PUBLISHED BY THE FLORIDA BAR. AUTHORED BY: MITCHELL GOLDBERG AND BRYAN APPEL
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Down markets yield an uptick in insolvent real estate transactions, which may result in cancellation of indebtedness income (COD income). Real estate investors across the U.S. have been faced with increasing interest rates throughout 2023, resulting in the commercial real estate lending industry pulling back and leaving borrowers wondering what to do next.[1] Following a string of severe hurricane damage in the Florida market, commercial insurance rates have skyrocketed in Florida and, in some cases, have doubled over prior coverage periods.[2] As such, Florida commercial real estate borrowers with pending maturity dates are facing a refinance in a maelstrom of rising rates and costs. This maelstrom may lead to an inability to refinance and the need to consider bankruptcy or foreclosure proceedings or transferring the property back to the lender in lieu of a foreclosure (referred to as a “deed in lieu”). Often, such insolvency proceedings lead to COD income to the borrower. As if the foregoing economic pains were not enough, sponsors of commercial real estate deals with foreign investors that go through a foreclosure proceeding or a deed in lieu may find themselves with personal liability for the phantom withholding taxes attributable to the foreign investor’s share of the resulting COD income.
This article discusses the intersection of partnership taxation, COD income, withholding taxes on a foreign partner’s share of partnership income, and the potential applicability of trust fund penalties for failing to withhold, in each case, under the Internal Revenue Code of 1986, as amended (the code).
The U.S. Supreme Court set forth the fundamental tenant of federal taxation that gross income includes any “accessions to wealth, clearly realized, and over which the taxpayers have complete dominion and control.”[3] This broad interpretation is codified in code §61, which states, “gross income means all income from whatever source derived” except when an item of income is explicitly excluded from gross income. However, courts have held that there is no “accession to wealth” when a taxpayer receives loan proceeds because the loan proceeds are coupled with an obligation to repay.[4] In other words, if we are looking at a taxpayer’s balance sheet, upon receipt of a loan, the taxpayer debits assets and makes a corresponding credit to liabilities resulting in no increase to owner’s equity. If that obligation to repay is eliminated other than by repaying the loan in full, the taxpayer now has an accession to wealth that is included in gross income as COD income.[5] The year the COD income is recognized and included in gross income is the year in which an identifiable event occurs, based on the totality of the circumstances, which crystalizes the fact that a debt will never be repaid.[6] Note, however, that the identifiable event that triggers the recognition of COD income usually takes place years after the loan proceeds were received. As such, COD income constitutes phantom income because it is income that is required to be recognized and included in gross income in a taxable year without receiving any corresponding money.
Identifiable Events in Commercial Real Estate Loans
When the obligation to repay a loan secured by commercial real estate is discharged pursuant to a sale, transfer to the lender via a bankruptcy, foreclosure, or deed in lieu proceeding (assuming each is an identifiable event), the federal income tax consequences to the borrower depend on whether such a loan was a nonrecourse or recourse loan. If the loan is nonrecourse, the amount of the nonrecourse loan that is discharged constitutes sales proceeds to the borrower and included in amount realized, even if the fair market value of the commercial real estate is less than the amount of such loan. If the loan is recourse, there is a bifurcated transaction: On one hand, the borrower is deemed to have sold the commercial real estate under §1001 and has taxable gain or loss to the extent the difference between the fair market value of the commercial real estate and the borrower’s adjusted basis; on the other hand, the borrower has COD income to the extent the amount of the recourse loan discharged exceeds the fair market value of the commercial real estate.[7] For example, borrower purchases blackacre for $10,000 with a $1,000 down payment and a secured note for $9,000 (for which borrower is not personally liable and lender’s sole recourse is blackacre), depreciates blackacre by $3,100, pays down the note to $7,600, and sells blackacre for $1,600 plus assumption of the note. Borrower’s amount realized is $9,200 ($1,600 plus $7,600) and borrower has a taxable gain of $2,300 ($9,200 less $6,900; there is no COD income).[8] Assume the same facts, except borrower transfers blackacre to the lender via a deed in lieu when blackacre has a fair market value of $6,000 and borrower is discharged from the remaining $7,600 outstanding under the note. Under these facts, borrower’s amount realized is $6,000 (the fair market value) and borrower has COD income of $1,600 ($7,600 less $6,000).[9] Note that neither the code nor applicable Treasury Regulations define what is “recourse” and “nonrecourse” for these specific purposes. The foregoing examples indicate, however, that a loan is considered nonrecourse if the lender’s sole remedy is to the asset that secures the loan and recourse if the lender can collect from the borrower’s other assets. The distinction can be significant to a borrower. If the debt discharged is characterized as COD income, it is taxed as ordinary income but may be eligible for an exclusion from gross income (discussed further on). If the debt discharged is characterized as sales proceeds, any resulting gain may be taxed as long-term capital gains and any resulting loss may be taxed as an ordinary non-capital loss. Which result is best for the borrower depends on that borrower’s specific facts and circumstances.
COD Income Exclusions
Code §108(a) provides five specific instances in which COD income is excluded from gross income: 1) COD income occurs in a Ch. 11 bankruptcy case (the Ch. 11 exception); 2) COD income occurs when the taxpayer is insolvent (the insolvency exception); 3) COD income is qualified farm indebtedness; 4) COD income is qualified real property business indebtedness (the QRPBI exception); 5) COD income is qualified principal residence indebtedness discharged prior to January 1, 2026. The amount of COD income that can be excluded under the insolvency exception is limited to the extent the taxpayer is insolvent (i.e., aggregate liabilities exceed aggregate fair market value of assets) immediately before the debt discharge.[10] The QRPBI exception only applies to indebtedness incurred or assumed to acquire, construct, reconstruct, or substantially improve real property used in a trade or business. The amount of COD income under the QRPBI exception that can be excluded is generally limited to the extent the qualified indebtedness outstanding immediately prior to discharge exceeds the fair market value of the qualified real property, provided that in no event shall the amount excluded exceed the aggregate adjusted basis of the taxpayer’s depreciable real property immediately prior to discharge. When COD income is excluded under the QRPBI exception, the amount excluded reduces the basis of the taxpayer’s depreciable real property.[11] Where COD income is excluded under the Ch. 11 exception or the insolvency exception, the amount excluded reduces the taxpayer’s other tax attributes.[12] If no exception applies, the taxpayer is required to include COD income in gross income.
Partnerships and COD Income
A partnership is not subject to federal income tax. Rather, its partners are liable for federal income tax in their separate or individual capacities on their distributive share of the partnership’s income, gain, loss, deductions, or credits.[13] However, the character of any item of income, gain, loss, deduction, or credit is determined at the partnership level and such character is retained when a partner is allocated his or her distributive share of such item.[14] The default classification for federal income tax purposes of a limited liability company with two or more members, absent an affirmative election to be taxed as a corporation, is a partnership.[15] For purposes of this article, references to a partnership include both a state law partnership and a limited liability company taxed as a partnership, and references to a partner include both a partner in a state law partnership and a member in a limited liability company taxed as a partnership. When a partnership has an item of COD income, each partner must include his or her distributable share of such COD income in gross income unless an exception applies. The exceptions under code §108 and the related reduction of tax attributes described above are not applied at the partnership level; they are applied at the partner level.[16] As such, partners in the same partnership that have COD income can have different tax results depending on each partner’s facts and circumstances. Assume individuals A, B, and C are equal partners in ABC partnership and ABC partnership has $3 million of COD income that occurs in a Ch. 11 proceeding under the Bankruptcy Code in which ABC partnership is the debtor and no exclusions under code §108 are potentially applicable other than the insolvency exception and the Ch. 11 exception. Partner A is insolvent to the extent of $1.5 million, partner B files for Ch. 11 bankruptcy, and partner C is solvent and does not commence any insolvency proceeding. Under these facts, the ABC partnership will not be able to exclude any COD income at the partnership level. Rather, partner A will include $1 million of COD income in his or her distributable share and will be able to exclude his or her entire amount of COD income under the insolvency exception; partner B will include $1 million of COD income in his or her distributable share and will be able to exclude his or her entire amount of COD income under the Ch. 11 exception; and partner C will include $1 million of COD income in his or her distributable share but will not be able to exclude such COD income under any of the exceptions in code §108(a).
Overview of ECI and FDAP
A nonresident alien individual, foreign partnership, foreign trust, foreign estate, or foreign corporation (in each case, a foreign taxpayer) is generally subject to U.S. income taxation on only two categories of U.S. source income: 1) fixed, determinable, annual, and periodic income (FDAP income),[17] and 2) income effectively connected with a U.S. trade or business (ECI).[18] FDAP income generally includes interest, dividends, royalties, etc., paid by U.S. payors that is not connected with a U.S. trade or business. What is and is not a U.S. trade or business is not defined in the code or Treasury Regulations. Whether or not a foreign taxpayer is engaged in a U.S. trade or business is generally based on the totality of the facts and circumstances. Courts have held that, to be engaged in a U.S. trade or business, a foreign taxpayer must be engaged in “substantial, regular, or continuous ordinary business activity in the United States.”[19] Whether an item of U.S. source income is FDAP or ECI is determined under one of two tests: an asset use test or a business activities test. The asset use test is met if the U.S. sourced income is “derived from assets used in or held for use in the conduct of” a U.S. trade or business.[20] The business activities test is met if activities of the U.S. trade or business were “a material factor in the realization of the income, gain, or loss.”[21] Generally speaking, if either test is met, the U.S. source income is ECI. If neither test is met, the U.S. source income is FDAP. Code §897 explicitly provides that gain or loss of a foreign taxpayer from the disposition of a U.S. real property interest (USRPI) is deemed to be ECI. When a partnership is engaged in a U.S. trade or business, a foreign taxpayer that is a partner in such partnership is deemed engaged in the same U.S. trade or business.[22] Whether the act of owning rental property in the U.S. rises to the level of a trade or business for purposes of treating the rental income as ECI or FDAP is a question of fact.[23] For instance, courts have held that mere ownership of U.S. rental property by a foreign taxpayer and receipt of income therefrom, absent more activities by the foreign taxpayer in the operation and maintenance of the U.S. rental property, does not rise to the level of a U.S. trade or business.[24]
U.S. Sourced Income
Given the limited categories of income that subjects a foreign taxpayer to U.S. income tax, the initial inquiry is whether an item of income received by a foreign taxpayer is U.S. source income. The question of whether and to what extent COD income is U.S. source income is unsettled.[25] In fact, in an unnumbered 1992 field service advisory, the Internal Revenue Service stated in a footnote, “the law is unclear as to how to determine the source of discharge of indebtedness income.”[26] If it is determined that COD income is U.S. source income, the question then becomes whether COD income is FDAP or ECI and the respective withholding obligations (discussed further on). In Big Hong Ng, et al. v. C.I.R., T.C. Memo 1997-248, the taxpayer, a foreign-owned corporation, as its sole asset, an interest in rental property located in the U.S. The taxpayer in Big Hong borrowed funds from affiliates and deployed the loan proceeds in connection with its ownership and operation of such rental property. Subsequently, the taxpayer distributed its interest in the rental property to its sole shareholder and ceased conducting any further operations, whereupon the Tax Court determined that such distribution was an identifiable event that triggered COD income to the taxpayer since it became clear that the debts due to affiliates would not be repaid by the taxpayer. The taxpayer in Big Hong argued that the COD income was neither U.S. source income nor ECI and, as such, the taxpayer (a foreign corporation) was not subject to U.S. income tax on such COD income. The Tax Court rejected this argument and held that the taxpayer was subject to U.S. income tax on the COD income because it was related to its activity of owning the U.S. rental property. While the Tax Court in Big Hong did not explicitly hold that the COD income was U.S. source or that it was ECI, such a result is implicit in the Tax Court’s holding because it found that the taxpayer’s rental activities were a trade or business in the U.S. and that the cancelled indebtedness was related to such business. In reaching its conclusion, the Tax Court appeared to trace where the loan proceeds were deployed (i.e., in the U.S.). Note, however, that the Tax Court concluded the taxpayer was engaged in a trade or business without much explanation or detail concerning the nature and scope of activities in the U.S. vis-à-vis the U.S. rental property. While only a Tax Court memorandum opinion, Big Hong is one of the few authorities on point addressing how to source COD income.
FDAP and ECI Withholding Obligations
FDAP income is subject to a flat 30% tax on the gross amount.[27] To ensure the collection of FDAP income, a 30% withholding tax is imposed on payors of FDAP income (i.e., the withholding agent).[28] Where a partnership has ECI allocated to a foreign taxpayer, the partnership is required to withhold an amount equal to the amount of such ECI multiplied by the highest marginal U.S. income tax rate applicable to such foreign taxpayer (i.e., code §1446 withholding).[29] When a foreign taxpayer sells a USRPI, subject to limited exceptions, the transferee is required to withhold 15% of the amount realized under code §1445. Code §1461 imposes liability on any person who is required and fails to deduct and withhold any tax in respect of payments to a foreign taxpayer. Code §6672 can impose personal liability (i.e., it will “pierce the corporate veil”) on certain officers, directors, and other “responsible persons” who willfully fail to withhold and remit withholding taxes. Generally speaking, a responsible person is someone who has a duty to perform, has the power and authority to direct the act of withholding and remitting taxes, and the authority to determine which creditors (including the IRS) will or will not be paid (regardless of whether that power and authority are actually exercised).[30] For instance, when an entity is required and fails to withhold, that entity is liable under code §1461 and the CEO of such entity (typically a responsible person) can be personally liable under code §6672 if he or she willfully caused such failure. Penalties under code §6672 (referred to as “trust fund penalties” are not dischargeable in bankruptcy.
Phantom Withholding Obligations in a Cashless Transaction
With respect to COD income, because no cash is actually paid, the foregoing withholding rules can impose a withholding requirement despite no money to actually withhold from. The regulations under code §§1441 and 1445 provide some relief, however. Treas. Reg. §1.1441-2(d)(2) provides that, when a lender forgives a loan, such lender is deemed to have made a payment of income to the borrower that is COD income. The Treasury Regulations go on to provide that 30% withholding is not required on such deemed payment (assuming it is FDAP income) so long as the withholding agent is unrelated and does not have custody or control over money or property of the borrower during the period beginning when COD income is triggered and the due date (including extensions) of the tax return required to be filed (i.e., IRS form 1042) for the year in which the payment is deemed to occur. In the context of a foreclosure or deed in lieu, if certain procedural requirements are met, Treas. Reg. §1.1445-2(d)(3) provides that the transferee of the USRPI is relieved of any withholding requirement if the transferor of the USRPI does not receive any money or other property. However, under code §1446, there is no similar relief from withholding for a non-cash item of ECI, such as COD income, received by a U.S. partnership and allocated to a foreign taxpayer. In fact, during the notice and comment proceedings for the regulations promulgated under code §1446, comments were submitted requesting such an exception and the Treasury Department and the Service expressly rejected all requests for exceptions stating:
Treasury and the IRS believe that section 1446 requires a partnership to pay 1446 tax on COD income and gain recognized by reason of a foreclosure or deed in lieu of foreclosure on property when such income or gain is allocated to foreign partners. The purpose of the statute is to collect taxes that foreign persons may not otherwise pay, regardless of the liquidity or financial situation of the withholding agent.[31]
Example 1 — Foreign Taxpayer with Direct Real Property Ownership (No Withholding Obligations)
Now, let’s put all the above concepts together. Consider an individual foreign taxpayer who owns commercial real estate in Miami worth $50 million, with an adjusted basis of $15 million, and subject to a recourse debt of $70 million. If such foreign taxpayer transfers the commercial real estate to the U.S. lender via a deed in lieu, receives no other consideration, the U.S. lender is not holding any other property of the foreign taxpayer, and U.S. lender forgives the remaining $20 million of the debt (i.e., there is an identifiable event), the following results occur: the U.S. lender has no FIRPTA withholding requirements under Treas. Reg. §1.1445-2(d)(3) if all procedural requirements are met, and, where the $20 million of COD income is U.S. source FDAP income, the U.S. lender has no withholding requirements under Treas. Reg. §1.1441-2(d)(2), or, where the $20 million of COD income is U.S. source ECI, the U.S. lender has no withholding requirements under §1446 since U.S. lender is not a partnership of which the foreign taxpayer is a partner (if the debt were nonrecourse, there is no COD income and U.S. lender still has no withholding requirements under Treas. Reg. §1.1445-2(d)(3)). The ability of foreign taxpayer to exclude the COD income (if any) will depend on his or her specific facts.
Example 2 — Florida Partnership Owns Real Property with Some Foreign Partners (Phantom Withholding Obligations)
Now consider the same facts, except a Florida limited liability company taxed as a partnership (U.S. partnership) is the owner of the commercial real estate as its sole asset and U.S. partnership has a foreign taxpayer owning a 40% partnership interest and the remaining 60% of U.S. partnership is owned by U.S. taxpayers. U.S. partnership transfers the commercial real estate to U.S. lender via a deed in lieu. The tax consequences to U.S. partnership and its partners will depend on whether the debt is recourse or nonrecourse, whether the ownership and operation of the commercial real estate constitutes a U.S. trade or business, and the specific facts and circumstances of each partner.
In scenario 1, where the debt is recourse and U.S. partnership is engaged in a trade or business (for instance, where commercial real estate is a 300-key apartment complex actively managed by U.S. partnership), U.S. partnership will have $35 million of phantom gain that is ECI under Treas. Reg. §1.1001-2(a) and code §897, of which $14 million is allocated to the foreign taxpayer giving rise to a $5.18 million withholding obligation under code §1446.[32] In addition, applying Big Hong, such U.S. partnership will have $20 million of COD income that is ECI, of which $8 million is allocated to the foreign taxpayer giving rise to a $2.96 million withholding obligation under code §1446.
In scenario 2, where the debt is nonrecourse (regardless of whether the commercial real estate is used in a trade or business), the entire $70 million debt is included in U.S. partnership’s amount realized resulting in ECI gain of $55 million under Treas. Reg. §1.1001-2(a) and code §897, of which $22 million is allocated to foreign taxpayer resulting in a $8.14 million of withholding obligation under code §1446.
In scenario 3, where the debt is recourse and U.S. partnership is not engaged in a U.S. trade or business (for instance, where commercial real estate is a triple net lease), the same taxable as scenario 1 occurs except the foreign taxpayer is now not deemed engaged in a U.S. trade or business. Is the COD income now FDAP income? An argument could be made that COD income is not fixed or determinable (since extraneous factors are needed to determine its taxability) and thus not FDAP income. Does U.S. partnership have a 30% withholding obligation or is the U.S. partnership a withholding agent to whom the exception under Treas. Reg. §1.1441-2(d)(2) applies? Assuming the COD income is U.S. source FDAP income for which U.S. partnership is required to withhold, a $2.4 million withholding obligation arises under code §1441.
In all instances, the withholding obligation of U.S. partnership (totaling up to $8.14 million) is a phantom withholding obligation because there is no cash from which to withhold. Where COD income arises in scenarios 1 and 3, such COD income (and associated withholding obligations) may be reduced under §108. However, as discussed above, any such reduction or exclusion is determined at the partner level (other than whether the debt is qualified real property business indebtedness) based on the facts of each partner. As such, it is incumbent on foreign taxpayer to alleviate U.S. partnership’s foregoing COD income withholding obligations. If foreign taxpayer partner fails to make an election to exclude or is otherwise nowhere to be found, U.S. partnership cannot reduce its withholding obligations. Conversely, where the debt is nonrecourse there is no COD income and no opportunity to reduce U.S. partnership’s withholding obligations.
Unclear Guidance for Responsible Persons in a Cashless Transaction
Assume further that U.S. partnership is a manager-managed limited liability company and individual A is the sole manager (the manager). As manager of a limited liability company, the manager generally has exclusive control over the business and affairs of U.S. partnership.[33] Where U.S. partnership is required and fails to withhold up to $8.14 million of withholding taxes, manager is likely a responsible person under code §6672 that may be personally liable for up to $8.14 million of trust fund penalties. Can someone willfully fail to pay withholding taxes where there are no funds from which to withhold? There is no clear guidance.
The foregoing examples illustrate the potential insult to injury that may arise for real estate ventures in a down market that have foreign partners, particularly to those individuals who control such real estate ventures and who may be considered responsible persons for purposes of code §6672. Why would Treasury Department and the Service provide exceptions under code §§1441 and 1445 (discussed above) but affirmatively choose not to provide a similar exception under code §1446 on the grounds that the purpose of code §1446 is to “collect taxes that foreign persons may not otherwise pay?”[34] Aren’t code §§1441 and 1445 similarly designed to ensure the collection and payment of taxes from foreign persons who might not otherwise pay? Looking at the foregoing example 2, if the aggregate theory of partnership taxation applies (which appears to be the case under code §108) or if the commercial real estate was owned as tenants-in-common (and subchapter K of the code did not apply) foreign taxpayer is considered as transferring an undivided 40% interest in the commercial real estate to U.S. lender, recognizing gain on such undivided interest and a proportionate amount of COD income, as applicable. Yet, because it was wrapped in a U.S. partnership, the withholding tax results are dramatically different and potentially impose devastating trust fund penalties on the manager.
Structuring Considerations
A rising tide lifts all boats. In a bullish market everyone wins and the phantom withholding obligations discussed above are a non-issue. However, in a down market, these phantom withholding obligations can rear their ugly heads. Sponsors and other developers of real estate projects with foreign investors should be mindful. In structuring their real estate ventures, planning should be done for the good times and the bad. A simple solution is for those persons setting up real estate partnerships to do their diligence and make sure that any foreign investor makes his or her investment through a separate U.S. entity established by such foreign investor. This would push all withholding obligations away from the partnership and to the foreign investor’s own U.S. entity (and all potential penalties would similarly be pushed away). Another alternative is, if an insolvency event is on the horizon and a partnership has a foreign partner, take affirmative steps to cause such foreign partner to cease being a partner at the time the ECI and/or COD income is recognized.[35] Lastly, it may be attractive to convert the partnership to a C corporation so that the exclusions under code §108 can now be applied at the corporate level (in particular the insolvency exception). But, taxpayer beware. Such a conversion would be deemed a transfer of all assets and liabilities of the partnership under code §351. Where liabilities are assumed in excess of the aggregate basis in a transaction to which code §351 applies, code §357(c) treats such excess as taxable phantom gain.
Navigating phantom withholding obligations in a cashless real estate transaction is challenging. Best practice is for those structuring real estate deals to be proactive to ensure the complex and overlapping issues highlighted in this article are promptly addressed, among other corporate and tax hurdles. While we often do not want to “let the tax tail wag the economic dog” in corporate transactions, phantom withholding obligations dictate otherwise.
[1] Colin Stouffer, Interest Rate Woes: a Snapshot of the Lending Landscape in Commercial Real Estate, Reuters (Aug. 3, 2023), https://www.reuters.com/legal/transactional/interest-rate-woes-snapshot-lending-landscape-commercial-real-estate-2023-08-03/.
[2] Mark Gilman, Another Blow to Commercial Real Estate — Storms and a Lack of Carriers at Fault for Doubling of Commercial Insurance Rates in Florida, Yahoo! Finance (June 14, 2023).
[3] See C.I.R. v. Glenshaw Glass Co., 348 U.S. 426 (1955).
[4] See Matarese v. C.I.R., T.C. Memo 1975-84.
[5] See U.S. v. Kirby Lumber Co., 284 U.S. 1 (1931); 26 U.S.C. 61(a)(11).
[6] See Cozzi v. C.I.R., 88 TC 435 (1987).
[7] See Treas. Reg. §1.1001-2(a); Rev. Rul. 90-16, 1990-1 CB 12.
[8] See Treas. Reg. §1.1001-2(c), Ex. 2.
[9] Id. at Ex. 8.
[10] 26 U.S.C. §108(a)(3); 26 U.S.C. 108(d)(3).
[11] 26 U.S.C. §108(c).
[12] 26 U.S.C. §108(b).
[13] 26 U.S.C. §§701, 702(a)-(c).
[14] See 26 U.S.C. §702(b).
[15] Treas. Reg. §301.7701-2(a), (c).
[16] 26 U.S.C. §108(d)(6).
[17] See 26 U.S.C. §§871(a), 881(a).
[18] See 26 U.S.C. §§871(b), 882.
[19] Spermacet Whaling & Shipping Co. v. C.I.R., 30 T.C. 618 (1958), aff’d 281 F.2d 646 (6th Cir. 1960); See also Pinchot v. C.I.R., 113 F.2d 718 (2d Cir. 1940); De Amodio v. C.I.R., 34 T.C. 894 (1960), aff’d, 299 F.2d 623 (3d Cir. 1962).
[20] 26 U.S.C. §864(c)(2)(A).
[21] 26 U.S.C. §864(c)(2)(B).
[22] See 26 U.S.C. §875.
[23] Because of this, the code allows a foreign taxpayer to affirmatively elect to treat rental income as ECI. See 26 U.S.C. §871(d).
[24] See Neill v. C.I.R., 46 B.T.A. 197 (1942); Herbert v. C.I.R., 30 T.C. 26 (1958); see de Amodi v. C.I.R., 34 T.C. 894 (1960), aff’d on another issue 299 F.2d 623 (3d Cir. 1962) (Foreign taxpayer’s ownership and operation of multiple real estate properties in the U.S. through an agent went beyond mere ownership of property and receipt of income and constitutes a U.S. trade or business.).
[25] See Jeff Rubinger and Daniel May, International Tax Aspects of Cancellation of Indebtedness, J. of Taxation, Vol. 98, No. 06 (June 2003); Tax Section of the New York State Bar Association, Report on Source, “Effective Connection” of COD income in Cross-Border Financings, Report No. 1070 (Nov. 5, 2004).
[26] 1992 WL 1354851.
[27] 26 U.S.C. §§871(a); 881(a).
[28] 26 U.S.C. §§1441; 1442
[29] 26 U.S.C. §1446.
[30] See Internal Revenue Manual 5.7.3.4.1 (Aug. 6, 2015).
[31] T.D. 9200 (May 13, 2005).
[32] When a U.S. partnership is subject to withholding under both code §§1445 and 1446, code §1446 governs and controls. See Treas. Reg. §1.1446-3(c)(2).
[33] See Fla. Stat. §605.0407(3).
[34] See note 25.
[35] Beware code §1446(f), which imposes a 10% withholding requirement on the transfer of partnership interests that have assets that generate ECI.
