Defining 'attributable to' under sec. 897(g).

• Author: fine, Ilene W.

In general, a foreign person who invests in a U.S. real property interest (USRPI) through a partnership is subject to tax under Sec. 897 on the gain recognized on disposition of the partnership interest to the extent "attributable to" USRPIs held by the partnership (Sec. 897(g)). According to the legislative history, the Foreign Investment in Real Property Tax Act of 1980, P.L. 96-499 (FIRPTA), was intended "to establish equity of tax treatment in U.S. real property between foreign and domestic investors ... [and] not ... to impose a penalty on foreign investors or to discourage foreign investors from investing in the United States" (S. Rep't 96-504, 96th Cong., 1st Sess., 6 (1979)). This underlying intent often is lost in practice--the lack of regulatory and published guidance about the treatment of partnerships has left taxpayers and tax practitioners uncertain about how to identify a reasonable method to determine the amount of gain subject to tax under FIRPTA.

An interest in a domestic corporation can be a USRPI in its entirety if the domestic corporation is a U.S. real property holding corporation at any time during the determination period. However, an interest in a partnership is a USRPI only to the extent of the underlying assets. For purposes of determining the amount of gain subject to tax under Sec. 897, Sec. 897(g) treats the amount of money and the fair market value (FMV) of property received in exchange for a partnership interest, to the extent attributable to a USRPI, as an amount received from the sale or exchange of a USRPI. Accordingly, if a foreign person sells an interest in a partnership that holds both USRPIs and non-USRPIs, Sec. 897(g) requires the foreign person to determine what proportion of the amount realized is attributable to a USRPI.

To date, regulations have not been issued under Sec. 897(g) to clarify how to determine what is attributable to a USRPI when a partnership owns both USRPIs and non-USRPIs. Added complexity arises when the partnership makes various allocations and adjustments that have to be taken into account or when there is a loss on the USRPIs but a gain on the non-USRPIs.

In the absence of guidance, various potential approaches could be applied, each yielding different results. Some of the potential approaches include:

* Allocating the partner's selling price and basis based on the relative FMV of the assets on the date of sale;

* Applying the methodology in Rev. Rul. 91-32, even though the...