Hello everyone,
We have been approached by a title company facing one of the now many tricks and attempts to avoid FIRPTA, this is just the "summary" of a lot of back and forth between a great, one step ahead of a dirty game, knowledgeable and experienced title agent who smelled "something funky" in this particular transaction and is not going for it.
***This post provides general information about FIRPTA concepts for educational purposes only and does not constitute specific legal or tax advice and you should not rely on this email as a substitute for professional advice from a qualified tax or legal advisor.***
We have reviewed the proposed transaction based on our discussion and my conversation with the Seller's CPA. While I haven't found any directly applicable court cases, I have serious concerns about the availability of a FIRPTA exemption due to the "substance over form" doctrine. The timing and lack of economic substance suggest the NRA is the true seller, despite the attempted Section 351 non-recognition transfer. Stripping away this structure, the transaction appears to be a sale by a foreign person of US real property, clearly subject to FIRPTA.
1. Date ___________ NRA owner of US real property parcel 001 creates a US C Corporation recently [anticipating sale of the US real property 001 by the US C Corp].
2. Date ___________ US C Corp enters into a sale contract to sell the property 001 currently owned by NRA who intends to transfer property 001 to the US C Corp under section 351 non-recognition provision to avoid FIRPTA on transferring the US real property 001 to the US C Corporation.
3. Date ___________ Deed to US real property 001 is recorded at the county clerk's office as transferred from NRA to US C Corporation
4. Date ___________ Closing transferring US real property 001 to Buyer from US C Corporation is exempt from FIRPTA because Seller is a US entity and not a USRPHC.
The dates have to be in a logical order, selling property you don't yet own seems to be out of sequence.
Key Issues:
- Timing: The sales contract was executed before the US C corporation even owned the property. This suggests the foreign owner was the true seller, despite the later transfer.
- Lack of Economic Substance: The formation of the US C corporation and the transfer of the property appear motivated primarily by avoiding FIRPTA, with no other clear business purpose. This raises red flags for the IRS.
- Risk of IRS Challenge: The IRS could disregard the transfer to the US C corporation and treat the foreign owner as the seller, triggering FIRPTA withholding.
Specific Concerns:
- The NRA CPA's attempt to justify the transfer solely based on Section 351 non-recognition further highlights the lack of economic substance.
- The fact that the selling corporation was recently formed and the property wasn't recorded in its name until after the sales contract was entered into raises suspicion.
Recommendation:
If I were to provide advice based on the existing fact pattern (I have yet to see any facts supported by documents), I would advise against relying on the Certificate of Non-Foreign Status. To avoid potential liability, the buyer should withhold FIRPTA taxes. The seller can then address and recover the withholding by filing a U.S. tax return with the IRS.
Conclusion:
The transaction appears to be structured primarily to avoid FIRPTA, raising significant risks. It's crucial to proceed with caution and ensure compliance with FIRPTA requirements.
Potential Seller Dilemma:
If the real estate sale contract has been signed, the money exchanged, and the deal is beyond the option period, the Seller may have painted themselves into a corner. The Buyer could proceed with the purchase and insist on withholding, leaving the Seller with two options:
1. Acquiesce to withholding, withdraw the Certificate of Non-Foreign Status, proceed with the sale, and claim a refund when the Corporate tax return Form 1120 is filed.
2. Try to back out and risk being sued by the Buyer for specific performance, with the Buyer potentially informing the IRS of the transaction and the problematic Certificate of Non-Foreign Status.
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Mary Enzi CAA
Tax Solutions – FIRPTA Consulting
[email protected]+1 (281) 578-1040
Katy TX
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