REVENUE RULE 92-74

1992-2 C.B. 156, 1992-38 I.R.B. 9.

Internal Revenue Service
Revenue Ruling

ELECTIONS UNDER SECTION 882(D)

Published: September 21, 1992

Section 882. Tax on Income of Foreign Corporations Connected with United States Business

(See Also Section 897.)

Elections under section 882(d). This ruling explains the income tax consequences of an election under section 882(d) of the Code by a foreign corporation.

ISSUE

How does an election under section 882(d) of the Internal Revenue Code with respect to property that is a United States real property interest affect the computation of net operating losses and capital gains and losses on disposition of the property?

FACTS

A foreign corporation makes an election under section 882(d) with respect to United States real property. The amounts involved and the circumstances of ownership are such that allowance of any losses or credits is not limited by section 469. Transactions with respect to the property lead to the following results in the current taxable year (and no other facts are relevant):

Situation 1. Current allowable deductions attributable to the property exceed current income from the property; the taxpayer has income from other United States trades or businesses, as well as income from other property subject to a section 882(d) election.

Situation 2. Current allowable deductions attributable to the property exceed current income from the property; the property is disposed of in the current year at a loss; the taxpayer has income from other United States trades or businesses, as well as income from other property subject to a section 882(d) election; and the taxpayer has no other capital gains or losses.

Situation 3. Current allowable deductions attributable to the property exceed current income from the property; the property is disposed of in the current year at a gain; the taxpayer has income from other United States trades or businesses, as well as income from other property subject to a section 882(d) election; and the taxpayer has no other capital gains or losses.

Situation 4. Current income from the property exceeds current allowable deductions attributable to the property; the property is disposed of in the current year at a loss; the taxpayer has income from other United States trades or businesses, as well as income from other property subject to a section 882(d) election; and the taxpayer has no other capital gains or losses.

LAW AND ANALYSIS

Section 882(d) of the Code allows a foreign corporation to elect to have certain income from real property held for the production of income treated as if it were effectively connected with the conduct of a trade or business within the United States. The legislative history of section 882(d) of the Code provides that "[t]he provisions relating to the applicability of such an election, as well as the manner of making or revoking the election, are identical to the provisions of section 871(d)...." H.R. 1450, 1966-2 C.B. 965, 1030. See also section 1.882-2(a) of the regulations. In language also applicable to section 882(d), the legislative history of section 871(d) explains that:

[t]o the extent that deductions are connected with income from such real property in respect of which an election is made ..., such deductions shall be treated as connected with income which is effectively connected with the conduct of a trade or business within the United States.

H.R. 1450, 1966-2 C.B. 965, 1019.

While the income from property subject to a section 882(d) election is treated as if it were effectively connected with the conduct of a trade or business within the United States for purposes of imposing tax on a net basis under section 882(a)(1), the property itself is treated as a capital asset which, if depreciable, is subject to the allowance for depreciation under section 167. An election under section 882(d) does not permit a capital asset to be treated as property used in a trade or business for purposes of applying other provisions of the Code, such as section 1221(2) or 1231(b). Section 1.871-10(c)(2) of the Income Tax Regulations.

Section 172(a) of the Code allows a deduction for an amount equal to the aggregate of the net operating loss carryovers to the taxable year, plus the net operating loss carrybacks to such year. Section 172(c) defines "net operating loss" as the excess of deductions allowed by Chapter 1 of the Code over the gross income as computed with modifications specified in section 172(d).

A loss on disposition of property subject to a section 882(d) election is a capital loss. Section 1.871-10(c)(2) of the regulations. Section 1211(a) provides that losses from sales or exchanges of capital assets are allowed to a corporate taxpayer only to the extent of gains from such sales or exchanges. Because section 172(c) defines "net operating loss" as the excess of deductions allowed by this chapter over gross income, computed with the modifications specified in section 172(d), and section 1211(a) allows no deduction for an excess of capital losses over capital gains, a corporation may not utilize a net capital loss in computing its deduction under section 172(c). Section 1212(a) allows a corporation to carry a net capital loss back three years and forward five years.

Section 897(a)(1) of the Code states that gain or loss from the disposition of a United States real property interest is taken into account, in the case of a foreign corporation, under section 882(a)(1), as if the taxpayer were engaged in a United States trade or business during the taxable year and as if such gain or loss were effectively connected with that trade or business.

In the case of corporations, capital gains described in section 897(a)(1) are included in gross income under section 882(a)(2). In computing taxable income under section 882, current allowable deductions that are treated as effectively connected with a United States trade or business as a result of an election under section 882(d), may offset effectively connected capital gains described in section 897(a)(1). See H.R. 96-1167, 96th Cong., 2d Sess. (1980), 1980-2 C.B. 530, 571; and section 1.871-10(c)(1) of the regulations.

In the case of corporations, capital losses are allowed only to the extent of capital gains.

HOLDINGS

An election under section 882(d) of the Code requires taxpayers to account for current operating gains and losses, and gains and losses on disposition of the property subject to the election, as follows:

Situation 1. Current allowable deductions attributable to the property exceed current income from the property. In the case of an election under section 882(d), the excess of current allowable deductions attributable to the property over current income from the property may be used to offset income from other United States trades or businesses, as well as income from other property subject to a section 882(d) election. If such deductions exceed the current income described above, the excess will constitute a net operating loss under section 172(c) of the Code. The normal carryback and carryover rules in section 172(b) apply with respect to the net operating loss.

Situation 2. Current allowable deductions attributable to the property exceed current income from the property; the property is disposed of in the current year at a loss; and the taxpayer has no other capital gains or losses. In the case of an election under section 882(d) of the Code, a foreign corporation is not entitled to a deduction for the current year for capital losses in excess of capital gains (section 1211(a)). In computing a net operating loss, the net capital loss may not be used in the computation, because it is not an allowable deduction under Chapter 1 of subchapter B of the Code (section 172(c)). A foreign corporation may use the excess of current allowable deductions attributable to the property over current income from the property to offset income from other United States trades or businesses, as well as income from other property subject to a section 882(d) election. If such deductions exceed the current income described above, the excess will constitute a net operating loss under section 172(c) of the Code.

The normal carryback and carryover rules in section 1212(a) apply with respect to the capital loss.

Situation 3. Current allowable deductions attributable to the property exceed current income from the property; the property is disposed of in the current year at a gain; and the taxpayer has no other capital gains or losses. In the case of a capital gain on disposition of real property not attributable to a United States trade or business by a foreign corporation, the gain is treated as effectively connected with a United States trade or business under section 897(a)(1) of the Code. Therefore, the gain is included in gross income under section 882(a)(2). If current allowable deductions attributable to the property exceed the total of current income from the property and gain on disposition, such excess may be used to offset income from other United States trades or businesses, as well as income from other property subject to a section 871(d) or 882(d) election. If such deductions exceed the income described above, the excess will constitute a net operating loss under section 172(c). See H.R. 96- 1167, 1980-2 C.B., at page 571. The normal carryback and carryover rules in section 172(b)(1) apply with respect to the net operating loss.

Situation 4. Current income from the property exceeds current allowable deductions attributable to the property; the property is disposed of in the current year at a loss; and the taxpayer has no other capital gains or losses. In the case of an election under section 882(d) of the Code, a foreign corporation is not entitled to a deduction for the current year for capital losses in excess of capital gains (section 1211(a)). In computing a net operating loss, the net capital loss may not be used in the computation, because it is not an allowable deduction under Chapter 1 of subchapter B of the Code (section 172(c)).

The normal carryback and carryover rules in section 1212(a) apply with respect to the capital loss.

DRAFTING INFORMATION

The principal author of this revenue ruling is Ed Williams of the Office of the Associate Chief Counsel (International). For further information on this ruling, call Mr. Williams at 202-874-1490 (not a toll-free call), or write to CC:INTL:Brl, Room 3319, 950 L'Enfant Plaza, Washington, D.C. 20024.

Rev. Rul. 92-74, 1992-2 C.B. 156, 1992-38 I.R.B. 9.