On May 12, 2023, IRS Office of Chief Counsel issued GLAM 2023-003 (the “GLAM”) analyzing the application of the “regularly traded stock exception” in Section 897(c)(3) to stock of a US real property holding corporation (“USRPHC”) held by partnerships. Though not binding on the IRS, the GLAM provides helpful insight into the IRS view as to whether to apply the exception at the partner or partnership level.

Section 897 Background

Section 897 was enacted as part of the Foreign Investment in Real Property Tax Act (“FIRPTA”) in 1980, in order to subject sales of U.S. real property held by non-U.S. persons to tax in the U.S. Under the capital gains sourcing rules in Sections 871 and 881, capital gains are generally sourced (and subject to tax) in the taxpayer’s country of residence. FIRPTA is an exception to those general rules. Section 897 deems any gain from the disposition of a U.S. Real Property Interest (“USRPI”) by a foreign person as effectively connected income (“ECI”), thereby subjecting it to U.S. income tax.

Under Section 897(c)(1)(A)(iii), a USRPI includes any interest (other than an interest solely as a creditor) in a domestic corporation, unless the taxpayer verifies that this corporation was not a USRPHC at any point during the five year period ending on the date of the disposition. A USRPHC is any corporation where the fair market value of its USRPI is equal to or greater than 50% of its U.S. and non-U.S. real property interests plus its trade or business assets.

The regularly traded stock exception in Section 897(c)(3), excludes any class of stock of a corporation that are regularly traded on an established securities market from being treated as a USRPI where a person holds no more than 5 percent of that class of stock (10 percent in the case of public REITs). In essence, this exception prevents foreign investors who own 5 percent or less of a publicly traded corporation (10 percent in the case of public REITs) from being subject to U.S. taxation under the FIRPTA rules.

Section 897(c)(6)(C) applies the Section 318(a) constructive ownership rules (modified to reduce certain attribution thresholds) in determining whether any person owns 5 percent (10 percent for public REITs) of a given class of stock for purposes of the regularly traded stock exception.

There has been a significant amount of uncertainty regarding the application of Section 897(c)(3) to partnerships. This uncertainty has centered around the question of whether the test for USRPI should be applied at the partnership level, the “entity approach,” or at the partner level, the “aggregate approach.” The entity approach sees the partnership as a distinct entity separate from its partners, implying that it is the partnership, not the individual partners, that owns the assets and manages the operations. Conversely, under the aggregate approach, ownership of a partnership’s assets and responsibility for its operations are attributed directly to the partners, rather than the partnership. The GLAM notes that determination of whether to apply an aggregate or entity view to a partnership “depends on the characterization that is more appropriate to carry out the purpose of the Code or Regulatory provision at issue.”


The GLAM discussed two scenarios involving PRS, a partnership where each partner is allocated a proportionate share of income and loss. The partnership owns a portion of CORP, a domestic corporation classified as a USRPHC. Among the partners is a non-resident alien individual, NRA, who owns a 25 percent interest in the capital and profits of PRS.

In the first situation, PRS holds eight percent of CORP’s outstanding stock. When PRS sells all of its CORP stock and realizes gain, the gain is allocated among PRS’s partners, including NRA.

In the second situation, PRS owns four percent of CORP’s outstanding stock, and NRA directly owns 4.5 percent. When NRA disposes of all CORP stock held directly, gain is recognized.

Taking the entity approach, the GLAM concludes that in both Situation 1 and 2, the regularly traded stock exception does not apply, resulting in PRS being required to file a U.S. tax return in Situation 1 and in NRA being required to file a U.S. tax return in Situation 2.

The GLAM reasons that whether to consider a partnership as an entity or aggregate for these purposes can be influenced by the treatment of partnerships in similar circumstances where U.S. tax liability is contingent on the nexus of a partner’s proportion of partnership income. In these scenarios, nexus is evaluated at the level of the partnership, based on its activities. For instance, when a foreign entity invests in a U.S.-based trade or business via a partnership, the trade or business operations are attributed to the foreign entity, thereby necessitating the filing of U.S. tax returns. This holds true irrespective of the extent of the foreign partner’s ownership interest in the partnership, as referenced in Section 875(1) and Treas. Reg. Section 1.6012-1(b)(1)(i). Similarly, the Section 864(b) safe harbor’s applicability for a partner investing through a partnership is examined at the partnership level. For the purposes of any applicable treaty, a partnership’s permanent establishment is attributed to the partner. Furthermore, a tax-exempt entity may garner unrelated business taxable income from a partnership in which the entity is a partner, regardless of whether it is publicly traded or the ownership level.

The GLAM points out that partnerships serve as collective investment platforms. The potential obligation to file U.S. tax returns should the partnership exceed the 5 percent threshold (10 percent for public REITs) stems from the decision to invest collectively and the requirement is in line with the principles of Section 875 and other authorities.

Ultimately, the GLAM concludes, based on this analysis, it is reasonable to conclude that Section 897(c)(3) applies at the partnership level when a partnership holds stock in a USRPHC.

Key Takeaways

The GLAM provides a better understanding of how the IRS’s view of the regularly traded stock exception’s application to partnerships. Its implications are profound in terms of the determination of tax liability for foreign partners of a partnership that invests in the stock of a publicly traded USRPHC. Non-U.S. persons and partnerships with non-U.S. persons as partners should take note of the potential risk of a return filing obligation following the GLAM.

Please contact a Leo Berwick team member to discuss the application of the GLAM or for any other FIRPTA inquiries.