SECTION 2. BACKGROUND

.01 Overview of Section 897

Under section 897(a), gain or loss from the disposition of a USRPI by a nonresident alien individual or a foreign corporation is taken into account as effectively connected income under section 871(b)(1) or section 882(a)(1), respectively, as if the taxpayer

were engaged in a trade or business within the United States during the taxable year and the gain or loss were effectively connected with the trade or business.

Section 897(c)(1) generally defines a USRPI to mean an interest in real property located in the United States or the Virgin Islands and any interest (other than an interest solely as a creditor) in any domestic corporation, unless the taxpayer establishes that such corporation was not a United States real property holding corporation (“USRPHC”) at any time during the shorter of the period the taxpayer held such interest or the 5-year period ending on the date of the disposition of such interest. Under section 897(c)(2), a USRPHC is defined as any corporation if the fair market value of its USRPIs equals or exceeds 50-percent of the sum of the fair market value of (i) its USRPIs, (ii) its real property interests located outside of the United States, and (iii) any of its other assets used or held for use in a trade or business. If any class of stock of a corporation is regularly traded on an established securities market, section 897(c)(3) generally provides that stock of that class is treated as a USRPI only with respect to a person who held more than 5 percent of such class of stock during a defined period (applying certain constructive ownership rules under section 897(c)(6)(C)).

.02 Treatment of Distributions by Foreign Corporations under Section 897(d)

Under section 897(d)(1), except to the extent provided in regulations, gain is recognized by a foreign corporation on the distribution (including a distribution in liquidation or redemption) of a USRPI in a transaction that otherwise qualifies for nonrecognition under chapter 1 of the Code. Section 897(d)(2) provides that gain is not recognized under section 897(d)(1) if (i) at the time of the receipt of the distributed property, the distributee would be subject to taxation on a subsequent disposition of the distributed property, and the basis of the distributed property in the hands of the distributee is no greater than the adjusted basis of such property before the distribution, increased by the amount

1 Notice 89-57, 1989-1 C.B. 698, suspends the return filing requirement in §1.897-5T(d)(1)(iii) if: (i) the transfer or distribution otherwise qualifies in its entirety for nonrecognition under the temporary regulations under section 897(d) and (e), (ii) the transferor or distributor does not have any other income that is effectively connected with a U.S. trade or business during the taxable year that includes the transfer or distribution subject to the temporary regulations under section 897(d) and (e); and (iii) either a withholding certificate is obtained pursuant to §1.1445-3(a) or a notice of nonrecognition is submitted to the IRS pursuant to the provisions of §1.1445-2(d)(2).

September 8, 2025 388 Bulletin No. 2025–37