Question about federal income tax on foreign corp.

[Famspear]

Federal income taxation of foreign corporations is not something I deal with a lot. I have a question about the treatment of a sale, by a foreign corporation, of a tract of undeveloped real estate in Texas.

The corporation sells the real estate at a gain. The real estate was the corporation's only asset other than a related party receivable, and the corporation wasn't really "engaged" in a trade or business. It just held the real estate for many years as an investment, then sold it.

The corporation has a large net operating loss created by the write off of the related party receivable (from a former shareholder, a foreigner). The corporation also has a large passive activity loss carryover, and we don't know what generated that.

I'm puzzled about the interplay between the section 882(d) election and the effect of section 897.

Section 897 says, in part, that a gain of a foreign corporation from the disposition of a "United States real property interest" (USRPI) shall be taken into account under section 882(a)(1) as if the taxpayer were "engaged in a trade or business within the United States," and as if such gain were "effectively connected with such trade or business."

So, the gain from my sale would appear to come under section 882(a)(1) (and not under section 881), which means that many of the ordinary rules of corporate income taxation would apply (not the 30% tax under section 881 on the "amount received", which in this case could have been a much larger tax).

But, since section 897 makes section 882(a)(1) apply, what is the purpose of the election under section 882(d)? This is the election to treat a foreign corporation's gain from the sale of "real property located in the United States" as "income which is effectively connected with the conduct of a trade or business within the United States."

But, under section 897, it seems to me that such a gain is ALREADY treated that way -- even without the section 882(d) election. So, is the election superfluous?

Is there something I am missing?

As a separate issue, I am concerned that the Internal Revenue Service might assert that the net operating loss carryover and the passive activity loss carryover are not deductible in the year of the gain, under the theory that they don't qualify under section 882(c)(1)(A) as being "effectively connected" to the "conduct" of the "trade or business" gain. I'm somewhat confident that I can justify the deduction for the net operating loss carryover, because related party receivable actually did relate, in a complex, indirect way, to the real estate that was sold.

The way I'm figuring it, even without the 882(d) election, I have zero "regular" federal income tax, zero alternative minimum tax, and zero section 884 branch profits tax.

My main question is: What purpose does the 882(d) election serve, if the property is already covered by the treatment under section 897?

[Famspear]

Footnote:

I note that the section 882(d) election was enacted in the Foreign Investors Tax Act of 1966 (Pub. L. No. 89-809), while section 897 was enacted much later, as part of the Foreign Investment in Real Property Tax Act of 1980, which was part of the Omnibus Reconciliation Act of 1980 (Pub. L. No. 96-499).

Did Congress, in 1980, make the 882(d) election superfluous, or at least partly superfluous?

I did find an IRS Chief Counsel memorandum from December 8, 2004, taking the position that a section 882(d) election is not available for a tax year in which the taxpayer derives no income from U.S. real property other than the gain from the sale of the property.

[LaVidaRoja]

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