PROCEDURES SPECIFIED FOR FOREIGN CORPS TO AVOID GAIN RECOGNITION ON DISTRIBUTION OF USRPIs BY ENTERING INTO CLOSING AGREEMENTS.

Rev. Proc. 90-19

SECTION 1. PURPOSE

This revenue procedure provides a procedure for certain foreign corporations, that would otherwise be subject to gain recognition on the distribution of certain U.S. real property interests under section 1.897-5T(c)(2)(ii)(B) of the Income Tax Regulations, to obtain nonrecognition on the distribution by entering into a closing agreement under section 7121 of the Internal Revenue Code.

SEC. 2. BACKGROUND

Section 897(d)(1) of the Code and section 1.897-5T(c)(1) of the temporary regulations generally require that, if a foreign corporation makes a distribution (including a distribution in liquidation under section 332(a)) of a United States real property interest (USRPI) as defined in section 897(c)(1) to a shareholder, then the foreign corporation must recognize any gain (but not loss) on the distribution. The gain recognized is the excess of the fair market value of the USRPI at the time of the distribution over its adjusted basis. Section 1.897-5T(c)(2) contains an exception to the gain recognition rule of section 1.897-5T(c)(1) that applies to liquidation distributions under section 332(a) of USRPIs to a domestic or foreign corporation meeting the stock ownership requirements of section 332(b) if certain conditions are met. However, this exception is not available in the case of a distribution to a domestic corporation where there have been certain dispositions of the stock of the distributing foreign corporation within five years of a liquidation distribution to a domestic corporation.

Notice 89-85, 1989-31 I.R.B. 9, revises the exception in section 1.897-5T(c)(2) and provides that, in the case of a distribution to a domestic corporation, the exception to the gain recognition rule in section 1.897-5T(c)(1) will apply only if the distributing foreign corporation pays an amount equal to any taxes that section 897 would have imposed (together with interest that would have accrued) upon all persons who disposed of interests in the foreign corporation (or a corporation from which the distributed USRPI(s) were acquired in a transaction described in section 381) after June 18, 1980, if the foreign corporation had been a domestic corporation on the date of each of such dispositions. Certain other requirements not relevant here must also be satisfied.

Notice 89-85 applies to section 332 distributions of USRPIs by foreign corporations to domestic corporations that occur after July 31, 1989. However, a distributing foreign corporation may choose instead to apply the rules of the current temporary regulations to such a distribution where the distributee corporation owned stock in the distributing foreign corporation satisfying the requirement of section 332(b) on July 31, 1989.

SEC. 3. SCOPE

If a foreign corporation, within the 5-year period described in section 1.897-5T(c)(2)(ii)(B)(2), distributes in a liquidation under section 332(a) a USRPI to a domestic corporation that met the ownership requirements of section 332(b) with respect to the distributing foreign corporation on July 31, 1989, and the distributing foreign corporation owned the USRPI on July 31, 1989, then the distributing foreign corporation shall not be required to recognize gain under section 1.897-5T(c)(2)(ii)(B) of the temporary regulations if the requirements of section 4 of this revenue procedure are met.

SEC. 4. PROCEDURE

01. The requirements of section 1.897-5T(c)(2)(i) of the temporary regulations must be met;

02. Before the distribution in liquidation under section 332(a), the distributee domestic corporation and the distributing foreign corporation must request relief in a private letter ruling application submitted to the Office of the Associate Chief Counsel (International), and the ruling application must include a statement and supporting facts indicating that the liquidation is necessary to integrate trades or businesses actively conducted within the United States; and

03 Before the distribution in liquidation under section 332(a), the distributee domestic corporation and the distributing foreign corporation must enter into a closing agreement with the Service under section 7121 with appropriate terms and conditions, including terms and conditions relating to the recognition of gain upon any disposition of the USRPI or of the stock of the distributee domestic corporation within five years after the date of the last gain from the disposition of stock described in section 1.897- 5T(c)(2)(ii)(B)(2) (other than certain dispositions specified in the closing agreement as determined within the discretion of the Service).

SEC. 5. DRAFTING INFORMATION

The principal author of this revenue procedure is Leslie Anne Cracraft of the Office of Associate Chief Counsel (International). For further information regarding this revenue procedure, contact Ms. Cracraft on (202) 566-6442 (not a toll-free call).