[Code of Federal Regulations]
[Title 26, Volume 9]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.897-2]

[Page 544-562]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.897-2  United States real property holding corporations.

    (a) Purpose and scope. This section provides rules regarding the 
definition and consequences of U.S. real property holding corporation 
status. U.S. real property holding corporation status is important for 
determining whether gain from the disposition by a foreign person of an 
interest in a domestic corporation is taxable. Such status is also 
important for purposes of the withholding and reporting requirements of 
sections 1445 and 6039C. For example, a person that buys stock of a U.S. 
real property holding corporation from a foreign person is required to 
withhold under section 1445. In addition, for purposes of determining 
whether another corporation is a U.S. real property holding corporation, 
an interest in a foreign corporation is a U.S. real property interest 
unless it is established that the foreign corporation is not a U.S. real 
property holding corporation. The general definition of a U.S. real 
property holding corporation is provided in paragraph (b) of this 
section. Paragraph (c) provides rules regarding the dates on which U.S. 
real property holding corporation status must be determined. The assets 
that must be included in making the determination of a corporation's 
status are set forth in paragraph (d), while paragraph (e) provides 
special rules regarding the treatment of interests held by a corporation 
in partnerships, trusts, estates, and

[[Page 545]]

other corporations. Rules regarding the termination of U.S. real 
property holding corporation status are set forth in paragraph (f). 
Paragraph (g) explains the manner in which an interest-holder can 
establish that a corporation is not a U.S. real property holding 
corporation, and paragraph (h) provides rules regarding certain 
notification requirements applicable to corporations.
    (b) U.S. real property holding corporation--(1) In general. A 
corporation is a U.S. real property holding corporation if the fair 
market value of the U.S. real property interests held by the corporation 
on any applicable determination date equals or exceeds 50 percent of the 
sum of the fair market values of its--
    (i) U.S. real property interests;
    (ii) Interests in real property located outside the United States; 
and
    (iii) Assets other than those described in subdivision (i) or (ii) 
of this paragraph (b)(1) that are used or held for use in its trade or 
business.

See paragraphs (d) and (e) of this section for rules regarding the 
directly and indirectly held assets that must be included in the 
determination of whether a corporation is a U.S. real property holding 
corporation. The term ``interest in real property located outside the 
United States'' means an interest other than solely as a creditor (as 
defined in Sec. 1.897-1(d)) in real property (as defined in Sec. 
1.897-(b)) that is located outside the United States or the Virgin 
Islands. If a corporation qualifies as a U.S. real property holding 
corporation on any applicable determination date after June 18, 1980, 
any interest in it shall be treated as a U.S. real property interest for 
a period of five years from that date, unless the provisions of 
paragraph (f)(2) of this section are applicable.
    (2) Alternative test--(i) In general. The fair market value of a 
corporation's U.S. real property interests shall be presumed to be less 
than 50 percent of the fair market value of the aggregate of its assets 
described in paragraphs (d) and (e) of this section if on an applicable 
determination date the total book value of the U.S. real property 
interests held by the corporation is 25 percent or less of the book 
value of the aggregate of the corporation's assets described in 
paragraphs (d) and (e) of this section.
    (ii) Definition of book value. For purposes of this section and 
Sec. 1.897-1(e) the term ``book value'' shall be defined as follows. In 
the case of assets that are held directly by the corporation, the term 
means the value at which an item is carried on the financial accounting 
records of the corporation, if such value is determined in accordance 
with generally accepted accounting principles applied in the United 
States. In the case of assets of which a corporation is treated as 
holding a pro rata share pursuant to paragraphs (e) (2) and (3) of this 
section and Sec. 1.897-1(e), the term ``book value'' means the 
corporation's share of the value at which the asset is carried on the 
financial accounting records of the entity that directly holds the 
asset, if such value is determined in accordance with generally accepted 
accounting principles applied in the United States. For purposes of this 
paragraph (b)(2)(ii), an entity need not keep all of its books in 
accordance with U.S. accounting principles, so long as the value of the 
relevant assets is determined in accordance therewith.
    (iii) Denial of presumption. If the Internal Revenue Service 
determines, on the basis of information as to the fair market values of 
a corporation's assets, that the presumption allowed by this paragraph 
(b)(2) may not accurately reflect the status of the corporation, the 
Service will notify the corporation that it may not rely upon the 
presumption. The Service will provide a written notice to the 
corporation that sets forth the general grounds for the Service's 
conclusion that the presumption may be inaccurate. By the 90th day 
following the date on which the corporation receives the Service's 
notification, the corporation must determine whether on its most recent 
determination date it was a U.S. real property holding corporation 
pursuant to the general rule set forth in paragraph (b)(1) of this 
section and must notify the Service of its determination. If the 
corporation determines that it was not a U.S. real property holding 
corporation pursuant to the general rule, then the corporation may upon 
future determination dates rely upon

[[Page 546]]

the presumption allowed by this paragraph (b)(2), unless on the basis of 
additional information the Service again requests that the determination 
be made pursuant to the general rule. If the corporation determines that 
it was a U.S. real property holding corporation on its most recent 
determination date, then by the 180th day following the date on which 
the corporation received the Service's notification the corporation (if 
a domestic corporation) must notify each holder of an interest in it 
that contrary to any prior representations it was a U.S. real property 
holding corporation as of its most recent determination date.
    (iv) Applicability of penalties. A corporation that had previously 
relied upon the presumption allowed by this paragraph (b)(2) but that is 
determined to be a U.S. real property holding corporation shall not be 
subject to penalties for any incorrect notice previously given pursuant 
to the requirements of paragraph (h) of this section, if:
    (A) The corporation in fact carried out the necessary calculations 
enabling it to rely upon the presumption allowed by this paragraph 
(b)(2); and
    (B) The corporation complies with the provisions of paragraph 
(b)(2)(iii) of this section. However, a corporation shall remain subject 
to any applicable penalties if at the time of its reliance on the 
presumption allowed by this paragraph (b)(2) the corporation knew that 
the book value of relevant assets was substantially higher or lower than 
the fair market value of those assets and therefore had reason to 
believe that under the general test of paragraph (b)(1) of this section 
the corporation would probably be a U.S. real property holding 
corporation. Information with respect to the fair market value of its 
assets is known by a corporation if such information is included on any 
books and records of the corporation or its agent, is known by its 
directors or officers, or is known by employees who in the course of 
their employment have reason to know such information. A corporation 
relying upon the presumption allowed by this paragraph (b)(2) has no 
affirmative duty to determine the fair market values of assets if such 
values are not otherwise known to it in accordance with the preceding 
sentence. The rules of this paragraph (b)(2)(iv) may be illustrated by 
the following examples.

    Example 1. DC is a domestic corporation engaged in light 
manufacturing that knows that it has foreign shareholders. On its 
December 31, 1985 determination date DC held assets used in its trade or 
business, consisting largely of recently-purchased equipment, with a 
book value of $500,000. DC's only real property interest was a factory 
that it had occupied for over 50 years, which had a book value of 
$200,000. The factory was located in a deteriorated downtown area, and 
DC had no knowledge of any facts indicating that the fair market value 
of the property was substantially higher than its book value. Therefore, 
DC was entitled to rely upon the presumption allowed by Sec. 1.897-
2(b)(2) and any incorrect statement pursuant to Sec. 1.897-2(h) that 
arose out of such reliance would not give rise to penalties.
    Example 2. The facts are the same as in Example 1, except as 
follows. By the time of DC's December 31, 1989 determination date, the 
downtown area in which DC's factory was located had become the subject 
of an extensive urban renewal program. On December 1, 1989, the 
president of DC was offered $750,000 for the factory by a developer who 
planned to convert the property into condominiums. Because DC thus had 
knowledge of the fair market value of its assets which made it clear 
that the corporation would probably be a U.S. real property holding 
corporation under the general rule of Sec. 1.897-2(b)(1), DC was not 
entitled to rely upon the presumption allowed by Sec. 1.897-2(b)(2) 
after December 1, 1989, and any false statements arising out of such 
reliance thereafter would give rise to penalties.

    (v) Effect on interest-holders and related persons. For the effect 
on interest holders and related persons of reliance on a statement 
issued by a corporation that made a determination as to whether it was a 
U.S. real property holding corporation under the provisions of Sec. 
1.897-2(b), see Sec. Sec. 1.897-2(g)(1)(ii)(A) and 1.897-2(g)(2)(ii).
    (c) Determination dates for applying U.S. real property holding 
corporation test--(1) In general. Whether a corporation is a U.S. real 
property holding corporation is to be determined as of the following 
dates:
    (i) The last day of the corporation's taxable year;
    (ii) The date on which the corporation acquires any U.S. real 
property interest;

[[Page 547]]

    (iii) The date on which the corporation disposes of an interest in 
real property located outside the United States or disposes of other 
assets used or held for use in a trade or business during the calendar 
year, subject to the provisions of paragraph (c)(2)(i) of this section; 
and
    (iv) In the case of a corporation that is treated pursuant to 
paragraph (d)(4) or (5) of this section as owning a portion of the 
assets held by an entity in which the corporation directly or indirectly 
holds an interest, the date on which that entity either (A) acquires a 
U.S. real property interest, (B) disposes of an interest in real 
property located outside the United States or (C) disposes of other 
assets used or held for use in a trade or business during the calendar 
year, subject to the provisions of paragraph (c)(2)(ii) of this section. 
A determination that is triggered by a transaction described in 
subdivision (ii), (iii), or (iv) of this paragraph (c)(1) must take such 
transaction into account. However, the first determination of a 
corporation's status need not be made until the 120th day after the 
later of the date of incorporation or of the date on which the 
corporation first acquires a shareholder. In addition, no determination 
of a corporation's status need be made during the 12-month period 
beginning on the date on which a corporation adopts a plan of complete 
liquidation, provided that all the assets of the corporation (other than 
assets retained to meet claims) are distributed within such period.
    (2) Transactions not requiring a determination--(i) Transactions by 
corporation. Notwithstanding the provisions of paragraph (c)(1) of this 
section, a determination of U.S. real property holding corporation 
status need not be made on the date of:
    (A) A corporation's disposition of inventory or livestock (as 
described in Sec. 1.897-1(f)(1)(i) (A) and (C));
    (B) The satisfaction of accounts receivable arising from the 
disposition of inventory or livestock or from the performance of 
services;
    (C) The disbursement of cash to meet the regular operating needs of 
the business (e.g., to acquire inventory or to pay wages and salaries);
    (D) A corporation's disposition of assets used or held for use in a 
trade or business (other than inventory or livestock) not in excess of a 
limitation amount determined in accordance with the rules of subdivision 
(iii) of this paragraph (c)(2); or
    (E) A corporation's acquisition of U.S. real property interests not 
in excess of a limitation amount determined in accordance with the rules 
of subdivision (iii) of this paragraph (c)(2).
    (ii) Transactions by entity other than corporation. Notwithstanding 
the provisions of paragraph (c)(1)(iv) or (c)(2)(v) of this section, in 
the case of a corporation that is treated as owning a portion of the 
assets held by an entity in which the corporation directly or indirectly 
holds an interest, a determination of U.S. real property holding 
corporation status need not be made on the date of:
    (A) The entity's disposition of inventory or livestock (as described 
in Sec. 1.897-1(f)(1)(i) (A) and (C));
    (B) The satisfaction of accounts receivable arising from the 
entity's disposition of inventory or livestock or from the performance 
of personal services;
    (C) The entity's disbursement of cash to meet the regular operating 
needs of its business (e.g. to acquire inventory or to pay wages and 
salaries);
    (D) The entity's disposition of assets used or held for use in a 
trade or business (other than inventory or livestock) not in excess of a 
limitation amount determined in accordance with the rules of subdivision 
(iii) of this paragraph (c)(2); or
    (E) The entity's acquisition of U.S. real property interests not in 
excess of a limitation amount determined in accordance with the rules of 
subdivision (iii) of this paragraph (c)(2).
    (iii) Calculation of limitation amount. The amount of assets used or 
held for use in a trade or business that may be disposed of, and the 
amount of U.S. real property interests that may be acquired, by a 
corporation or other entity without triggering a determination date 
shall be calculated in accordance with the following rules:
    (A) If, in accordance with the provisions of paragaphs (d) and (e) 
of this

[[Page 548]]

section, a corporation on its most recent determination date was 
considered to hold U.S. real property interests having a fair market 
value that was less than 25 percent of the aggregate fair market value 
of all the assets it was considered to hold, then the applicable 
limitation amount shall be 10 percent of the fair market value of all 
trade or business assets or all U.S. real property interests (as 
applicable) held directly by the corporation or by another entity 
described in paragraph (c)(1)(iv) of this section on that determination 
date.
    (B) If, in accordance with the provisions of paragraphs (d) and (e) 
of this section, a corporation on its most recent determination date was 
considered to hold U.S. real property interests having a fair market 
value that was equal to or greater than 25 and less than 35 percent of 
the aggregate fair market value of all the assets it was considered to 
hold, then the applicable limitation amount shall be 5 percent of the 
fair market value of all trade or bussiness assets or all U.S. real 
property interests (as applicable) held directly by the corporation or 
by another entity described in paragraph (c)(1)(iv) of this section on 
that determination date.
    (C) If, in accordance with the provisions of paragraphs (d) and (e) 
of this section, a corporation on its most recent determination date was 
considered to hold U.S. real property interests having a fair market 
value that

was equal to or greater than 35 percent of the aggregate fair market 
value of all the assets it was considered to hold, then the applicable 
limitation amount shall be 2 percent of the fair market value of all 
trade or business assets or all U.S. real property interests (as 
applicable) held directly by the corporation or by another entity 
described in paragraph (c)(1)(iv) of this section on that determination 
date.
    (D) If a corporation is not a U.S. real property holding corporation 
under the alternative test of paragraph (b)(2) of this section (relating 
to the book value of the corporation's assets), then the applicable 
limitation shall be 10 percent of the book value of all trade or 
business assets or all U.S. real property interests (as applicable) held 
directly by the corporation or by another entity described in paragraph 
(c)(1)(iv) of this section on the most recent determination date.
    Dispositions or acquisitions by the corporation or other entity of 
assets having a value less than the applicable limitation amount must be 
cumulated by the corporation or entity making such dispositions or 
acquisitions, and a determination must be made on the date of a 
transaction that causes the total of either type to exceed the 
applicable limitation. Once a determination is triggered by a 
transaction that causes the applicable limitation to be exceeded, the 
computation of the amount of trade or business assets disposed of or 
real property interests acquired after that date shall begin again at 
zero.
    The rules of this paragraph (c)(2) may be illustrated by the 
following examples.

    Example 1. DC is a domestic corporation, no class of stock of which 
is regularly traded on an established securities market, that knows that 
it has several foreign shareholders. As of December 31, 1984, DC holds 
U.S. real property interests with a fair market value of $500,000, no 
real property interests located outside the U.S. and other assets used 
in its trade or business with a fair market value of $1,600,000. Thus, 
the fair market value of DC's U.S. real property interests ($500,000) is 
less than 25% ($525,000) of the total ($2,100,000) of DC's U.S. real 
property interests ($500,000), interests in real property located 
outside the United States (zero), and assets used or held for use in a 
trade or business ($1,600,000). DC is not a U.S. real property holding 
corporation, and under the rule of paragraph (c)(2)(i) of this section 
it may dispose of trade or business assets with a fair market value 
equal to 10 percent ($160,000) of the total fair market value 
($1,600,000) of such assets held by it on its most recent determination 
date (December 31, 1984), without triggering a determination of its U.S. 
real property holding corporation status. Therefore, when DC disposes of 
$60,000 worth of trade or business assets (other than inventory or 
livestock) on March 1, 1985, and again on April 1, 1985, no 
determination of its status is required on either date. However, when DC 
disposes of a further $60,000 worth of such trade or business assets on 
May 1, its total dispositions of such assets ($180,000) exceeds its 
applicable limitation amount, and DC is therefore required to determine 
its U.S. real property holding corporation status. On May 1, 1985, the 
fair market value of DC's U.S. real property interests ($500,000) is 
greater

[[Page 549]]

than 25 percent ($480,000) and less than 35 percent ($672,000) of the 
total ($1,920,000) of DC's U.S. real property interests ($500,000), 
interests in real property located outside the United States (zero), and 
assets used or held for use in a trade or business ($1,420,000). DC is 
still not a U.S. real property holding corporation, but must now compute 
its applicable limitation amount as of the May 1 determination date. 
Under the rule of paragraph (c)(2)(iii)(B) of this section. DC could now 
dispose of trade or business assets other than inventory or livestock 
with a total fair market value equal to 5 percent of the fair market 
value of all trade or business assets held by DC on the May 1 
determination date. Therefore, disposition of such trade or business 
assets with a fair market value of more than $71,000 (5 percent of 
$1,420,000) will trigger a further determination date for DC.
    Example 2. DC is a domestic corporation, no class of stock of which 
is regularly traded on an established securities market, that knows that 
it has several foreign shareholders. As of December 31, 1986, DC's only 
assets are a U.S. real property interest with a fair market value of 
$300,000 other assets used or held for use in its trade or business with 
a fair market value of $600,000, and a 50 percent partnership interest 
in domestic partnership DP. DC's interest in DP constitutes a percentage 
ownership interest in the partnership of 50 percent, and pursuant to the 
rules of paragraph (e)(2) of this section DC is treated as owning a 
portion of the assets of DP determined by multiplying that percentage by 
the fair market value of DP's assets. As of December 31, 1986, DP's only 
assets are U.S. real property interests with a fair market value of 
$120,000 and other assets used in its trade or business with a fair 
market value of $380,000. As of its December 31, 1986, determination 
date, the fair market value ($360,000) of the U.S. real property 
interests DC holds ($300,000) and is treated as holding ($80,000 [The 
fair market value of DP's U.S. real property interest ($120,000) 
multiplied by DC's percentage ownership interest in DP (50 percent)]), 
is equal to 31 percent of the sum of the fair market values ($1,150,000) 
of the U.S. real property interests DC holds and is treated as holding 
($360,000) DC's interest in real property located outside the United 
States (zero), and assets used or held for use in a trade or business 
that DC holds or is treated as holding ($790,000 [$600,000 (held 
directly) plus $190,000 (DC's 50 percent share of assets used or held 
for use in a trade or business by DP)]). Thus, under the rules of 
paragraph (c)(2) (i) and (iii)(B) of this section DC may dispose of 
assets used or held for use in its trade or business with a fair market 
value equal to 5 percent ($30,000) of the total fair market value 
($600,000) of such assets held directly by it on its most recent 
determination date (December 31, 1986), without triggering a 
determination of its U.S. real property holding corporation status. In 
addition, under the rules of paragraph (c)(2) (ii) and (iii)(A) of this 
section, a determination date for DC would not be triggered by DP's 
disposition of trade or business assets (other than inventory or 
livestock) with a fair market value equal to 5 percent ($19,000) of the 
total fair market value ($380,000) of such assets held by it as of DC's 
most recent determination date (December 31, 1986). However, any 
disposition of such assets by DP exceeding that limitation would trigger 
a determination of DC's U.S. real property holding corporation status. 
In addition under the rule of paragraph (c)(1)(iv) of this section, any 
disposition of a U.S. real property interest by DP would trigger a 
determination date for DC, while under the rule of paragraph (c)(2)(ii) 
of this section no disposition of inventory or livestock by DP would 
trigger a determination for DC.

    (3) Alternative monthly determination dates--(i) In general. 
Notwithstanding the provisions of paragraphs (c) (1) and (2) of this 
section, a corporation may choose to determine its U.S. real property 
holding corporation status in accordance with the rules of this 
paragraph (c)(3). In the case of a corporation that has determined that 
it is not a U.S. real property holding corporation pursuant to the 
alternative test of paragraph (b)(2) of this section (relating to the 
book value of the corporation's assets), the rules of this paragraph 
(c)(3) may be applied by using book values rather than fair market 
values in all relevant calculations.
    (ii) Monthly determinations. A corporation that determines its U.S. 
real property holding corporation status in accordance with the rules of 
this paragraph (c)(3) must make a determination at the end of each 
calendar month.
    (iii) Transactional determinations. A corporation that determines 
its U.S. real property holding corporation status in accordance with the 
rules of this paragraph (c)(3) must make a determination as of the date 
on which, pursuant to a single transaction (consisting of one or more 
transfers):
    (A) U.S. real property interests are acquired, and/or
    (B) Interests in real property located outside the U.S. and/or 
assets used or held for use in a trade or business are disposed of,

if the total fair market value of the assets acquired and/or disposed of 
exceeds 5 percent of the sum of the fair market

[[Page 550]]

values of the U.S. real property interests, interests in real property 
located outside the U.S., and assets used or held for use in a trade or 
business held by the corporation.
    (iv) Exceptions. Notwithstanding any other provision of this 
paragraph (c)(3), the first determination of a corporation's status need 
not be made until the 120th day after the later of the date of 
incorporation or the date on which the corporation first acquires a 
shareholder. In addition, no determination of a corporation's status 
need be made during the 12-month period beginning on the date on which a 
corporation adopts a plan of complete liquidation, if all the assets of 
the corporation (other than assets retained to meet claims) are 
distributed within such period.
    (4) Valuation date methods--(i) In general. For purposes of 
determining whether a corporation is a U.S. real property holding 
corporation on any applicable determination date, the fair market value 
of the assets held by the corporation (in accordance with Sec. 1.897-
2(d)) as of that determination date must be used.
    (ii) Alternative valuation date method for determination dates other 
than the last day of the taxable year. For purposes of paragraph 
(c)(4)(i) of this section, if an applicable determination date under 
paragraph (c) (1), (2), or (3) of this section is other than the last 
day of the taxable year, property may be valued as of the later of the 
last day of the previous taxable year or the date such property was 
acquired. For purposes of the determination date that falls on the last 
day of the taxable year, fair market value as of that date must always 
be used.
    (iii) Consistent methods. The valuation date method selected under 
this paragraph (c)(4) for the first determination date in a taxable year 
must be used for all subsequent determination dates for such year. In 
addition, the valuation date method selected must be used for all 
property with respect to which the determination is made. The use of one 
method for one taxable year does not preclude the use of the other 
method for any other taxable year.
    (5) Illustrations. The rules of this paragraph (c) are illustrated 
by the following examples:

    Example 1. Nonresident alien individual C purchased 100 shares of 
stock of domestic corporation K on July 26, 1985. Although K has 
additional shares of common stock outstanding, its stock has never been 
traded on an established securities market. At all times during calendar 
year 1985, K's only assets were a parcel of U.S. real estate (parcel A) 
and a parcel of country Z real estate (parcel B). On December 31, 1985, 
the fair market value of parcel A was $1,000,000 and the fair market 
value of parcel B was $2,000,000. For purposes of determining whether K 
was a U.S. real property holding corporation during 1985, the only 
applicable determination date was December 31, 1985, because K did not 
make any acquisitions or dispositions described in paragraph (c)(1) of 
this section during the year. The test of paragraph (b) of this section 
is applied using the fair market value of the property held on that 
date. K was not a U.S. real property holding corporation during 1985 
because as of December 31, 1985, the fair market value ($1,000,000) of 
the U.S. real property interests held by K did not equal or exceed 50 
percent ($1,500,000) of the sum ($3,000,000) of the fair market value of 
K's U.S. real property interest ($1,000,000), the interests in real 
property located outside the United States ($2,000,000), plus other 
assets used or held for use by K in a trade or business (zero).
    Example 2. The facts are the same as in example 1, except that on 
April 7, 1986, K purchased another parcel of U.S. real estate for 
$2,000,000. K's purchase of real property on April 7 triggered a 
determination on that date. As provided in paragraph (c)(3)(ii) of this 
section, K chooses to use the value of parcels A and B as of the 
previous December 31, while newly acquired parcel C must be valued as of 
its acquisition on April 7, 1986. On that date, K qualifies as a U.S. 
real property holding corporation, since the fair market value of its 
U.S. real property interests ($3,000,000) exceeds 50 percent 
($2,500,000) of the sum ($5,000,000) of the fair market value of K's 
U.S. real property interests ($3,000,000), its interests in real 
property located outside the U.S. ($2,000,000), and its other assets 
used or held for use in a trade or business (zero).

    (d) Assets held by a corporation. The assets that must be included 
in the determination of whether a corporation is a U.S. real property 
holding corporation are the following:
    (1) U.S. real property interests that are held directly by the 
corporation (including directly-held interests in foreign corporations 
that are treated

[[Page 551]]

as U.S. real property interests pursuant to the rules of paragraph 
(e)(1) of this section);
    (2) Interests in real property located outside the United States 
that are held directly by the corporation;
    (3) Assets used or held for use in a trade or business that are held 
directly by the corporation;
    (4) A proportionate share of assets held through a partnership, 
trust, or estate pursuant to the rules of paragraph (e)(2) of this 
section; and
    (5) A proportionate share of assets held through a domestic or 
foreign corporation in which a corporation holds a controlling interest, 
pursuant to the rules of paragraph (e)(3) of this section.
    (e) Special rules regarding assets held by a corporation--(1) 
Interests in foreign corporations. For purposes only of determining 
whether any corporation is a U.S. real property holding corporation, an 
interest in a foreign corporation shall be treated as a U.S. real 
property interest unless it is established that the interest was not a 
U.S. real property interest under the rules of this section on the 
applicable determination date. The rules of paragraph (g)(2) of this 
section must be complied with to establish that the interest is not a 
U.S. real property interest. However, regardless of whether an interest 
in a foreign corporation is treated as a U.S. real property interest for 
this purpose, gain or loss from the disposition of an interest in such 
corporation will not be treated as effectively connected with the 
conduct of a U.S. trade or business by reason of section 897(a). The 
rules of this paragraph (e)(1) are illustrated by the following 
examples. In each example, fair market value is determined as of the 
applicable determination dates under paragraph (c)(4)(i) of this 
section.

    Example 1. Nonresident alien individual F holds all of the stock of 
domestic corporation DC. DC's only assets are 40 percent of the stock of 
foreign corporation FC, with a fair market value of $500,000, and a 
parcel of country W real estate, with a fair market value of $400,000. 
Foreign corporation FP, unrelated to DC, holds the other 60 percent of 
the stock of FC. FC's only asset is a parcel of U.S. real estate with a 
fair market value of $1,250,000. FC is a U.S. real property holding 
corporation because the fair market value of its U.S. real property 
interests ($1,250,000) exceeds 50 percent ($625,000) of the sum of the 
fair market values of its U.S. real property interests ($1,250,000), its 
interests in real property located outside the United States (zero), 
plus its other assets used or held for use in a trade or business 
(zero). Consequently DC's interest in FC is treated as a U.S. real 
property interest under the rules of this paragraph (e)(1). DC is a U.S. 
real property holding corporation because the fair market value 
($500,000) of its U.S. real property interest (the stock of FC) exceeds 
50 percent ($450,000) of the sum ($900,000) of the fair market value of 
its U.S. real property interests ($500,000), its interests in real 
property located outside the United States ($400,000), plus its other 
assets used or held for use in a trade or business (zero). If F disposes 
of her stock within 5 years of the current determination date, her gain 
or loss on the disposition of her stock in DC will be treated as 
effectively connected with a U.S. trade or business under section 
897(a). However, FP's gain on the disposition of its FC stock would not 
be subject to the provisions of section 897(a) because the stock of FC 
is a U.S. real property interest only for purposes of determining 
whether DC is a U.S. real property holding corporation.
    Example 2. Nonresident alien individual B holds all of the stock of 
domestic corporation US. US's only assets are 40 percent of the stock of 
foreign corporation FC1. Nonresident alien individual N, unrelated to 
US, holds the other 60 percent of FC1's stock. FC1's only assets are 40 
percent of the stock of foreign corporation FC2. The remaining 60 
percent of the stock of FC2 is owned by nonresident alien individual X, 
who is unrelated to FC1. FC2's only asset is a parcel of U.S. real 
estate with fair market value of $1,000,000. FC2, therefore, is a U.S. 
real property holding corporation, and the stock of FC2 held by FC1 is a 
U.S. real property interest for purposes of determining whether FC1 is a 
U.S. real property holding corporation (but not for purposes of treating 
FC1's gain from the disposition of FC2 stock as effectively connected 
with a U.S. trade or business under section 897(a)). As all of FC1's 
assets are U.S. real property interests, the stock of FC1 held by US is 
a U.S. real property interest for purposes of determining whether US is 
a U.S. real property holding corporation (but not for purposes of 
subjecting N's gain on the dispositon of FC1 stock to the provisions of 
section 897(a)). As US is a domestic corporation and as all of its 
assets are U.S. real property interests, US is a U.S. real property 
holding corporation, and the stock of US held by B is a U.S. real 
property interest for purposes of section 897(a)). Therefore, B's gain 
or loss upon the disposition of the stock of US within 5 years of the 
most recent determination date is subject to the provisions of section 
897(a).


[[Page 552]]


    (2) Proportionate ownership of assets held by partnerships, trusts, 
and estates. For purposes of determining whether a corporation is a U.S. 
real property holding corporation, a holder of an interest in a 
partnership, a trust, or an estate (whether domestic or foreign) shall 
be treated pursuant to section 897(c)(4)(B) as holding a proportionate 
share of the assets held by the entity.

However, a holder of an interest shall not be treated as holding a 
proportionate share of assets that in the hands of the entity are 
subject to the rule of Sec. 1.897-1(f)(3)(ii) (concerning the trade or 
business assets of investment companies). Such proportionate share is to 
be determined in acordance with the rules of Sec. 1.897-1(e) on each 
applicable determination date. The interest in the entity shall itself 
be disregarded when a proportionate share of the entity's assets is 
attributed to the interest-holder pursuant to the rule of this paragraph 
(e)(2). Any asset treated as held by a holder of an interest by reason 
of this paragraph (e)(2) which is used or held for use in a trade or 
business by the partnership, trust, or estate shall be treated as so 
used or held for use by the holder of the interest. The proportionate 
ownership rule of this paragraph (e)(2) applies successively upward 
through a chain of ownership. The proportionate ownership rule of this 
paragraph (e)(2) is illustrated by the following examples. In each 
example fair market value is determined as of the applicable 
determination date under paragraph (c)(4)(i) of this section.

    Example 1. Nonresident alien individual F holds all of the stock of 
domestic corporation DC. DC is a partner in foreign partnership FP, and 
DC's percentage ownership interest in FP is 50 percent. DC's other 
assets are a parcel of country F real estate with a fair market value of 
$500,000 and other assets which it uses in its business with a fair 
market value of $100,000, FP's assets are a parcel of country Z real 
estate with a fair market value of $300,000 and a parcel of U.S. real 
estate with a fair market value of $2,000,000. For purposes of 
determining whether DC is a U.S. real property holding corporation, DC 
is treated as holding its pro rata share of the assets held by FP. DC's 
pro rata share of the U.S. real estate held by FP is $1,000,000, 
determined by multiplying the fair market value ($2,000,000) of the U.S. 
real property interests held by FP by DC's percentage ownership interest 
in FP (50 percent). DC's pro rata share of the country Z real estate 
held by FP is $150,000, determined in the same manner. DC is a U.S. real 
property holding corporation because the fair market value ($1,000,000) 
of its U.S. real property interests (the U.S. real estate it is treated 
as holding proportionately) exceeds 50 percent ($875,000) of the sum 
($1,750,000) of the fair market value of its U.S. real property 
interests ($1,000,000), its interests in real property located outside 
the United States [($650,000) (its country F real estate and its pro 
rata share of the country Z real estate)], plus its other assets which 
are used or held for use in a trade or business ($100,000). Because DC 
is a domestic U.S. real property holding corporation, the stock of DC is 
a U.S. real property interest and F's gain or loss on the disposition of 
this DC stock within 5 years of the current determination date will be 
treated as effectively connected with a U.S. trade or business under 
section 897(a).
    Example 2. Nonresident alien individual B holds all of the stock of 
domestic corporation US. US is a beneficiary of foreign trust FT. US's 
percentage ownership interest in FT is 90 percent. US has no other 
assets. FT is a partner in domestic partnership DP. FT's percentage 
ownership interest in DP is 30 percent. FT has no other assets. DP's 
only asset is a parcel of U.S. real estate with a fair market value of 
$1,000,000. FT is treated as holding U.S. real estate with a fair market 
value of $300,000 (30 percent of the U.S. real estate held by DP with a 
fair market value of $1,000,000). For purposes of determining whether US 
is a U.S. real property holding corporation, the proportionate ownership 
rule is applied successively upward through the chain of ownership. 
Thus, US is treated as holding 90 percent of FT's $300,000 pro rata 
share of the U.S. real estate held by DP. US is a U.S. real property 
holding corporation because the fair market value ($270,000) of its U.S. 
real property interests (its pro rata share of the U.S. real estate held 
by DP) exceeds 50 percent ($135,000) of the sum of the fair market 
values of its U.S. real property interests ($270,000), its interests in 
real property located outside the United States (zero), plus its other 
assets used or held for use in a trade or business (zero). Because US is 
a domestic U.S. real property holding corporation, the stock of US is a 
U.S. real property interest, and B's gain or loss from the disposition 
of US stock within 5 years of the current determination date will be 
treated as effectively connected with a U.S. trade or business under 
section 807(a).

    (3) Controlling interests in corporations. For purposes only of 
determining whether a corporation is a U.S. real property holding 
corporation, if the

[[Page 553]]

corporation (the ``first corporation'') holds a controlling interest in 
a second corporation--
    (i) The first corporation is treated as holding a proportionate 
share of each asset (i.e., U.S. real property interests, interests in 
real property located outside the United States, and assets used or held 
for use in a trade or business) held by the second corporation, 
determined in accordance with the rules of Sec. 1.897-1(e);
    (ii) Any asset so treated as held proportionately by the first 
corporation which is used or held for use by the second corporation in a 
trade or business shall be treated as so used or held for use by the 
first corporation; and
    (iii) Interests in the second corporation held by the first 
corporation are not themselves taken into account as U.S. real property 
interests (regardless of whether the second corporation is a U.S. real 
property holding corporation) or as trade or business assets. However, 
the first corporation shall not be treated as holding a proportionate 
share of assets that in the hands of the second corporation are subject 
to the rules of Sec. 1.897-1(f)(3)(ii) (concerning the trade or 
business assets of investment companies). A determination of what 
portion of the assets of the second corporation are considered to be 
held by the first corporation shall be made as of the applicable dates 
for determining whether the first corporation is a U.S. real property 
holding corporation.

A ``controlling interest'' means 50 percent or more of the fair market 
value of all classes of stock of the corporation, determined as of the 
applicable determination date. In determining whether a corporation 
holds a controlling interest in another corporation, section 318(a) 
shall apply (except that sections 318(a)(2)(C) and (3)(C) are applied by 
substituting the phrase ``5 percent'' for ``50 percent''). However, a 
corporation that does not directly hold any interest in a second 
corporation shall not be treated as holding a controlling interest in 
the second corporation by reason of the application of section 
318(a)(3)(C). The rules of this paragraph (e)(3) apply successively 
upward through a chain of ownership. For example, if the second 
corporation owns a controlling interest in a third corporation, the 
rules of this paragraph shall be applied first to determine the portion 
of the assets of the third corporation that is considered to be held by 
the second corporation and then to determine the portion of the assets 
held and considered to be held by the second corporation that is 
considered to be held by the first corporation. The controlling interest 
rules of this paragraph (e)(3) apply, regardless of whether a 
corporation is domestic or foreign, whenever it is necessary to 
determine whether a corporation is a U.S. real property holding 
corporation. The rules of this paragraph (e)(3) are illustrated by the 
following examples. In each example fair market value is determined as 
of the applicable determination date under paragraph (c)(4)(i) of this 
section and no corporation holds constructively any interest not 
specified in the example.

    Example 1. Nonresident alien individual N owns all of the stock of 
domestic corporation DC. DC's only assets are 60 percent of the fair 
market value of all classes of stock of foreign corporation FS and 60 
percent of the fair market value of all classes of stock of domestic 
corporation DS. The percentage ownership interest of DC in each of FS 
and DS is 60 percent. The balance of the stock in FS and DS is held by 
nonresident alien individual B, who is unrelated to DC. FS's only asset 
is a parcel of country F real estate with a fair market value of 
$1,000,000. DS's only asset is a parcel of U.S. real estate with a fair 
market value of $2,000,000. The value of DC stock in FS and DS is not 
taken into account for purposes of determining whether DC is a U.S. real 
property holding corporation. Rather, because DC holds a controlling 
interest (60 percent) in each of FS and DS, DC is treated as holding a 
portion of each asset held by FS and DS. DC's portion of the country F 
real estate held by FS is $600,000, determined by multiplying the fair 
market value ($1,000,000) of the country F real estate by DC's 
percentage ownership interest (60 percent). Similarly, DC's portion of 
the U.S. real estate held by DS is $1,200,000 (60 percent of 
$2,000,000). DC is a U.S. real property holding corporation, because the 
fair market value ($1,200,000) of its U.S. real property interests (its 
portion of the U.S. real estate) exceeds 50 percent ($900,000) of the 
sum ($1,800,000) of the fair market values of its U.S. real property 
interests ($1,200,000), its interests in real property located outside 
the United States (the $600,000 portion of country F real estate), plus 
its other assets used or held for use in a trade or business (zero). 
Because DC is a domestic U.S. real property

[[Page 554]]

holding corporation, the stock of DC is a U.S. real property interest, 
and N's gain or loss on the disposition of DC stock within 5 years of 
the current determination date would be treated as effectively connected 
with a U.S. trade or business under section 897(a).
    Example 2. (i) Nonresident alien individual F owns all of the stock 
of domestic corporation US1. US1's only asset is 85 percent of the fair 
market value of all classes of stock of domestic corporation US2. US2's 
only assets are 60 percent of the fair market value of all classes of 
stock of domestic corporation US3, with a fair market value of $600,000, 
and a parcel of country D real estate with a fair market value of 
$800,000. US3's only asset is a parcel of U.S. real estate with a fair 
market value of $2,000,000. The percentage ownership interest of F in 
US1 is 100 percent.

Although US1 owns 85 percent of the stock of US2, US1's percentage 
ownership interest in US2 is 75 percent, because US2 has other interests 
other than solely as a creditor outstanding. US2's percentage ownership 
interest in US3 is 60 percent.
    (ii) US2 holds a controlling interest in US3, since it holds more 
than 50 percent of the fair market value of all classes of stock of US3. 
Consequently, the value of US2's stock in US3 is not taken into account 
in determining whether US2 is a U.S. real property holding corporation, 
even though US3 is a U.S. real property holding corporation. Instead, 
US2 is treated as holding a portion of the U.S. real estate held by US3. 
US2's portion of the U.S. real estate is $1,200,000, determined by 
multiplying US2's percentage ownership interest (60 percent) by the fair 
market value ($2,000,000) of the U.S. real estate. US1 holds a 
controlling interest in US2 (75 percent.). By reapplying the rules of 
paragraph (e)(3) of this section successively upward through the chain 
of ownership, US1's stock in US2 is not taken into account, and US1 is 
treated as holding a portion of the country D real estate held by US2 
and the U.S. real estate which US2 is treated as holding 
proportionately. US1's portion of the country D real estate is $600,000, 
determined by multiplying US1's percentage ownership interest (75 
percent) by the fair market value ($800,000) of the country D real 
estate. US1's portion of the U.S. real estate which US2 is treated as 
owning is $900,000, determined by multiplying US1's percentage ownership 
interest (75 percent) by the fair market value ($1,200,000) of US2's 
portion of U.S. real estate held by US3. US1 is a U.S. real property 
holding corporation, because the fair market value ($900,000) of its 
U.S. real property interests (its portion of US2's portion of U.S. real 
estate) is more than 50 percent ($750,000) of the sum ($1,500,000) of 
fair market values of its U.S. real property interests ($900,000), its 
interests in real property located outside the United States ($800,000), 
plus its other assets need or held for use in a trade or business 
(zero). Because US1 is a U.S. real property holding corporation and is a 
domestic corporation, the stock of US1 is a U.S. real property interest, 
and F's gain or loss on the disposition of US1 stock within 5 years of 
the current determination date will be treated as effectively connected 
with a U.S. trade or business under section 897(a).
    Example 3. Nonresident alien individual B holds all of the stock of 
domestic corporation DC. DC's only assets are 40 percent of the fair 
market value of all classes of stock of foreign corporation FC and a 
parcel of country R real estate with a fair market value of $100,000. 
FC's only asset is one parcel of U.S. real estate with a fair market 
value of $1,000,000. The fair market value of the FC stock held by DC is 
$200,000. FC is a U.S. real property holding corporation. Since DC does 
not hold a controlling interest in FC, the controlling interest rules of 
paragraph (e)(3) of this section do not apply to treat DC as holding a 
portion of the U.S. real estate held by FC. However, because FC is a 
U.S. real property holding corporation, the stock of FC is a U.S. real 
property interest for purposes of determining whether DC is a U.S. real 
property holding corporation. DC is a U.S. real property holding 
corporation because the fair market value ($200,000) of its U.S. real 
property interest (the stock of FC) exceeds 50 percent ($150,000) of the 
sum ($300,000) of the fair market values of its U.S. real property 
interest ($200,000), its interests in real property located outside the 
United States ($100,000), plus its other assets used or held for use in 
a trade or business (zero). Because DC is a U.S. real property holding 
corporation and is a domestic corporation, its stock is a U.S. real 
property interest, and B's gain or loss on the disposition of DC stock 
within 5 years of the current determination date would be subject to the 
provisions of section 897(a).
    Example 4. Nonresident alien individual C owns all of the stock of 
domestic corporation DC1. DC1's only assets are 25 percent of the fair 
market value of all classes of stock of domestic corporation DC2, and a 
parcel of U.S. real estate with a fair market value of $100,000. The 
stock of DC2 is not an asset used or held for use in DC1's trade or 
business. DC2's only assets are a building located in the U.S. with a 
fair market value of $100,000 and manufacturing equipment and inventory 
with a fair market value of $200,000, DC2 is not a U.S. real property 
holding corporation. Since DC1 does not hold a controlling interest in 
DC2, the rules of this paragraph (e)(3) do not apply to treat DC1 as 
holding a portion of the assets held by DC2.

[[Page 555]]

In addition, since DC2 is not a U.S. real property corporation, its 
stock does not constitute a U.S. real property interest. Therefore, for 
purposes of determining whether DC1 is a real property holding 
corporation, its interest in DC2 is not taken into account. Since DC1's 
only other asset is a parcel of U.S. real estate, DC1 is a U.S. real 
property holding corporation, and C's gain or loss on the disposition of 
DC1 stock within 5 years of the current determination date would be 
subject to the provisions of section 897(a).

    (4) Co-application of rules of this paragraph (e). The rules of this 
paragraph (e) apply in conjunction with one another for purposes of 
determining whether a corporation is a U.S. real property holding 
corporation. The rule of this paragraph (e)(4) is illustrated by the 
following example. In the example fair market value is determined as of 
the applicable determination date in accordance with paragraph (c)(4)(i) 
of this section.

    Example. Nonresident alien individual B holds 100 percent of the 
stock of domestic corporation US. US's only asset is 10 percent of the 
stock of foreign corporation FC1. FC1's only asset is 100 percent of the 
stock of foreign corporation FC2. FC2's only asset is a 50 percent 
interest in domestic partnership DP. FC2's percentage ownership interest 
in DP is 50 percent. DP's only asset is a parcel of U.S. real estate 
with a fair market value of $10,000,000. In determining whether US is a 
U.S. real property holding corporation, the rules of this paragraph (e) 
apply in conjunction with one another. Consequently, under paragraph 
(e)(2) of the section FC2 is treated as holding U.S. real estate with a 
fair market value of $5,000,000 (50 percent of $10,000,000, its pro rata 
share of real estate held by DP). Under paragraph (e)(3) of this 
section, FC1 is treated as holding 100 percent of the assets of FC2 
(U.S. real estate with a fair market value of $5,000,000). FC1, 
therefore, is a U.S. real property holding corporation. Under paragraph 
(e)(1) of this section, the stock of FC1 is treated as U.S. real 
property interest. US is a U.S. real property holding corporation 
because 100 percent of its assets (the stock of FC1) are U.S. real 
property interests. As US is a U.S. real property holding corporation 
and is a domestic corporation, the stock of US is a U.S. real property 
interest, and B's gain or loss from the disposition of stock of US 
within 5 years of the current determination date will be subject to the 
provisions of section 897(a).

    (f) Termination of U.S. real property holding corporation status--
(1) In general. A U.S. real property holding corporation may voluntarily 
determine its status as of the date of any acquisition or dispositon of 
assets. If the fair market value of its U.S. real property interests on 
such date no longer equals or exceeds 50 percent of the fair market 
value of all assets described in paragraphs (d) and (e) of this section, 
such corporation shall cease to be U.S. real property holding 
corporation as of such date, and on the day that is five years after 
such date interests in such corporation shall cease to be treated as 
U.S. real property interests (unless subsequent transactions within the 
five-year period have caused the fair market value of the corporation's 
U.S. real property interests to equal or exceed 50 percent of the fair 
market value of assets described in paragraphs (d) and (e) of this 
section). A corporation that determines that interests in it have ceased 
to be U.S. real property interests pursuant to the rules of this 
paragraph (f) may so inform the Internal Revenue Service, as provided in 
paragraph (h) of this section.
    (2) Early termination. Interests in a U.S. real property holding 
corporation shall immediately cease to be U.S. real property interests 
as of the first date on which the following conditions are met--
    (i) The corporation does not hold any U.S. real property interests, 
and
    (ii) All of the U.S. real property interests directly or indirectly 
held by such corporation at any time during the previous five years (but 
disregarding any disposed of before June 19, 1980) either (A) were 
directly of indirectly disposed of in transactions in which the full 
amount of the gain (if any) was recognized or (B) ceased to be U.S. real 
property interests by reason of the application of this paragraph (f) to 
one or more other corporations.

For purposes of this paragraph (f)(2), a corporation that disposes of 
all U.S. real property interests other than a lease that has a fair 
market value of zero will be considered to have disposed of all of its 
U.S. real property interests, provided that the leased property is used 
in the conduct by the corporation of a trade or business in the United 
States. Such a lease may include an option to renew, but only if such 
option is for a renewal at fair

[[Page 556]]

market rental rates prevailing at the time of renewal.
    (g) Establishing that a corporation is not a U.S. real property 
holding corporation--(1) Foreign persons disposing of interests--(i) In 
general. A foreign person disposing of an interest in a domestic 
corporation (other than an interest solely as a creditor) must establish 
that the interest was not a U.S. real property interest as of the date 
of disposition, either by:
    (A) Obtaining a statement from the corporation pursuant to the 
provisions of subdivision (ii) of this paragraph (g)(1), or
    (B) Obtaining a determination by the Commissioner, Small Business/
Self Employed Division (SB/SE) pursuant to the provisions of subdivision 
(iii) of this paragraph (g)(1).

If the foreign person does not establish by either method that the 
interest disposed of was not a U.S. real property interest then the 
interest shall be presumed to have been a U.S. real property interest 
the disposition of which is subject to section 897(a). See paragraph 
(g)(3) of this section for certain exceptions to this rule. It should be 
noted that the rules of this section relate solely to interests in a 
corporation that are interests other than solely as a creditor. 
Therefore, a statement by a corporation or a determination by the 
Commissioner (under paragraphs (g) or (h) of this section) that an 
interest is not a U.S. real property interest depends solely upon 
whether or not the corporation was a U.S. real property holding 
corporation during the period described in section 897(c)(1)(A)(ii) 
(subject to certain special rules). The determination of whether an 
interest is one solely as a creditor is made under the rules of Sec. 
1.897-1(d).
    (ii) Statement from corporation--(A) In general. A foreign person 
disposing of an interest in a domestic corporation may establish that 
the interest was not a U.S. real property interest as of the date of the 
disposition by requesting and obtaining from the corporation a statement 
that the interest was not a U.S. real property interest as of that date. 
However, a corporation's statement shall not be valid for purposes of 
this rule, and thus may not be relied upon for purposes of establishing 
that an interest was not a U.S. real property interest, unless the 
corporation complies with the notice requirements of paragraph (h) (2) 
or (h)(4) of this section.

A foreign person that requests and obtains such a statement is not 
required to forward the statement to the Internal Revenue Service and is 
not required to take any further action to establish that the interest 
disposed of was not a U.S. real property interest. To qualify under this 
rule, the foreign person must obtain the corporation's statement no 
later than the date, including any extensions, on which a tax return 
would otherwise be due with respect to a disposition. A foreign person 
that relies in good faith upon a statement from the corporation is not 
thereby excused from filing a return and paying any taxes and interest 
due thereon if the corporation's statement is later found to have been 
incorrect. However, such reliance shall be taken into account in 
determining whether the foreign person shall be subject to any penalty 
for the previous failure to file. However, a foreign person that knew or 
had reason to know that a corporation's statement was incorrect is not 
entitled to rely upon such statement and shall remain liable for all 
applicable penalties.
    (B) Coordination with section 1445. Pursuant to section 1445 and 
regulations thereunder, withholding of tax is not required with respect 
to a foreign person's disposition of an interest in a domestic 
corporation, if the transferee is furnished with a statement by the 
corporation under paragraph (h) of this section that the interest is not 
a U.S. real property interest. A foreign person that obtains a 
corporation's statement for that purpose prior to the date of 
disposition may also rely upon the statement for purposes of this 
paragraph (g)(1)(ii), unless the corporation informs the foreign person 
(pursuant to paragraph (h)(1)(iv)(C) of this section) that it became a 
U.S. real property holding corporation after the date of the notice but 
prior to the actual date of disposition.

[[Page 557]]

    (iii) Determination by Commissioner--(A) In general. A foreign 
person disposing of an interest in a domestic corporation may establish 
that the interest was not a U.S. real property interest as of the date 
of disposition by requesting and obtaining a determination to that 
effect from the Commissioner. Such a determination may be requested 
pursuant to the provisions of subdivision (B) or (C) of this paragraph 
(g)(1)(iii). A request for a determination should be addressed to: 
Commissioner, Small Business/Self Employed Division (SB/SE); S C3-413 
NCFB, 500 Ellin Road, Lanham, MD 20706. A foreign transferor who has 
requested a determination by the Commissioner pursuant to the rules of 
this paragraph (g)(1)(iii) is not thereby excused from filing a return 
and paying any tax due by the date, including any extensions, on which 
such return and payment would otherwise be due with respect to a 
disposition. If the Commissioner subsequently determines and notifies 
the foreign transferor that the interest was not a U.S. real property 
interest, the foreign transferor shall be entitled to a refund of any 
taxes, penalties, and interest paid by reason of the application of 
section 897(a) pursuant to the rules of paragraph (g)(1)(i) of this 
section, together with any interest otherwise due on such refund, if a 
claim for refund is made within the applicable time limits.
    (B) Determination based on Commissioner's information. A foreign 
person may request that the Commissioner make a determination based on 
information contained in the Commissioner's records, if:
    (1) The foreign person made a request to the corporation for 
information as to the status of its interest no later than the 90th day 
before the date, including any extensions, on which a tax return would 
otherwise be due with respect to a disposition, and
    (2) The corporation failed to respond to such request by the 30th 
day following the date the request was delivered to the corporation.

If the Commissioner is unable to make a determination based on 
information available to him, he shall inform the foreign person that 
the interest must be treated as a U.S. real property interest unless the 
person subsequently obtains either the necessary statement from the 
corporation or a determination pursuant to subdivision (C) of this 
paragraph (g)(1)(iii).
    (C) Determination based on information supplied by foreign person. A 
foreign person may request that the Commissioner make a determination 
based on information supplied by the foreign person. Such information 
may be drawn, for example, from annual reports, financial statements, or 
records of the corporation, and must establish to the satisfaction of 
the Commissioner that the foreign person's interest was not a U.S. real 
property interest as of the date of disposition.
    (D) Determination by Commissioner on his own motion. Notwithstanding 
any other provision of this section, a foreign person shall not treat 
the disposition of an interest in a domestic corporation as a 
disposition of a U.S. real property interest if such person is notified 
that the Commissioner has upon his own motion determined that the 
interest was not a U.S. real property interest as of the date of 
disposition.
    (2) Corporations determining U.S. real property holding corporation 
status--(i) In general. A corporation that must determine whether it is 
a U.S. real property holding corporation, and that holds an interest in 
another corporation (other than a controlling interest as defined in 
paragraph (e)(3) of this section), must determine whether or not that 
interest was a U.S. real property interest as of its own determination 
date, by either:
    (A) Obtaining a statement from the second corporation pursuant to 
the provisions of subdivision (ii) of this paragraph (g)(2);
    (B) Obtaining a determination by the Commissioner pursuant to the 
provisions of subdivision (iii) of this paragraph (g)(2); or
    (C) Making an independent determination pursuant to the provisions 
of subdivision (iv) of this paragraph (g)(2).

A corporation that is unable to determine by any of the above methods 
whether its interest in a second corporation is a U.S. real property 
interest must presume that such interest is a U.S. real property 
interest.

[[Page 558]]

    (ii) Statement from corporation. A corporation may determine whether 
or not an interest in a second corporation was a U.S. real property 
interest as of its own determination date by obtaining from the second 
corporation a statement that the interest was not a U.S. real property 
interest as of that date. However, the second corporation's statement 
shall not be valid for purposes of this rule, and thus may not be relied 
upon for purposes of establishing that an interest was not a U.S. real 
property interest, unless such corporation complies with the notice 
requirements of paragraph (h)(2) or (h)(4) of this section.

A corporation that requests and obtains such a statement is not required 
to forward the statement to the Internal Revenue Service and is not 
required to take any further action to establish that the interest in 
the second corporation was not a U.S. real property interest. If the 
second corporation's statement is later found to have been incorrect, 
the first corporation shall not be subject to penalties arising out of 
past failures to comply with the requirements of section 897 or 1445, if 
such failures were attributable to reliance upon the second 
corporation's statement. By the 90th day following receipt of a 
notification from the Service or from the second corporation that a 
prior statement was incorrect, the first corporation must redetermine 
its status (as of its most recent determination date) and if appropriate 
notify the Internal Revenue Service that it is a U.S. real property 
holding corporation in accordance with paragraph (h)(1)(ii)(C) of this 
section. However, a corporation that knew or had reason to know that a 
second corporation's statement was incorrect is not entitled to rely 
upon such statement and shall remain liable for all applicable taxes, 
penalties, and interest arising out of the second corporation's status 
as a U.S. real property holding corporation.
    (iii) Determination by Commissioner--(A) In general. A corporation 
may determine whether or not an interest in a second corporation was a 
U.S. real property interest as of its own determination date by 
requesting and obtaining a determination to that effect from the 
Commissioner. Such a determination may be requested pursuant to the 
provisions of subdivision (B) or (C) of this paragraph (g)(2)(iii). A 
request for a determination must be addressed to: Commissioner, Small 
Business/Self Employed Division (SB/SE); S C3-413 NCFB, 500 Ellin Road, 
Lanhan, MD 20706. A corporation that has requested a determination by 
the Commissioner pursuant to the provisions of this paragraph is not 
thereby excused from taking any action required by section 897 or 1445 
by the date on which such action would otherwise be due. However, the 
Commissioner may grant a reasonable extension of time for the 
satisfaction of any requirement if the Commissioner is satisfied that 
the corporation has not sought a determination pursuant to this 
paragraph (g)(2)(iii) for a principal purpose of delay.
    (B) Determination based on Commissioner's information. A corporation 
may request that the Commissioner make a determination based on 
information contained in the Commissioner's records, if:
    (1) The corporation made a request to the second corporation for 
information as to the status of its interest no later than the fifth day 
following the first corporation's determination date, and
    (2) The second corporation failed to respond to such request by the 
30th day following the date the request was delivered to the second 
corporation.

Pending his resolution of such a request, the Commissioner will 
generally grant an extension with respect to the change-of-status 
notification that may otherwise be required pursuant to paragraph 
(h)(1)(ii) of this section. If the Commissioner is unable to make a 
determination based on information available to him, he shall inform the 
corporation that the interest must be treated as a U.S. real property 
interest unless the corporation subsequently obtains either the 
necessary statement from the second corporation or a determination 
pursuant to paragraph (g)(2)(iii)(C) or (g)(2)(iv) of this section.
    (C) Determination based on information supplied by corporation. A 
corporation may request that the Commissioner make a determination based 
on information supplied by the corporation. Such information may be 
drawn, for

[[Page 559]]

example, from annual reports, financial statements, or records of the 
second corporation, and must establish to the satisfaction of the 
Commissioner that the interest in the second corporation was not a U.S. 
real property interest as of the first corporation's determination date.
    (D) Determination by Commissioner on his own motion. Notwithstanding 
any other provision of this section, a corporation shall not treat an 
interest in a second corporation as a U.S. real property interest if the 
corporation is notified that the Commissioner has upon his own motion 
determined that the interest in the second corporation is not a U.S. 
real property interest.
    (iv) Independent determination by corporation. A corporation may 
independently determine whether or not an interest in a second 
corporation was a U.S. real property interest as of the first 
corporation's own determination date. Such determination must be based 
upon the best evidence available, drawn from annual reports, financial 
statements, records of the second corporation, or from any other source, 
that demonstrates to a reasonable certainty that the interest in the 
second corporation was not a U.S. real property interest. A corporation 
that makes an independent determination pursuant to this paragraph 
(g)(2)(iv) shall be subject to the special notification rule of 
paragraph (h)(1)(iii)(D) of the section. If the Commissioner 
subsequently determines that the corporation's independent determination 
was incorrect, the corporation shall be subject to penalties for any 
past failure to comply with the requirements of section 897 or 1445 only 
if the corporation's determination was unreasonable in view of facts 
that the corporation knew or had reason to know.
    (3) Requirements not applicable. If at any time during the calendar 
year any class of stock of a corporation is regularly traded on an 
established securities market, the requirements of this paragraph (g) 
shall not apply with respect to any holder of an interest in such 
corporation other than a person who holds an interest described in Sec. 
1.897-1(c)(2)(iii) (A) or (B). For example, a corporation determining 
whether it is a U.S. real property holding corporation need not 
ascertain from a regularly traded corporation in which it neither holds, 
nor has held during the period described in section 897(c)(1)(A)(ii), 
more than a 5 percent interest whether that regularly traded corporation 
is itself a U.S. real property holding corporation.

In addition, the requirements of this paragraph (g) do not apply to any 
holder of an interest in a domestically-controlled RETT, as defined in 
section 897(h)(4)(B).
    (h) Notice requirements applicable to corporations--(1) Statement to 
foreign interest-holder--(i) In general. A domestic corporation must, 
within a reasonable period after receipt of a request from a foreign 
person holding an interest in it, inform that person whether the 
interest constitutes a U.S. real property interest. No particular form 
is required for this statement, which need only indicate the 
corporation's determination. The statement must be dated and signed by a 
responsible corporate officer who must verify under penalties of perjury 
that the statement is correct to his knowledge and belief.
    (ii) Required determination. For purposes of the statement required 
by paragraph (h)(1)(i) of this section, an interest in a corporation is 
a U.S. real property interest if the corporation was a U.S. real 
property holding corporation on any determination date during the 5-year 
period ending on the date specified in the interest-holder's request, or 
on the date such request was received if no date is specified (or during 
such shorter period ending on the date that is applicable pursuant to 
section 897(c)(1)(A)(ii). However, an interest in a corporation is not a 
U.S. real property interest if such interest is excluded under section 
897(c)(1)(B).
    (2) Notice to the Internal Revenue Service. If a foreign interest 
holder requests that a domestic corporation provide a statement 
described in paragraph (h)(1) of this section, then such corporation 
must provide a notice to the Internal Revenue Service in accordance with 
this paragraph (h)(2). No particular form is required for such notice, 
but the following must be provided:
    (i) A statement that the notice is provided pursuant to the 
requirements of Sec. 1.897-2(h)(2);

[[Page 560]]

    (ii) The name, address, and identifying number of the corporation 
providing the notice;
    (iii) The name, address, and identifying number (if any) of the 
foreign interest holder that requested the statement (this information 
may be omitted from the notice if fully set forth in the statement to 
the foreign interest holder attached to the notice).
    (iv) Whether the interest in quesiton is a U.S. real property 
interest;
    (v) A statement signed by a responsible corporate officer verifying 
under penalties of perjury that the notice (including any attachments 
thereto) is correct to his knowledge and belief. A copy of any statement 
provided to the foreign interest holder must be attached to the notice. 
The notice must be mailed to the Director, Philadelphia Service Center, 
P.O. Box 21086, Drop Point 8731, FIRPTA Unit, Philadelphia, PA 19114-
0586 on or before the 30th day after the statement referred to in Sec. 
1.897-2(h)(1) is mailed to the interest holder that requested it. 
Failure to mail such notice within the time period set forth in the 
preceding sentence will cause the statement provided pursuant to Sec. 
1.897-2(h)(1) to become an invalid statement.
    (3) Requirements not applicable. The requirements of this paragraph 
(h) do not apply to domestically-controlled REITS, as defined in section 
897(h)(4)(B). These requirements also do not apply to a corporation any 
class of stock in which is regularly traded on an established securities 
market at any time during the calendar year. However, such a corporation 
may voluntarily choose to comply with the requirements of paragraph 
(h)(4) of this section.
    (4) Voluntary notice to Internal Revenue Service--(i) In general. A 
domestic corporation which determines that it is not a U.S. real 
property holding corporation--
    (A) On each of the applicable determination dates in a taxable year, 
or
    (B) Pursuant to section 897(c)(1)(B), may attach to its income tax 
return for that year a statement informing the Internal Revenue Service 
of its determination. A corporation that has provided a voluntary notice 
described in this Sec. 1.897-2(h)(4)(i) for the immediately preceding 
taxable year and that does not have an event described in Sec. 1.897-
2(c)(1) (ii), (iii) or (iv) prior to receiving a request from a foreign 
person under Sec. 1.897-2(h)(1), is exempt from the notice requirement 
of Sec. 1.897-2(h)(2).
    (ii) Early termination of real property holding corporation status. 
A corporation that determines during the course of its taxable year that 
interests in it have ceased to be U.S. real property interests pursuant 
to the rules of section 897(c)(1)(B) may, on the day of its 
determination or thereafter, provide a statement to the Director, 
Philadelphia Service Center, P.O. Box 21086, Drop Point 8731, FIRPTA 
Unit, Philadelphia, PA 19114-0586, informing the Service of its 
determination. No particular form is required but the statement must set 
forth the corporation's name, address, identification number, a brief 
statement regarding its determination and the date such determination 
was made. Such statement will enable foreign interest-holders to dispose 
of their interests without being subject to section 897(a), as provided 
in paragraph (g) of this section.
    (5) Supplemental statements--(i) By corporations with substantial 
intangible assets. A corporation that is subject to the requirements of 
paragraph (h)(2) of this section (or that voluntarily complies with the 
requirements of paragraph (h)(4) of this section) must submit a 
supplemental statement to the Internal Revenue Service if--
    (A) Such corporation values any of the intangible assets described 
in Sec. 1.897-1(f)(1)(ii) (other than goodwill or going concern value) 
by a method other than the purchase price or book value methods 
described in Sec. 1.897-1(o)(4); and
    (B) The fair market value of such intangible assets equals or 
exceeds 25 percent of the total of the fair market values of the assets 
the corporation is considered to hold in accordance with the provisions 
of paragraphs (d) and (e) of this section.
    The supplemental statement must inform the Internal Revenue Service 
that the corporation meets the criteria of subdivisions (A) and (B) of 
this paragraph (h)(5)(i), and must summarize the methods and 
calculations upon which the corporation's determination of the

[[Page 561]]

fair market value of its intangible assets is based. In addition, the 
supplemental statement must list any intangible assets that were 
purchased from any person that have been valued by the corporation at an 
amount other than their purchase price, and must provide a justification 
for such a departure from the purchase price. The supplemental statement 
must be attached to or incorporated in the statement provided under 
paragraph (h)(2) or (h)(4) of this section.
    (ii) Corporation not valuing goodwill or going concern value at 
purchase price. A corporation that is subject to the requirements of 
paragraph (h)(2) of this section (or that voluntarily complies with the 
requirements of paragraph (h)(4) of this section) must submit a 
supplemental statement to the Internal Revenue Service if such 
corporation values goodwill or going concern value pursuant to Sec. 
1.897-1(o)(4)(iii). The supplemental statement must set forth that it is 
made pursuant to this paragraph (h)(5)(ii), and must summarize the 
methods and calculations upon which the corporation's determination of 
the fair market value of such intangible assets is based. In addition, 
the supplemental statement must list any such assets that were purchased 
from any person that have been valued by the corporation at an amount 
other than their purchase price, and must provide a justification for 
such a departure from the purchase price. The supplemental statement 
must be attached to or incorporated in the statement provided under 
paragraph (h)(2) or (h)(4) of this section.
    (iii) Corporation using alternative U.S. real property holding 
corporation test. A corporation that is subject to the requirements of 
paragraph (h)(2) of this section (or that voluntarily complies with the 
requirements of paragraph (h)(4) of this section) must submit a 
supplemental statement to the Internal Revenue Service if--
    (A) Such corporation utilizes the rule of paragraph (b)(2) of this 
section (regarding the book values of assets held by the corporation) to 
presume that it is not a U.S. real property holding corporation; and
    (B) Such corporation is engaged in or is planning to engage in a 
trade or business of mining, farming, or forestry, or of buying and 
selling or developing real property, or of leasing real property to 
tenants.
    The supplemental statement must inform the Internal Revenue Service 
that the corporation meets the criteria of subdivisions (A) and (B) of 
this paragraph (h)(5)(iii), and must be attached to or incorporated in 
the statement provided under paragraph (h)(2) or (h)(4) of this section.
    (iv) Corporation determining real property holding corporation 
status of second corporation. A corporation that is subject to the 
requirements of paragraph (h)(2) of this section (or that voluntarily 
complies with the requirements of paragraph (h)(4) of this section) must 
submit a supplemental statement to the Internal Revenue Service if such 
corporation independently determines whether or not an interest in a 
second corporation is a U.S. real property interest, pursuant to 
paragraph (g)(2)(iv) of this section. The supplemental statement must 
set forth that it is made pursuant to this paragraph (h)(5)(iv) and must 
briefly summarize the facts upon which the corporation's determination 
is based and the sources of the information relied upon by the 
corporation. The supplemental statement must be attached to or 
incorporated in the statement provided under paragraph (h)(2) or (h)(4) 
of this section.
    (i) Transition Rules--(1) General waiver of penalties for failure to 
file. If a foreign person disposed of an interest in a domestic 
corporation between June 18, 1980 and January 23, 1987, and such person 
establishes under the rules of paragraph (g) of this section at any time 
that the interest disposed of was not a U.S. real property interest, 
then such person shall not be subject to tax under section 897 and shall 
not be subject to penalties (or interest) for failure to file an income 
tax return with respect to such disposition.
    (2) Foreign persons that met the requirements of prior regulations. 
A foreign person that disposed of an interest in a domestic corporation 
between June 18, 1980 and January 23, 1987, shall be deemed to have 
satisfied the requirements of paragraph (g) of this section with respect 
to such disposition if such

[[Page 562]]

person established under prior temporary or prior final regulations 
issued under section 897 that the interest disposed of was not a U.S. 
real property interest.

(Sec. 897 (94 Stat. 2683; 26 U.S.C. 897), sec. 6011 (68A Stat. 732; 26 
U.S.C. 6011) and sec. 7805 (68A Stat. 917; 26 U.S.C. 7805) of the 
Internal Revenue Code of 1954)

[T.D. 7999, 49 FR 50702, Dec. 31, l984; 50 FR 12531, Mar. 29, 1985; T.D. 
8113, 51 FR 46627, Dec. 24, 1986; 52 FR 3796, 3916, Feb. 6, 1987; T.D. 
9082, 68 FR 46083, Aug. 5, 2003]