans are disregarded in determining whether the
interests in X are readily tradable on a secondary market
or the substantial equivalent thereof.
FIRPTA
LTR 200851023 describes the taxpayers as four foreign
corporations that raise funds from non-U.S. investors
to invest in real estate and real-estate-related investments
located in the United States. (For LTR
200851023, see Doc 2008-26742 or 2008 WTD 247-32.) X,
a U.S. partnership, was created at the same time that
the foreign corporations were created to raise funds
from U.S. investors to invest in the same real estate and
real-estate-related investments. The foreign corporations
and X are collectively referred to as ‘‘feeder funds.’’ As
funds were periodically raised by one or more of the
feeder funds, a new domestic corporation was created,
and those funds were contributed to the new domestic
corporation. Each of these newly created domestic corporations
constituted a U.S. real property holding company
under section 897. The corporations used the
contributed funds to purchase assets that constituted
U.S. real property interests. One of these corporations
is A. A owns interests in a U.S. limited partnership,
which owns interests in some U.S. real property.
The taxpayers have proposed to form a new foreign
partnership (FP) and to contribute all of their equity
interests in the corporations, including A (transferred
property), to FP in a transaction qualifying under section
721. Each of the taxpayers represents that, for purposes
of section 897(g), the interests in FP that the taxpayers
receive in exchange for the transferred property
will be a U.S. real property interest to the extent attributable
to U.S. real property interests of FP.
Shortly after the taxpayer’s contribution, the U.S.
limited partnership will dispose of all of its assets in a
fully taxable transaction. The partnership will use the
proceeds to settle any outstanding liabilities and then
distribute its remaining assets to its partners, including
A, in a complete liquidation. A will use the proceeds
received in the liquidation to settle its outstanding
liabilities and then distribute its remaining assets to its
shareholders, which will include FP and X, in a complete
liquidation under section 331.
Provided that FP adopts the remedial allocation
method under the section 704 regulations and complies
with the filing requirements of temp. Treas. reg. section
1.897-5T(d)(1)(iii), the Service ruled that the taxpayers’
transfer of the transferred property in exchange for
partnership interests in FP will constitute a nonrecognition
transaction under section 721 and section 897(e).
The Service also ruled that any gain that FP realizes
in connection with the liquidation of A is not gain realized
in connection with the disposition of a U.S. real
property interest under section 897, provided that A
satisfies the exclusion described in section 897(c)(1)(B).
Section 897(c)(1)(B) provides that a taxpayer can establish
that a corporation was not a USRPHC during the
five-year period ending on the date of the disposition
of the interest by showing that the corporation did not
hold any USRPIs on the date of the disposition of that
interest and all of the USRPIs held by that corporation
during the five-year period were disposed of in a transaction
in which the full amount of gain was recognized.
Treaties
CCA 200848032 states that the U.S. competent authority
has interpreted the mutual agreement procedure
language in most U.S. treaties to mean that if the foreign
country raises an adjustment, the U.S. can grant
relief (a refund) even if it is for a tax year for which
the statute of limitations has closed. The U.S. would
not be able to increase a taxpayer’s income under the
treaty unless the IRS examiners had already assessed
additional tax.
Treaties
Canada, Iceland, and Bulgaria
Treasury announced on December 15, 2008, that the
protocol to the Canada-U.S. treaty and the new treaties
with Iceland and Bulgaria entered into force. (For the
Treasury announcement, see Doc 2008-26353 or 2008
WTD 242-30.)
New Zealand
SPECIAL REPORTS
Treasury also announced that the U.S. and New
Zealand agreed to enter into a treaty protocol. (For the
treaty protocol, see Doc 2008-25303 or 2008 WTD 232-
15.) The new agreement provides for the elimination of
source country taxation on some direct dividends and
on interest paid to banks and other financial enterprises
when the payer of the interest is not a related party. It
also reduces the limit of taxation on cross-border payments
of royalties from 10 percent to 5 percent.
France
Treasury announced that the U.S. and France signed
a treaty protocol providing for the elimination of
source country taxation of some direct dividends and
TAX NOTES INTERNATIONAL FEBRUARY 2, 2009 • 473
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