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Can FIRPTA be avoided with financial instruments?

With the continuing uncertainty in the stock markets, both in the United States and abroad, many investors are looking for safer places to invest their money, such as real estate. Nowhere is this more evident than in the case of foreign persons investing in U.S. real estate, where recent estimates indicate that the number of dollars invested in the U.S. real estate market by foreign investors rose from $38.9 billion in 1997 to $44.2 billion at the beginning of 2002, an increase of approximately 16 percent over this five-year period. (1)

From a U.S. federal income tax perspective, the primary obstacle facing foreign persons who invest in U.S. real estate is the Foreign Investment in Real Property Tax Act (FIRPTA), or more specifically, Internal Revenue Code (the "Code") [section] 897. Under this provision, any gain recognized by a foreign person on the disposition of a "United States real property interest" (USRPI) will be treated as if such gain were effectively connected to a U.S. trade or business and, therefore, subject to tax at the graduated tax rates that apply to U.S. persons. Additionally, when Code [section] 897 applies, the purchaser of a USRPI typically is required to withhold and remit to the IRS 10 percent of the purchase price in accordance with Code [section] 1445. While gains recognized under Code [section] 897 may be eligible for the favorable 20 percent capital gains tax rate, when compared to the tax-free return that generally is afforded to foreign persons on the sale of other U.S.-situs capital assets, (2) this does not seem like much of a bargain.

In order to avoid the application of Code [section] 897 but still participate in the U.S. real estate market, some foreign persons have attempted to use certain derivative products or financial instruments to create a synthetic long position in the U.S. real estate market. Although the use of options or forward contracts clearly would not accomplish this result, (3) a total return equity swap may achieve this objective. This article examines whether Code [section] 897 applies to a long position in an equity swap with respect to the stock of a U.S. real property holding corporation (USRPHC), (4) and if so, when such position is considered to be "disposed" of for Code [section] 897 purposes.

Total Return Equity Swaps in General

A total return equity swap is a cash-settled bilateral contract, in which each party agrees to make certain payments to the other depending on the value and dividend performance of the underlying asset. An investor may enter into an equity swap either 1) to simulate an investment in the underlying equity without actually acquiring the underlying equity (i.e., a synthetic long position), 2) to divest oneself of the economic exposure to a particular equity without actually disposing of the underlying equity (i.e., a synthetic short position).

With respect to a synthetic long position, the following example illustrates how an equity swap with respect to the stock of USRPHC (5) generally would operate: Assume a foreign investor, who believes that the value of hotels in the South Florida area will appreciate over the next several years, would like to invest in the stock of South Beach, Inc. ("South Beach"), a USRPHC whose underlying assets consist of hotels in the Miami Beach area. South Beach is neither a publicly traded corporation nor a "domestically controlled REIT," (6) both of which are exempt from Code [section] 897. (7) Investors in South Beach are given the option to convert their South Beach shares into shares of a publicly traded South Beach on a quarterly basis beginning on the third anniversary date of their initial investment in South Beach.

Unfortunately, certain legal restrictions prohibit the investor from owning a direct interest in South Beach. Therefore, the investor enters into a five-year equity swap with an investment bank whereby at the end of each year, 1) the bank pays the investor an amount equal to the sum of a) any distributions paid with respect to an interest in South Beach during the year and b) the increase, if any, in the fair market value of an interest in South Beach over the course of the year, and 2) the investor pays to the bank an amount equal to the sum of a) an interest rate (typically LIBOR) multiplied by the value of an interest in South Beach at the beginning of the year and b) the decrease, if any, in the fair market value of an interest in South Beach over the course of the year. The equity swap qualifies as a notional principal contract ("NPC") under Treas. Reg. [section] 1.446-3. (8) To hedge its position under the swap, the bank will purchase an interest in the underlying asset (i.e., the stock of South Beach).

Given that the investor's long position in the swap is equivalent economically to a leveraged purchase of the underlying stock in the USRPHC, the issue arises whether Code [section] 897 applies to the investor when such position is disposed of 2 The IRS could assert two alternative arguments in attempting to apply Code [section] 897 to the investor's long position in the swap 1) the investor's position in the swap is itself a USRPI, or 2) that the investor should be treated as owning the underlying USRPHC stock under common law principles.

Is a Long Position in an Equity Swap a USRPI?

Foreign persons typically are not subject to U.S. federal income tax on U.S. source capital gains unless these gains are effectively connected to a U.S. trade or business. (10) As stated above, however, Code [section] 897 treats any gain recognized by a foreign person on the disposition of a USRPI as if it were effectively connected to a U.S. trade or business. A USRPI is broadly defined as 1) a direct interest in real property located in the United States, and 2) an interest (other than an interest solely as a creditor) in any domestic corporation that constitutes a United States real property holding corporation (i.e., a corporation whose USRPIs make up at least 50 percent of the total value of the corporation's real property interests and business assets). (11)

The regulations promulgated under Code [section] 897 elaborate on the phrase "an interest other than an interest solely as a creditor" by stating it includes "an interest which is, in whole or in part, a direct or indirect right to share in the appreciation in value of an interest in an entity or a direct or indirect right to share in the appreciation in value of assets of, or gross or net proceeds or profits derived by, the entity." (12) Unfortunately, these regulations provide little guidance on what it means to have "a right to share in the appreciation of an interest in an entity."

Despite its rather broad language, however, an argument exists that the phrase was not intended to include long positions in equity swaps. Rather, it seems as if it was designed to deal with "equity kicker" type investments, such as shared appreciation mortgages, as the regulations state "a loan to an individual or entity under the terms of which a holder of the indebtedness has any direct or indirect right to share in appreciation in value of an interest in real property of the debtor is, in its entirety, an interest in real property other than solely as a creditor." (13) The regulations illustrate this principle by example: A non-U.S. taxpayer lends money to a U.S. resident in order for the U.S. resident to purchase a condominium. The non-U.S. resident lender is entitled to receive 13 percent annual interest for the first 10 years of the loan and 35 percent of any appreciation in the fair market value of the condominium at the end of the 10-year period. The example concludes that, because the lender has a right to share in the appreciation of the value of the condominium, he has an interest other than solely as a creditor in the condominium (i.e., a USRPI). (14)

This argument is further strengthened by the fact that the preamble to the final NPC regulations states that "[i]n light of the broad definition of specified index, the IRS is considering whether notional principal contracts ... involving other specified indices (e.g., United States real property) are subject to Section 897." (15) Given that the NPC regulations were released approximately nine years after the final Code [section] 897 regulations were issued, it is doubtful that Treasury would make such a statement if the Code [section] 897 regulations already were intended to deal with interests in equity swaps. (16) Notably, the IRS has yet to provide guidance in this area.

Nevertheless, because the long party in an equity swap with respect to the stock of a USRPHC is entitled to receive all of the appreciation in the underlying property, the IRS may argue that the investor has "a right to share in the appreciation" in the underlying property. Should the IRS make this argument, however, it likely will be a losing one. More specifically, based on the plain meaning of the word "share," which is defined as "to divide" or "apportion," (17) given that the long party to the swap receives 100 percent of the appreciation in the USRPHC's value, the long party is not "sharing" (i.e., dividing or apportioning) the appreciation with anyone. The same holds true if more than one investor enters into a swap on the same stock, as each investor would be receiving 100 percent of the appreciation in the underlying stock rather than a portion thereof. (18) In contrast, in the condominium example discussed above, the non-U.S. lender is properly considered as "sharing" in the appreciation with the U.S. resident borrower because the lender receives 35 percent of the appreciation and the borrower retains the remaining 65 percent of the appreciation. (19)

Treatment of Long Position in Equity Swap Under Common Law Principles

The IRS also may argue that Code [section] 897 applies because the investor's long position in the swap is the equivalent of an ownership interest in the underlying asset under common law principles. Although there is no authority directly on point, practitioners generally agree that a long position in an equity swap with respect to actively traded property should not cause the investor to be treated as the owner of the underlying property. (20) Among the reasons cited for this conclusion are that the investment in a swap 1) confers no voting, dividend, or liquidation rights in the underlying shares, 2) results in decreased liquidity, 3) often provides no ability to acquire the shares on the termination of the swap (swaps generally are cash-settled), and 4) presents an entirely different set of credit concerns than an investor would face had he invested directly in the underlying asset. (21) It is also significant that, with actively traded property, the counterparty may not necessarily hold the underlying asset to hedge its position in the swap.

With regard to an equity swap on non-actively traded property, however, such as the stock of a non-publicly traded USRPHC, the analysis is slightly different. Essentially this is because the less "fungible" the underlying asset, the more likely it is that the counterparty will hold the underlying asset to hedge its position in the swap. This gives the appearance that the counterparty is acting as the investor's agent, and as a result, may cause the investor to be treated as the owner of the underlying asset for tax purposes. In spite of these factors, however, some authority suggests an investor will not be treated as the owner of the underlying asset, even if the counterparty holds the asset and is under an obligation to transfer all of the earnings from the asset to the investor.

For example, in E.L. Connelly, 46 B.T.A. 222 (1942), a taxpayer entered into an agreement with an individual, who purchased shares of non-actively traded stock, whereby they agreed to share equally in all profits and losses on the stock (i.e., if the value of the stock depreciated, the taxpayer would be obligated to reimburse the purchaser for one half of the loss, whereas if the value of the stock appreciated, the taxpayer would be entitled to half of the appreciation). The IRS argued, among other things, that the purchaser acted as the taxpayer's agent, and therefore, the taxpayer should be treated as owning one-half of the underlying stock. The court, however, disagreed and held that the taxpayer should not be treated as owning one-half of the stock because he was merely obligated to reimburse the purchaser for one-half of the loss. (22) Moreover, the NPC regulations themselves clearly contemplate that swaps involving non-actively traded property may be treated as an NPC. (23) While admittedly the NPC regulations deal with the timing of income and loss recognition rather than ownership principles, it would seem odd for the IRS to treat a long party to an NPC as the owner of the underlying asset where regulations specifically allow swaps to be based on non-actively traded property.

Interestingly, the enactment of Code [section] 1260, a statutory constructive ownership provision, also may support the position that the long party to an equity swap should not be treated as the owner of the underlying asset. Code [section] 1260, which was enacted in 1999, generally prevents taxpayers from using derivative contracts to achieve a more favorable after-tax return in an investment in a hedge fund than they would have realized had they made a direct investment in the underlying fund. (24) Code [section] 1260 accomplishes this result by recharacterizing any long-term capital gain realized through an investment in a derivative contract into ordinary income, to the extent such long-term capital gain exceeds the "net underlying long-term capital gain" (i.e., the amount of long-term capital gain the taxpayer would have realized had he invested directly in the underlying fund). It also imposes an interest charge on the amount of any long-term capital gain that is converted into ordinary income. (25)

Notably, aside from its focus on income characterization and deferral, Code [section] 1260 does not affect the tax ownership of property. Thus, in enacting Code [section] 1260, arguably Congress was less concerned with taxpayers using derivatives to avoid other adverse tax consequences of property ownership, such as Code [section] 897, as it was with taxpayers using derivatives to manipulate the character and timing of income. (26) In fact, the legislative history to Code [section] 1260 specifically indicates that foreign taxpayers will not be subject to Code [section] 1260. (27) Nonetheless, as recent guidance in the constructive sale area indicates, the failure of a specific Code section to address a transaction does not necessarily prevent the IRS from challenging it under common law principles. (28)

Whether the Maturity or Termination of the Swap Constitutes a "Disposition"

Even if the IRS can successfully argue that Code [section] 897 should apply to a long position in a swap with respect to the stock of a USRPHC, a non-U.S. investor will be taxed under that section only when such position is "disposed" of. (29) Although Code [section] 897 does not define the term "disposition," the regulations promulgated thereunder provide that the term disposition "means any transfer that would constitute a disposition by the transferor for any purpose of the Internal Revenue Code and regulations thereunder." (30) Furthermore, the Internal Revenue Manual provides that a disposition may include "sales, gifts where liabilities exceed adjusted basis, like-kind exchanges, changes in interests in a partnership, trust, or estate, and corporate reorganizations, mergers, or liquidations; even foreclosures or inventory conversions. (31) A disposition also can include a distribution and a contribution to capital. (32) Thus, the term "disposition" appears to encompass a broad range of transactions.

With respect to an equity swap, a disposition could possibly result on either the maturity of the swap or upon on a termination or assignment of the swap, depending on the characterization of the swap payments. Specifically, three types of payments are made in connection with an equity swap: 1) periodic payments, 2) nonperiodic payments, and 3) termination payments. A periodic payment is defined as a payment made or received pursuant to an NPC that is payable at intervals of one year or less during the entire term of the contract, that is based on a specified index, and that is based on a single notional principal amount. (33) A nonperiodic payment, on the other hand, is a payment made or received with respect to an NPC other than a periodic payment or termination payment. (34) Finally, a termination payment is defined as a payment made or received to extinguish or assign all or a proportionate part of the remaining rights and obligations of any party under a NPC. (35) Of these three categories of payments, the only one that likely gives rise to a Code [section] 897 disposition is a "termination payment."

This conclusion is based on the effect of Code [section] 1234A, which provides that "gain or loss attributable to the cancellation, lapse, expiration, or other termination of a right or obligation with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer shall be treated as capital gain or loss from the sale of a capital asset." Assuming a position in an equity swap constitutes a capital asset in the hands of the taxpayer (which generally should be the case unless the taxpayer is a swaps dealer), (36) a payment made or received to terminate the swap should constitute a sale of that position for purposes of Code [section] 1234A. As noted above, because the term "disposition" includes a sale, a termination payment clearly should give rise to a disposition for purposes of Code [section] 897.

On the other hand, the IRS apparently believes that the receipt of periodic and nonperiodic payments do not constitute a "cancellation, lapse, expiration or other termination" with respect to a capital asset. (37) Specifically, the IRS has ruled that the receipt of periodic payments (including the final periodic payment) does not result in a Code [section] 1234A "sale" because such payments are simply made according to the original terms of the contract. (38) Similarly, the IRS has ruled that the receipt of nonperiodic payments does not give rise to a Code [section] 1234A "sale" because such payments do not terminate a NPC. (39)

Interestingly, however, courts have construed the term "disposition" broader than the term "sale." (40) Thus, it is possible that, despite not giving rise to a sale for purposes of Code [section] 1234A, the final periodic and nonperiodic payments pursuant to an equity swap may result in a Code [section] 897 disposition. One court in particular applied the plain meaning of disposition (i.e., "the getting rid, or making over, of anything; relinquishment") to find that a satisfaction of a claim resulted in a disposition (but not a sale) of the claim since it was "rid of or relinquished upon payment." (41)

Notwithstanding the potentially broader construction of the term "disposition," however, the Code [section] 897 regulations appear to indicate by way of example that the receipt of the final periodic and nonperiodic payments on the maturity of the swap should not result in a Code [section] 897 disposition. (42) In the example, a foreign corporation lends $1 million to a domestic individual, secured by a mortgage on residential real property purchased with the loan proceeds. Under the loan agreement, the foreign corporate lender will receive fixed monthly payments from the domestic borrower, constituting repayment of principal plus interest at a fixed rate, and a percentage of the appreciation in the value of the real property at the time the loan is retired. The example states that, because of the foreign lender's right to share in the appreciation in the value of the real property, the debt obligation gives the foreign lender an interest in the real property "other than solely as a creditor." Nevertheless, the example concludes that Code [section] 897 will not apply to the foreign lender on the receipt of either the monthly or the final payments since these payments are considered to consist solely of principal and interest for U.S. federal income tax purposes. In other words, the example concludes the receipt of the final payments did not result in a disposition of the debt obligation for purposes of Code [section] 897. The example did note, however, that a sale of the debt obligation by the foreign corporate lender would result in gain that is taxable under Code [section] 897.

Although this example deals with payments received pursuant to a shared appreciation mortgage rather than an equity swap, in both situations the foreign investor's rights to participate in the appreciation of the underlying real estate are contractually based. Accordingly, even if the IRS can get past the first hurdle regarding the applicability of Code [section] 897 to long positions in equity swaps, it seems that, unless the swap is terminated or assigned prior to its stated maturity, Code [section] 897 should not apply to treat the final periodic and nonperiodic payments as a "disposition."

Conclusion

With no signs of immediate improvement in either the U.S. economy or the worldwide stock markets, there is every reason to believe that the number of dollars invested by foreign persons in the U.S. real estate market only will continue to increase. In the case of a foreign person who is indifferent between a direct versus an indirect investment in the U.S. real estate market, so long as economically equivalent transactions continue to produce different tax consequences, an investment through an equity swap may be the best option.

(1) See Association of Foreign Investors in Real Estate Foreign Investment Survey; Kingsley Associates.

(2) See Code [section] 871(a)(2).

(3) See Treas. Reg. [section] 1.897-1(d)(2)(ii)(B) (an option or contract to acquire any interest in real property will constitute an interest in real property).

(4) For purposes of this article, it is assumed that the underlying asset in the swap is a type of asset that the counterparty (i.e., investment or commercial bank) would purchase to adequately hedge its position in the swap. It is also assumed that the underlying asset is neither stock in a publicly traded corporation nor an interest in a "domestically controlled REIT," both of which are exempt from Code [section] 897. See Code [section] 897(c)(3) and 897(h)(2), respectively. With respect to stock in a publicly traded corporation, Code [section] 897 will apply if an investor owns more than five percent of a class of such stock.

(5) Although the article deals with the stock of a USRPHC, the same strategy could be accomplished with interests in other entities such as partnerships or limited liability companies. Alternatively, the payments in the swap also could be based on a real estate index, such as the NCREIF Property Index.

(6) The term "domestically controlled REIT" generally means a REIT in which at all times during the last five years less than 50 percent in value of the stock was held directly or indirectly by foreign persons. Code [section] 897(h)(4)(B).

(7) Code [section] 897(c)(3) and 897(h)(2).

(8) An NPC is defined as a financial instrument that provides for the payment of amounts by one party to another at specified intervals calculated by reference to a specified index upon a notional principal amount in exchange for specified consideration or a promise to pay similar amounts. Treas. Reg. [section] 1.446-3(c)(1).

(9) In addition to possibly avoiding gain recognition under Code [section] 897, a non-U.S. investor also will avoid U.S. withholding taxes on the swap payments. Treas. Reg. [section] 1.1441-4(a)(3)(i). See also Treas. Reg. [section] 1.863-7(b), which generally treats the source of swap payments according to the resident of the recipient.

(10) A nonresident alien individual also will be subject to U.S. federal income tax on U.S. source capital gains if such individual is present in the United States for 183 days or more during the taxable year and certain other conditions are satisfied. See Code [section] 871(a)(2).

(11) Code [section] 897(c). Additionally, real property held by a partnership is treated as if it were held directly by the partners for purposes of Code [section] 897. Code [section] 897(c)(4)(B).

(12) Treas. Reg. [section] 1,897-1(d)(3)(i)(D).

(13) Treas. Reg. [section] 1.897-1(d)(2)(i).

(14) Treas. Reg. [section] 1.897-1(d)(2)(i), Example. See also Treas. Reg. [section] 1.897-1(h), Example 2.

(15) 58 Federal Register 53125, 53126; Treas. Dec. Int. Rev. 8491 (the "Preamble").

(16) Admittedly, when the final Code 3897 regulations were issued, equity swaps were not as common as they are today.

(17) THE AMERICAN HERITAGE DICTIONARY OF THE ENGLISH LANGUAGE.

(18) Some commentators also argue that a total return equity swap cannot constitute a USRPI because "[t]he regulations indicate that the right to share in appreciation must run from the issuer of the interest, and therefore an instrument is not a USRPI where the issuer is not a party to the contract. See Treas. Reg. [section] 1.897-1(d)(3)(ii)(B)." KEVIN M. KEYES, FEDERAL TAXATION OF FINANCIAL INSTRUMENTS AND TRANSACTIONS, [section] 14.04(4)(a) at 14-57 n.207 (1997).

(19) One commentator seems to agree with this position. See David F. Levy, Towards Equal Tax Treatment of Economically Equivalent Financial Instruments: Proposals for Taxing Prepaid Forward Contracts, Equity Swaps, and Certain Contingent Debt Instruments, 3 FLORIDA TAX REV. No. 8.

(20) See Edward D. Kleinbard, Equity Derivative Products: Financial Innovation's Newest Challenge to the Tax System, 69 TEX. L. REV. 1319, 1333 (1991); Richard L. Reinhold, Tax Issues in Equity Swap Transactions, 57 TAX NOTES 1185, 1199-1203 (Nov. 23, 1992); Lewis R. Steinberg, Selected Issues in the Taxation of Swaps, Structured Finance and Other Financial Products, 1 FLORIDA TAX REV. 263, 284 (1993); KEVIN M. KEYES, FEDERAL TAXATION OF FINANCIAL INSTRUMENTS AND TRANSACTIONS [section] 14.03(2)(a) at 14-25 (1997); and David S. Miller, Taxpayers' Ability To Avoid Tax Ownership: Current Law and Future Prospects, 51 TAX LAW. 279, 296 (1998).

(21) The long party to a swap is exposed to the credit risk of both the counterparty to the swap and (albeit indirectly) the entity whose stock makes up the underlying asset.

(22) See also Rev. Rul. 72-25, 1972-1 C.B. 127 (IRS ruled that an employee did not acquire a present interest in an annuity contract that his employer purchased to fund payments due the employee under a deferred compensation arrangement where the annuity contract was subject to the claims of the employer's general creditors); Rev. Rul. 82-54, 1982-1 C.B. 11, (IRS ruled that a life insurance company rather than the policyholder was considered the owner of the underlying investments of a variable annuity contract where the investments were not available to the general public).

(23) The preamble to Treas. Reg. 31.446-3 states that the regulations accommodate requests to expand the term specified index to include "property that is not publicly traded." See the Preamble, supra note 15, page 53126. Moreover, Treas. Reg. [section] 1.446-3(c)(4)(ii) provides that an example of "objective financial information" includes a notional principal amount based on an "outstanding balance of a pool of mortgages."

(24) Until regulations are issued, technically Code [section] 1260 should not apply to any stock in a corporation that is not a pass-through entity, such as the stock in a USRPHC. Code [section] 1260(c)(1). This does not necessarily prevent the IRS from attempting to apply it, however. See TAM 200301004 (Aug. 27, 2002) (IRS applied disguised sale of partnership interest provisions without regulations).

(25) The interest charge rules of Code [section] 1260 effectively were modeled after the PFIC provisions of Code [sections] 1291-98.

(26) It had been anticipated that the IRS would issue regulations modeled after Treas. Reg. [sections] 1.861-2(a)(7) (i.e., the substitute interest payments) and 1.861-3(a)(6) (i.e., the substitute dividend payments) that would apply a "look through" approach to equity swap payments and other derivative contracts. As of yet, however, nothing has been issued.

(27) H. Rept. 106-289, H.R. 2488.

(28) See Rev. Rul. 2003-7, 2003-5 I.R.B. 363 (IRS ruled that a variable prepaid forward contract did not cause a current sale under either common law principles or for purposes of Code [section] 1259).

(29) This article assumes that the term disposition refers to a taxable disposition, because certain tax-free dispositions of USRPIs do not trigger immediate gain recognition under Code [section] 897. See Code [section] 897(e) and Treas. Reg. [section] 1.897-6T.

(30) Treas. Reg. [section] 1.897-1(g).

(31) IRM 4233, [section] 5(13)1(8).

(32) See Code [section] 897(d) and (j).

(33) Treas. Reg. [section] 1.446-3(e)(1). An example of periodic payments include the dividend and interest related payments.

(34) Treas. Reg. [section] 1.446-3(f)(1). An example of a (contingent) nonperiodic payment would include a single appreciation/depreciation payment made at the maturity of an equity swap.

(35) Treas. Reg. [section] 1.446-3(h). An example of a termination payment would include a payment made by one party in the swap to the other to terminate the contract prior to its maturity.

(36) Code [section] 1221(a).

(37) See PLR 9824026 (March 12, 1998) and TAM 9730007 (April 10, 1997).

(38) See TAM 9730007 (April 10, 1997).

(39) See PLR 9824026 (March 12, 1998) (the ruling involves a fixed nonperiodic payment). Based on the language in TAM 9730007, an argument can be made that all nonperiodic payments (i.e., fixed and contingent) should be exempt from Code [section] 1234A since they are simply payments made pursuant to original terms of the contract. An argument exists, however, that a contingent nonperiodic payment (e.g., a single appreciation/depreciation made at the maturity of the swap) should be subject to Code [section] 1234A because such a payment does not accrue on a daily basis like a fixed nonperiodic payment but rather arises solely as a result of making or receiving the payment. See Kevin M. Keyes, supra note 18, [section] 14.04(3)(a), for a further discussion of this issue.

(40) See Herbert's Estate, 139 F.2d, 756 (3d Cir. 1943); and E. Zobel's Estate, 28 T.C. 885 (1957). Both cases dealt with whether the payment of a claim constituted a "disposition" of such claim.

(41) In Herbert's Estate, 139 F.2d at 758, the court applied the literal meaning of the word disposition, stating "[t]he dictionary definition of 'disposition' is the meaning one usually attributes to the word. It is 'The getting rid, or making over, of anything; relinquishment.' In this elementary and usual sense of the word, the transaction certainly falls within the statute. The estate had a chose in action, property, which it got rid of or relinquished upon payment."

(42) See Treas. Reg. [section] 1.897-1(h), Example 2.

Jeffrey L. Rubinger is an associate in Becker & Poliakoff's Ft. Lauderdale office. He received his J.D. from the University of Florida and an LL.M. in taxation from New York University. Mr. Rubinger is admitted to the Florida and New York bars, and is a certified public accountant.

This column is submitted on behalf of the Tax Section, Richard B. Comiter, chair, and Michael D. Miller, Benjamin A. Jablow, and Normarie Segurola, editors.
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Title Annotation:Foreign Investment in Real Property Tax Act
Author:Rubinger, Jeffrey L.
Publication:Florida Bar Journal
Date:Mar 1, 2004
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