REVENUE RULE 90-37

1990-1 C.B. 141, 1990-17 I.R.B. 9.

Internal Revenue Service
Revenue Ruling

U.S. AND ARGENTINA AGREEMENT; GAIN FROM DISPOSITION OF U.S. REAL PROPERTY INTEREST

Published: April 23, 1990

Section 883. - Exclusions from Gross Income, 26 CFR 1.882-1: Exclusions from gross income of foreign corporations.

(Also Sections 872, 897; 1.872-2.)

U.S. and Argentina Agreement; gain from disposition of U.S. real property interest. Gain from the disposition of a U.S. real property interest derived by an Argentine enterprise engaged in the international operations of ships or aircraft is not excluded from U.S. taxation under section 897 of the Code by Article 2(2) of an executive agreement between the U.S. and Argentina, concluded under sections 872(b) and 883(a).

ISSUE

Does the agreement between the United States and Argentina described below exempt gain from the disposition of U.S. real property interests from the tax imposed by section 897 of the Internal Revenue Code?

FACTS

X, a U.S. branch of an Argentine corporation, is engaged in the international operation of ships and aircraft through its offices in the U.S. In 1988, X disposed of real property that it had used in its business in a transaction in which X realized gain. The property is a U.S. real property interest within the meaning of section 897(c) of the Code.

LAW AND ANALYSIS

Sections 872(b) and 883(a) of the Code exclude from the gross income of a nonresident alien individual and of a foreign corporation, respectively, income derived from the operation of ships, aircraft, and certain railroad rolling stock if the foreign country in which such individual is a resident or such corporation is organized grants an equivalent exemption to U.S. individuals and corporations. The excluded income is exempt from United States taxation under subtitle A of the Code.

These provisions, first enacted as part of the Revenue Act of 1921, 42 Stat. 227, are intended to prevent the double taxation of shipping income of individuals or corporations that operate internationally and to eliminate the difficulties associated with determining the sources of income so earned. H.R. Rept. No. 1435, 80th Cong. 2d Sess. 1-3 (1938); S. Rept. No. 275, 67th Cong., 1st Sess. 14 (1921); see also M/V Nonsuco, Inc. v. Commissioner, 234 F.2d 583 (4th Cir. 1956). Reciprocal exemption may be provided by the exchange of notes through formal diplomatic channels. In addition, countries enacting laws similar to the provisions of sections 872(b) and 883(a) may be treated as granting an equivalent exemption. H.R. Rept. No. 1435.

The legislative history of sections 872(b) and 883(a) of the Code and their predecessors reflects the intent of Congress to exempt from U.S. taxation the shipping profits generated by the international transport of goods and passengers. These provisions were not intended to exempt investment or other non-shipping business income derived by shipping enterprises. See Rev. Rul. 74- 170, 1974-1 C.B. 175; Rev. Rul. 274, 1953-2 C.B. 81.

Section 897(a) of the Code requires foreign persons to take into account gain or loss from the disposition of a U.S. real property interest under section 871 in the case of nonresident alien individuals, or under section 882 in the case of foreign corporations, as if the gain or loss were effectively connected with the conduct of a trade or business by the foreign person within the United States. A U.S. real property interest is defined, in general, as an interest in real property in the United States or the U.S. Virgin Islands, or an interest in a domestic corporation that is a U.S. real property holding corporation within the meaning of section 897(c)(2). Gain from the disposition of a U.S. real property interest taxable under section 897 is not exempted by sections 872(b) and 883(a).

By exchange of notes dated December 30, 1987, the U.S. and Argentina concluded an agreement (The 'Agreement') based on sections 872(b) and 883(a) of the Code to exclude from taxation in one state the gross income derived by an enterprise of the other state from the international operation of ships or aircraft. 1988-1 C.B. 456. The Agreement also permits Argentina to impose its capital tax on certain assets of Argentine enterprises.

Article 2(1) of the Agreement, relating to gross income derived by an enterprise, applies only to gross income from the international operation of ships or aircraft. Thus, it does not apply to income from the disposition of a U.S. real property interest. Article 2(2) of the Agreement states:

Capital represented by ships or aircraft operated in international transport and by movable or immovable property pertaining exclusively to the operation of such ships or aircraft shall be taxable only in the Party in which the enterprise that operates such ships or aircraft is subject to tax in accordance with the preceding provisions.

This paragraph refers to a capital tax, and not gain from the disposition of a capital asset. This interpretation is consistent with both the language of the Agreement and the purpose and intent of sections 872(b) and 883(a). Accordingly, neither the income tax nor the capital tax provisions of the Agreement limit the right of the United States to tax gain from the disposition of a U.S. real property interest. Furthermore, sections 872(b) and 883(a) do not provide authority to conclude an executive agreement that modifies the taxation of income taxable pursuant to section 897. See also United States v. Guy W. Capps, Inc., 204 F.2d 655 (4th Cir. 1953); Swearingen v. United States, 565 F. Supp. 1019 (D.C. Col. 1983).

HOLDING

Gain realized by X from the disposition of a U.S. real property interest is not exempted by Article 2(2) of the Agreement from U.S. taxation under section 897 of the Code. Thus, amounts realized that are taxable pursuant to section 897 are not exempt from United States taxation under any provision of the Agreement.

DRAFTING INFORMATION

The principal author of this revenue ruling is James Sams, of the Office of Associate Chief Counsel (International). For further information about the ruling, contact Mr. Sams at (202) 377-9059 (not a toll-free call).

Rev. Rul. 90-37, 1990-1 C.B. 141, 1990-17 I.R.B. 9.