[Federal Register Volume 73, Number 212 (Friday, October 31, 2008)]
[Proposed Rules]
[Pages 64901-64903]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26074]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-130342-08]
RIN 1545-BI10


Infrastructure Improvements Under Section 897

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Advanced notice of proposed rulemaking.

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SUMMARY: This document describes issues that the IRS and the Treasury 
Department are considering addressing, in a notice of proposed 
rulemaking, under section 897 of the Internal Revenue Code (Code) 
regarding the definition of an interest in real property. The notice of 
proposed rulemaking would address certain rights granted by a 
governmental unit that are related to the lease, ownership, or use of 
real property. This document also invites comments from the public 
regarding these contemplated rules. All materials submitted will be 
available for public inspection and copying.

DATES: Written and electronic comments must be submitted by January 29, 
2009.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130342-08), room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
130342-08), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS and REG-130342-
08).

FOR FURTHER INFORMATION CONTACT: Concerning the proposals, Jeffrey P. 
Cowan at (202) 622-3850; concerning submissions, Richard A. Hurst at 
(202) 622-7180 (TDD Telephone) (not toll-free numbers) and his e-mail 
address is [email protected].

SUPPLEMENTARY INFORMATION:

Overview

    This document describes issues that the IRS and the Treasury 
Department are considering addressing, in a notice of proposed 
rulemaking, regarding the definition of an interest in real property 
within the meaning of section 897(c) of the Code. The notice of 
proposed rulemaking would address certain rights granted by a 
governmental unit that are related to the lease, ownership, or use of 
toll roads, toll bridges, and certain other physical infrastructure. 
The proposed regulations would amend the Sec.  1.897-1 regulations.

Transactions at Issue

    In a typical transaction at issue, a domestic partnership (DP) 
leases or purchases from an unrelated party infrastructure assets and 
any land underlying these infrastructure assets (together, specified 
infrastructure) within the United States. The DP's partners include 
domestic corporations with foreign shareholders. Examples of specified 
infrastructure include a toll road or toll bridge.
    Often, as a condition to operating the specified infrastructure and 
to collecting tolls for its use, DP is also required to obtain a 
governmental license, permit, franchise, or other similar right 
(governmental permit). The DP may also own or acquire property that 
would be used in the trade or business of operating the specified 
infrastructure, such as signs, snow plows, and electronic sensors.
    The physical attributes of the specified infrastructure, for 
example, a relatively narrow roadway, and terms and conditions related 
to the specified infrastructure, for example, that the

[[Page 64902]]

lessee is required to maintain and operate a roadway, mean that in many 
cases there may practically be no potential alternative commercial uses 
for the specified infrastructure. In those cases, the value of the 
leasehold interest in the specified infrastructure derives from the 
right to charge and collect tolls.

Background

    Section 897(a)(1) of the Code treats the gain or loss of a 
nonresident alien or foreign corporation from the disposition of a U.S. 
real property interest (USRPI) as if the taxpayer were engaged in a 
trade or business in the United States, and as if such gain or loss 
were effectively connected with such trade or business under sections 
871(b) or 882. In general, a USRPI includes an interest in real 
property located in the United States or the Virgin Islands, and any 
interest (other than an interest solely as a creditor) in a domestic 
corporation unless the taxpayer establishes that the corporation was at 
no time a U.S. real property holding corporation (USRPHC) within the 
period described in section 897(c)(1)(A)(ii). Section 897(c)(1)(A).
    Real property includes land and unsevered natural products of the 
land, improvements, and personal property associated with the use of 
real property. Section 1.897-1(b)(1). Section 1.897-1(b)(1) provides 
that local law definitions will not be controlling for purposes of 
determining the meaning of the term ``real property'' as it is used 
under section 897 and the regulations thereunder. The regulations 
define an ``improvement'' as a building, any other inherently permanent 
structure, or the structural components of either. Section 1.897-
1(b)(3). For this purpose an inherently permanent structure includes 
any property not otherwise described in Sec.  1.897-1(b)(3) that is 
affixed to real property and that will ordinarily remain affixed for an 
indefinite period of time. Further, Sec.  1.897-1(b)(3)(iii)(B) 
provides that an inherently permanent structure includes, for example, 
pavements and bridges.
    The Code defines an ``interest in real property'' to include fee 
ownership and co-ownership of land or improvements thereon, leaseholds 
of land or improvements thereon, options to acquire land or 
improvements thereon, and options to acquire leaseholds of land or 
improvements thereon. Section 897(c)(6)(A). Section 1.897-1(c)(1) 
further provides that the term USRPI also includes any interest, other 
than an interest solely as a creditor, in real property located in the 
United States or the Virgin Islands. Section 1.897-1(d)(2)(i) provides 
that an interest in real property other than an interest solely as a 
creditor includes any direct or indirect right to share in the 
appreciation in the value, or in the gross or net proceeds or profits 
generated by, the real property.
    A USRPHC is generally defined as a corporation the fair market 
value of whose USRPIs equals or exceeds 50 percent of the fair market 
value of its worldwide interests in real property, including its 
USRPIs, plus its other assets which are used or held for use in a trade 
or business. Section 897(c)(2). For this purpose, assets used or held 
for use in a trade or business include, among other things, certain 
intangible property described in Sec.  1.897-1(f)(1)(ii).
    For purposes of determining whether any corporation is a USRPHC, 
assets held by a partnership, trust, or estate are generally treated as 
held proportionately by its partners or beneficiaries. Section 
897(c)(4)(B) and Sec.  1.897-2(e)(2). The interest in the entity itself 
is disregarded when a proportionate share of the entity's assets are 
attributed to the interest-holder. Section 1.897-2(e)(2). Further, any 
asset treated as held by a partner or beneficiary by reason of this 
rule which is used or held for use by the partnership, trust, or estate 
in a trade or business is treated as so used or held by the partner or 
beneficiary. Section 897(c)(4)(B) and Sec.  1.897-2(e)(2). The 
proportionate ownership rules of Section 897(c)(4)(B) and Sec.  1.897-
2(e)(2) apply successively upward through a chain of ownership. Section 
1.897-2(e)(2).

Explanation of Contemplated Regulations

    The IRS and the Treasury Department are aware that in the 
transactions at issue taxpayers may be taking the position that for 
purposes of section 897 the governmental permit is not a USRPI within 
the meaning of section 897(c). Instead, these taxpayers may take the 
position that the governmental permit is an asset used or held for use 
in a trade or business. Further, these taxpayers may take the position 
that a significant portion of the fair market value of a DP's assets is 
allocable to the governmental permit rather than to the assets 
comprising the specified infrastructure.
    As noted in the Background section, under section 897(c)(2), a 
corporation is a USRPHC only if the fair market value of its USRPIs 
equals or exceeds 50 percent of the fair market value of its USRPIs 
plus its interests in real property located outside the United States, 
plus any other of its assets which are used or held for use in a trade 
or business. Therefore, if the fair market value of the governmental 
permit were treated as an asset used or held for use in a trade or 
business, and not a USRPI, the governmental permit would be taken into 
account in the denominator, but not the numerator, of the calculation 
provided for in section 897(c)(2) in order to determine whether any 
domestic corporation that is a partner in a DP is a USRPHC. Accounting 
for the governmental permit in this manner for purposes of the section 
897(c)(2) calculation reduces the likelihood that a domestic 
corporation to which such a right was attributed under section 
897(c)(4)(B) would be treated as a USRPHC under section 897(c)(2).
    The IRS and the Treasury Department, however, are of the view that 
in some of the transactions at issue the governmental permit may 
properly be characterized as a USRPI. Accordingly, the IRS and the 
Treasury Department are considering issuing proposed regulations 
regarding the definition of an interest in real property that would 
address certain licenses, permits, franchises, or other similar rights 
granted by a governmental unit (including, for purposes of section 897, 
an agency or instrumentality thereof) that are related to the value of 
the use or ownership of an interest in real property. The proposed 
regulations would address how the fair market value of such licenses, 
permits, franchises, or other similar rights should be taken into 
account when determining the fair market value of a corporation's 
USRPIs and interests in real property located outside the United States 
under section 897(c)(2).

Proposed Effective Date

    The IRS and the Treasury Department anticipate that the proposed 
regulations would apply for transactions occurring on or after the date 
of publication in the Federal Register as final or temporary 
regulations. No inference is intended as to how these arrangements are 
treated or characterized under current law.

Request for Comments

    Before the notice of proposed rulemaking is issued, consideration 
will be given to any written comments (a signed original and eight (8) 
copies) or electronic comments that are timely submitted to the IRS. 
All comments will be available for public inspection and copying.
    The IRS and Treasury Department specifically request comments on:
    1. The scope of this regulatory project, the types of licenses, 
permits, franchises, or other similar rights granted by a governmental 
unit with respect to specified infrastructure that might be treated as 
related to the value

[[Page 64903]]

of the lease, ownership, or use of an interest in real property, and 
what characteristics should be taken into account in making that 
determination.
    2. Whether this regulatory project should address the allocation of 
the consideration paid for the lease or purchase of a specified 
infrastructure and the license, permit, franchise, or other similar 
right to operate that specified infrastructure for purposes of 
determining the fair market value of such property.
    In regard to the allocation of purchase price, comments are also 
sought as to whether, for purposes of allocating the consideration paid 
for a lease of the specified infrastructure and the license, permit, 
franchise, or other similar right to operate that specified 
infrastructure, the length of the lease (including whether the lease is 
for the useful life of the property) should be taken into account.

L.E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E8-26074 Filed 10-30-08; 8:45 am]
BILLING CODE 4830-01-P