CCA 1028040: Chief Counsel allowed credit for FIRPTA withholding not remitted by the buyer

Plain-English summary

Chief Counsel Advice concluded that a nonresident alien seller could receive credit for tax withheld under FIRPTA even though the buyer did not remit the withheld amount to the IRS. The seller had to file the required U.S. tax return and provide substantial evidence, such as closing documents, showing the amount withheld. The advice explained that the withholding regulations permit this evidence when the IRS has not provided a stamped Form 8288-A. It also noted that the buyer remained liable for the required withholding and related filing and payment penalties.

Ruling snapshot

• Question: Could the seller claim credit for tax withheld from the sale of U.S. real property when the buyer never paid the withholding to the IRS?
• Outcome: advice given
• Key authorities: IRC §§ 897(c)(1)(A)(i), 1445(a), 1461, 1462, and 6651; Treas. Reg. §§ 1.897-1(c)(1)(i), 1.1445-1(b)(1), 1.1445-1(d), 1.1445-1(e), 1.1445-1(f)(1)-(3), and 1.1445-3(g)

Full text (IRS public release)

ID: CCA_2010061517383622 Number: 201028040
Release Date: 7/16/2010
Office: -----------
UILC: 1445.00-00

From: ---------------------
Sent: Tuesday, June 15, 2010 5:38:37 PM
To: ------------------
Cc: ----------------
Subject: advice on FIRPTA

Thanks for your patience while I coordinated with the IRC § 1445 experts within Counsel (------------).
Here is a written explanation that you can provide to the Service Center in bringing resolution to your
case.

Facts
A nonresident alien sold real property located in the United States, which is a United States real property
interest (USRPI) as defined in IRC § 897(c)(1)(A)(i) and Treas. Reg. § 1.897-1(c)(1)(i). The buyer
withheld 10% of the amount realized on the sale, as required under IRC § 1445(a) and Treas. Reg. §
1.1445-1(b)(1). However, the buyer did not pay over the amount withheld to the IRS. Consequently, the
nonresident alien seller did not receive a stamped copy of Form 8288-A from the IRS.
The seller filed a U.S. tax return on which it sought a credit in the amount withheld against his tax liability,
and sought a refund of the excess amount withheld. To date, the Service Center has refused to grant the
credit because it has no record of receiving the amount withheld from the buyer, as in fact the buyer had
not paid over the amount withheld.

Issue
Whether the seller is entitled to the credit (and thus a refund) even though the amount withheld was never
paid to the IRS.

Conclusion
Yes, the seller is entitled to the credit (and thus a refund in this case), provided that the seller has
substantial evidence (e.g., closing documents) of the amount of the credit.

Analysis
Treas. Reg. § 1.1445-1(f)(1) (last sentence) provides that "[a]ny tax withheld under section 1445(a) shall
be credited against the amount of income tax as computed in [the seller's] return." See also IRC § 1462
(granting a credit for income tax withheld at the source). Treas. Reg. § 1.1445-1(f)(2) provides that
generally a stamped copy of Form 8288-A (Statement of Withholding on Dispositions by Foreign Persons
of U.S. Real Property Interests) must be attached to the seller's return to establish the amount withheld
which is available as a credit. If the amount withheld under IRC § 1445(a) exceeds the seller's maximum
tax liability with respect to the disposition (as determined by the IRS), then the seller may seek an early
refund of the excess pursuant to Treas. Reg. § 1.1445-3(g), or a normal refund upon the filing of a tax
return.

Treas. Reg. § 1.1445-1(f)(3)(i) provides that if a stamped copy of Form 8288-A has not been provided to
the seller by the IRS, the seller may establish the amount of tax withheld by the buyer by attaching to its
tax return substantial evidence (e.g., closing documents) of such amount. Such a seller must attach to its
return a statement which supplies all of the information required by Treas. Reg. § 1.1445-1(d), including
the seller's identifying number. The preamble to T.D. 8113 (Dec. 24, 1986), which finalized the IRC §
1445 withholding regulations, explains that Treas. Reg. § 1.1445-1(f)(3)(i) was promulgated specifically to
deal with the situation in which the buyer failed to remit the withheld funds to the IRS. Accordingly, if the
seller filed the requisite tax return and establishes the amount withheld through substantial evidence, the
Service Center should grant a credit to the seller to the extent the amount withheld exceeds his maximum
tax liability with respect to the disposition, as determined by the IRS.

It should be noted that IRC § 1461 and Treas. Reg. § 1.1445-1(e) impose liability on the buyer for the tax
which it was required to withhold. In addition, IRC § 6651 imposes penalties on the buyer for failure to file
Form 8288 when due, and for failure to pay the withholding when due.

-------------has spoken with the --------------attorney who previously provided you advice in this case, and all
parties are now in agreement that credit for the withholding is permissible even though the amount
withheld was never paid to the IRS. Thus, please disregard the advice previously provided by ---------------
-------------------------------------------------------------------------------------------------------------------.

Please let me know if you have any questions.

------------------------------------------------------------------------------

------------------------------------------------------------------------------