New Rev. Proc. Clarifies Procedures for Obtaining Withholding Certificates for Real Property Sales to Foreign Persons

On Aug. 8, 2000, the IRS issued Rev. Proc. 2000-35, which clarified and superseded Rev. Proc. 88-23, which had outlined the procedures to obtain withholding tax certificates under Regs. Secs. 1.1445-3 and -6. These regulations provide rules on the Service's issuance of certificates that reduce or eliminate withholding under Sec. 1445(a).

Rev. Proc. 2000-35 discusses withholding certificates, the submission of applications for withholding certificates, entering into agreements for the payment of tax, the types of security acceptable to the IRS, installment sales, blanket withholding certificates and authorized representatives. The procedure is effective for applications for withholding certificates submitted after Sept. 27, 2000.

Congress enacted Sec. 1445 as a means of enforcing the tax imposed on dispositions by foreign persons of investments in U.S. real property. Sec. 1445(a) provides that a transferee of a U.S. real property interest from a foreign person must deduct and withhold 10% of the amount that the foreign person realized on the disposition. These withholding requirements ensure that certain foreign entities do not sell U.S. real property and evade tax by taking the proceeds out of the country.

Sec. 1445(b) and the regulations thereunder provide several exceptions to this requirement, including an exemption from withholding for persons who purchase property for use as a residence for $300,000 or less. Other exemptions include situations in which a transferor furnishes an affidavit of nonforeign status, property transferred is stock regularly traded on an established securities market, the Code does not require a transferor to recognize any gain or loss on the transfer and the transferor meets the requirements of Regs. Sec. 1.1445-2(d)(2), and the IRS issues a statement that excuses withholding. Similarly, Sec. 1445(c) provides that the required withholding amount can be reduced pursuant to the Service's determination of the transferor's maximum tax liability on the disposition.

Rev. Proc. 2000-35 supersedes Rev. Proc. 88-23, providing specific guidance as to how to obtain withholding certificates to reduce or eliminate the 10% withholding otherwise required under Sec. 1445(a). The major modifications and clarifications made to the prior revenue procedure are:

• To provide updated addresses and references to the specific Internal Revenue Centers where correspondence and applications should be sent;
• Taxpayers applying for a withholding certificate are now required to determine if a taxpayer identification number exists for each party concerned and to state in the application if none exists for a particular party;
• The application must state if U.S. income tax returns related to the real property interest had been filed or U.S. tax paid in the three years prior to the transfer. If no returns had been filed, the reason(s) why must be provided;
• Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests, must be used to apply for expedited approval for certain categories of applications. If, however, it is not substantially complete (e.g., it does not include a specific or estimated transfer date), it will be rejected when submitted;
• A "predecessor interest" is defined for purposes of determining a transferor's unsatisfied withholding liability;
• A new section on applications by foreign governments has been added for U.S. real properties used for diplomatic missions;
• Applications for a blanket withholding certificate that excuses withholding by providing a letter of credit must specify the U.S. real properties covered in the executed tax payment and security agreement.

From Carola Hanke, CPA, New York, NY