Here's a new legal memorandum from the IRS about sale by a nonresident of an option to acquire U. S. real estate. Link to the full text below.

PHIL'S EDITORIAL COMMENTS

Federal tax laws say that when a nonresident disposes of a "U. S. real property interest" there is tax to pay [go see Internal Revenue Code Section 897]. Also, the buyer must withhold 10% of the purchase price [go see Internal Revenue Code Section 1445].

So let's say a nonresident acquires an option to buy U. S. real estate. In a fit of speculative fervor, the nonresident later sells the option (at a profit or not). The nonresident never actually acquires the real estate.

Questions: Is the sale of the option taxable? Must the buyer withhold 10% of the price?

Answers (per the IRS): yes to both.

Comments (from me): Duh. The IRS is right. Why was this even a debatable point?

IRS LEGAL MEMORANDUM

The IRS Chief Counsel's office has issued a legal memorandum saying that the transfer of an option on real estate triggers the withholding requirements. Full text after the jump.

I've added Form 8288-B as a link in the navigation menu, under "IRS Website Links." This will take you to a fill-in PDF form that you can use to reduce Federal withholding from the required 10% of gross sale price.

In a Private Letter Ruling, the IRS backtracked and withdrew an earlier letter ruling on foreigners selling U.S. real estate.

See LTR 200453008, Release Date: SEPTEMBER 27, 2004, which is reproduced in full after the break. This was published 12/31/04 on Tax Notes Today, even though the letter ruling is dated September 27, 2004.

I have obtained private rulings for clients, and can tell you that this is a standard delay.

I'm going to have to dig deep and find the original 1990 ruling that was tossed overboard.

There's a new bill introduced in Congress: H.R. 3829.

Among other things, it contains a provision that proposes to create a new breed of animal exempt from FIRPTA. It's a domestically controlled investment partnership.

If foreign partners hold less than 50% of the capital or profits interests, AND no one has more than 10% of the partnership, AND the partnership has less than 10% of its assets in U.S. real estate, then FIRPTA doesn't apply.

Current tax law says the IRS cannot share tax information with other government agencies. Now the Treasury Inspector General for Tax Administration has suggested that the IRS ask Congress to change the law. This will allow the IRS to share information.

Expect something out of Congress after a while, to achieve precisely this. Turn on your legislative auto-trackers to look for amendments to 26 U.S.C. Section 6103.