ADISA submitted a letter to several members of Congress yesterday urging them to withdraw Section 2 of IRS Notice 2007-55, which pertains to the treatment of liquidating distributions of a real estate investment trust.

Under the 2007 IRS Notice, liquidating distributions are treated as capital gain distributions subject to the Foreign Investment in Real Property Tax Act (FIRPTA), which results in a tax on these foreign investments in U.S. real estate businesses. This unintended tax burden discourages foreign investors from putting capital to work to create jobs and improve U.S. communities.

Following is an excerpt from the letter:

“The 2007 IRS Notice created tax disparity between REIT shareholders in economically parallel positions. Specifically, REIT liquidating distributions to domestic shareholders are treated as sales of stock, while such distributions to foreign shareholders are treated as capital gain distributions. This tax imposed solely on foreign investment in U.S. real estate can have a discouraging impact on such investment. Since liquidating distributions are the economic equivalent of a shareholder selling all of its stock in a REIT, there is little reason why the tax treatment should be different. A bipartisan letter sent to you on October 10, 2017, and signed by 32 House Ways and Means Committee members expressed the same sentiment.

Two years ago, the Trump administration took an important step intended to address unnecessary tax complexity by issuing IRS Notice 2017-38, which signaled the administration’s support for reducing burdensome tax regulations. In the spirit of this newer IRS notice, withdrawing the 2007 IRS Notice would reduce tax complexity and reinstate the consistent treatment of REIT liquidating distributions to domestic and foreign shareholders.

In addition, on March 5, 2019, the Treasury Department released a policy statement acknowledging that “[f]ailure to promulgate regulations previewed in notices on a timely basis can cause confusion or uncertainty for taxpayers.” Accordingly, the policy statement announced that each future notice of intent to issue proposed regulations will provide that, if such proposed regulations or other guidance are not released within 18 months after the notice’s publication, the Treasury Department and the IRS will not assert positions adverse to taxpayers based on the notice until additional guidance is issued. Although the 2007 IRS Notice is not covered by the policy statement, the absence of regulations or other guidance since the 2007 IRS Notice was issued over a decade ago has caused the same “confusion [and] uncertainty for taxpayers” that led the Treasury Department to implement the new policy. While we urge the complete withdrawal of the 2007 IRS Notice, we would also urge the IRS to announce that it will not assert positions adverse to taxpayers based on the 2007 IRS Notice until further guidance is released, consistent with Treasury Department policy.

Prior to the issuance of the 2007 IRS Notice, foreign shareholders relied on well-established U.S. tax law that treated REIT liquidating distributions as sales of stock. The Internal Revenue Code expressly states that amounts received by a shareholder in a distribution in complete liquidation of a corporation “shall” be treated as full payment in exchange for the stock. Congressional intent has been that liquidating distributions by REITs, as with liquidating distributions of any other corporation, should be treated as sales of stock.”

To read the letter in its entirety, here.

The letter was signed by ADISA President Greg Mausz, and was submitted to:

The Honorable Richard Burr
The Honorable Bill Cassidy
The Honorable John Cornyn
The Honorable Mike Crapo
The Honorable Steve Daines
The Honorable Mike Enzi
The Honorable James Lankford
The Honorable Robert J. Portman
The Honorable Pat Roberts
The Honorable Tim Scott
The Honorable John Thune
The Honorable Patrick J. Toomey
The Honorable Todd Young
The Honorable Michael F. Bennet
The Honorable Sherrod Brown
The Honorable Maria Cantwell
The Honorable Benjamin L. Cardin
The Honorable Thomas R. Carper
The Honorable Robert P. Casey
The Honorable Catherine Cortez-Masto
The Honorable Margaret Wood Hassan
The Honorable Debbie Stabenow
The Honorable Mark Robert Warner
The Honorable Sheldon Whitehouse
The Honorable Ron Wyden, Ranking Member Senate Finance Committee