[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Rules and Regulations]
[Pages 66076-66077]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30871]



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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8647]
RIN 1545-AS51


Withholding of Tax on Dispositions of U.S. Real Property 
Interests by Foreign Persons

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to 
withholding upon certain distributions or dispositions of U.S. real 
property interests. These regulations reflect changes to the law made 
by the Omnibus Budget Reconciliation Act of 1993 and affect withholding 
agents required to withhold tax due on certain dispositions and 
distributions of U.S. real property interests.

DATES: These final regulations are effective January 22, 1996. These 
regulations are applicable to transactions occurring after August 9, 
1993.

FOR FURTHER INFORMATION CONTACT: Gwendolyn A. Stanley (202) 622-3860 
(not a toll free-call).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final regulations reflecting changes made by 
the Omnibus Budget Reconciliation Act of 1993 to the withholding rates 
on certain distributions and dispositions of U.S. real property 
interests. These regulations were not preceded by a Notice of Proposed 
Rulemaking because the withholding rates were changed by the Act. This 
document also updates the address of the Assistant Commissioner 
(International) to whom various forms must be sent.

Explanation of Provisions

    The rate of withholding under section 1445(e) (1) and (2) of the 
Internal Revenue Code was increased from 34% to 35% by the Omnibus 
Budget Reconciliation Act of 1993. The existing regulations reflect the 
prior 34% withholding rate. These regulations reflect the increase in 
withholding to 35% (or the highest rate specified in section 1445(e) 
(1) or (2)) for dispositions occurring on or after August 10, 1993.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in EO 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and, therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
these final regulations were submitted to the Small Business 
Administration for comment on their impact on small business.

Drafting Information

    The principal author of these regulations is Gwendolyn Stanley, 
Office of Associate Chief Counsel (International), IRS. However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
    Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Section 1.1445-5 also issued under 26 U.S.C. 1445(e)(6).
    Section 1.1445-8 also issued under 26 U.S.C. 1445(e)(6). * * *
    Authority: 26 U.S.C. 7805. * * *

    Par. 2. In section 1.1445-1, the section heading and paragraph 
(g)(10) are revised to read as follows:


Sec. 1.1445-1  Withholding on dispositions of U.S. real property 
interests by foreign persons: In general.

* * * * *
    (g) * * *
    (10) Address of the Assistant Commissioner International. Any 
written communication directed to the Assistant Commissioner 
(International) is to be addressed as follows: Director, Philadelphia 
Service Center; 11601 Roosevelt Blvd.; Philadelphia, PA 19255; ATTN: 
Drop Point 543X.
    Par. 3. Section 1.1445-5 is amended as follows:
    1. Paragraph (c)(1)(ii) is revised.
    2. The third sentence and the last sentence of paragraph 
(c)(1)(iii)(A) are revised.
    3. Paragraph (c)(1)(iii)(B) is removed.
    4. Paragraph (c)(1)(iii)(C) is redesignated as (c)(1)(iii)(B) and 
revised.
    5. Paragraph (c)(1)(iv) is revised.
    6. Paragraph (c)(3)(ii) is revised.
    7. The first sentence of paragraph (d)(1) is revised.
    8. The second sentence of paragraph (d)(1) is removed.
    The revisions read as follows:


Sec. 1.1445-5  Special rules concerning distributions and other 
transactions by corporations, partnerships, trusts, and estates.

* * * * *
    (c)(1) * * *
    (ii) Disposition by partnership. A partnership must withhold a tax 
equal to 35 percent (or the highest rate specified in section 
1445(e)(1)) of each foreign partner's distributive share of the gain 
realized by the partnership upon the disposition of each U.S. real 

[[Page 66077]]
property interest. Such distributive share of the gain must be 
determined pursuant to the principles of section 704 and the 
regulations thereunder. For the rules applicable to partnerships, 
interests in which are regularly traded on an established securities 
market, see Sec. 1.1445-8.
    (iii) Disposition by trust or estate--(A) In general. * * * The 
fiduciary must withhold 35 percent (or the highest rate specified in 
section 1445(e)(1)) of any distribution to a foreign beneficiary that 
is attributable to the balance in the U.S. real property interest 
account on the day of the distribution. * * * For rules applicable to 
trusts, interests in which are regularly traded on an established 
securities market and real estate investment trusts, see Sec. 1.1445-8.
    (B) Example. The following example illustrates the rules of 
paragraph (c)(1)(iii)(A) of this section.

    On January 1, 1994, A establishes a domestic trust (which has as 
its taxable year, the calendar year) for the benefit of B, a 
nonresident alien, and C, a U.S. citizen. The trust is not a trust 
subject to sections 671 through 679. Under the terms of the trust, 
the trustee, T, is given discretion to distribute income and corpus 
of the trust to provide for the reasonable needs of B and C. During 
the trust's 1994 tax year, T disposes of three parcels of vacant 
land located in the United States. The following chart illustrates 
the computation of the amount subject to withholding under section 
1445 with respect to distributions made by T to B and C during 1994.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             U.S. real  
                                                                             Gains or      Distributions   Distributions   Section 1445      property   
                   Date                              Parcel sold              (loss)           to C        to B (before     withholding      interest   
                                                                             realized                      withholding)      35% rate         account   
--------------------------------------------------------------------------------------------------------------------------------------------------------
 1/01/94..................................  ............................  ..............  ..............  ..............  ..............  ..............
 3/01/94..................................  Parcel 1....................        140,000   ..............  ..............  ..............         140,000
 3/05/94..................................  ............................  ..............           5,000          10,000           3,500         125,000
 3/15/94..................................  ............................  ..............          10,000           5,000           1,750         110,000
 5/01/94..................................  Parcel 2....................        300,000   ..............  ..............  ..............         410,000
 5/15/94..................................  Parcel 3....................        (50,000)  ..............  ..............  ..............         360,000
12/01/94..................................  ............................  ..............         170,000         170,000          59,500          20,000
 1/01/95..................................  ............................  ..............  ..............  ..............  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    (iv) Disposition by grantor trust. The trustee or equivalent 
fiduciary of a trust that is subject to the provisions of subpart E of 
part 1 of subchapter J (sections 671 through 679) must withhold a tax 
equal to 35 percent (or the highest rate specified in section 
1445(e)(1)) of the gain realized from each disposition of a U.S. real 
property interest to the extent such gain is allocable to a portion of 
the trust treated as owned by a foreign person under subpart E of part 
1 of subchapter J.
* * * * *
    (3) * * *
    (ii) Amount to be withheld. A partnership or trust electing to 
withhold under this Sec. 1.1445-5(c)(3) shall withhold from each 
distribution to a foreign person an amount equal to 35 percent (or the 
highest rate specified in section 1445(e)(1)) of the amount 
attributable to section 1445(e)(1) transfers.
* * * * *
    (d) Distributions of U.S. real property interests by foreign 
corporations--(1) In general. A foreign corporation that distributes a 
U.S. real property interest must deduct and withhold a tax equal to 35 
percent (or the rate specified in section 1445(e)(2)) of the amount of 
gain recognized by the corporation on the distribution. * * *
* * * * *
    Par. 4. Section 1.1445-8(c)(2)(i) is revised to read as follows:


Sec. 1.1445-8  Special rules regarding publicly traded partnerships, 
publicly traded trusts and real estate investment trusts (REITS).

* * * * *
    (c) * * *
    (2) REITS--(i) In general. The amount to be withheld with respect 
to a distribution by a REIT, under this section shall be equal to 35 
percent (or the highest rate specified in section 1445(e)(1)) of the 
amount described in paragraph (c)(2)(ii) of this section.
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
    Approved: November 28, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-30871 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U