On Aug. 19, 2025, the Department of the Treasury and the Internal Revenue Service issued Notice 2025-45, announcing their intent to propose regulations under sections 897(d) and 897(e) of the Internal Revenue Code (IRC). These regulations would modify application of the current rules to certain inbound asset reorganizations under section 368(a)(1)(F) (commonly known as “F reorganizations”), focusing on transactions involving U.S. real property interests (USRPIs) where a foreign corporation redomiciles into the United States.
Relevant Current Rules
1. Section 897 Overview
Section 897, enacted as part of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), is the primary provision that subjects foreign persons to U.S. tax on dispositions of U.S. real estate. It provides that gain or loss from the disposition of a USRPI by a nonresident alien individual or a foreign corporation is treated as effectively connected with a U.S. trade or business, thereby making it taxable in the United States. A USRPI includes not only direct ownership interests in U.S. real property (such as land, buildings, and improvements) but also certain indirect interests, most notably stock in a domestic corporation that qualifies as a U.S. real property holding corporation (USRPHC). A corporation is generally classified as a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50% of the combined fair market value of its (i) U.S. real property interests, (ii) interests in real property located outside the United States, and (iii) other assets used in a trade or business. As a result, many foreign investments in U.S. real estate are effectively ‘looked through’ to impose tax on stock dispositions that otherwise might not be subject to U.S. taxation.
2. Distributions by Foreign Corporations (Section 897(d))
Section 897(d) addresses situations where a foreign corporation distributes a USRPI, including distributions made in liquidations, redemptions, or other transactions that would otherwise qualify for nonrecognition under Subchapter C. Under the general rule, the foreign corporation is required to recognize gain as if the USRPI were sold at fair market value, thereby preventing a foreign entity from avoiding U.S. tax by transferring U.S. real estate to its shareholders without recognition.
The regulations under §1.897-5T provide detailed rules for the application of section 897(d). For example, in reorganizations involving a USRPHC, a foreign transferor corporation that distributes stock of a USRPHC to its shareholders pursuant to section 361(c) is generally subject to gain recognition.
There are, however, important exceptions. Gain recognition is not required if:
a. The distributee would be subject to U.S. taxation on a subsequent disposition of the distributed property (e.g., because the property remains a USRPI in the distributee’s hands); and
b. The basis of the property in the distributee’s hands does not exceed the adjusted basis in the hands of the distributing corporation (plus any gain recognized by the transferor).
Additionally, under the regulations and subsequent IRS guidance (e.g., Notice 89-85 and Notice 2006-46), a foreign corporation can avoid gain recognition by complying with specific reporting and filing requirements, which may include attaching detailed declarations to U.S. tax returns and, in some cases, demonstrating that appropriate FIRPTA tax would have been collected on prior transfers of stock.
These rules are intended to ensure that FIRPTA applies consistently to USRPI dispositions and to prevent taxpayers from structuring distributions or reorganizations to avoid U.S. tax on underlying U.S. real estate. However, the complexity of the exceptions, and the compliance obligations they impose, have often made inbound reorganizations involving foreign corporations administratively burdensome and potentially tax-costly.
3. Nonrecognition Provisions (Section 897(e))
Section 897(e) coordinates FIRPTA with IRC’s nonrecognition rules, such as those for corporate reorganizations, contributions to controlled corporations, and like-kind exchanges. In general, nonrecognition provisions only apply to a foreign person’s disposition of a USRPI if the USRPI is exchanged for another interest that will continue to be subject to U.S. taxation on a future disposition. This ensures that FIRPTA’s reach is preserved even where gain would ordinarily be deferred.
The temporary regulations under Treas. Reg. §1.897-6T implement this rule by requiring that, immediately after the exchange, the property received must itself be a USRPI or an interest that would be taxed upon disposition. For example, if a foreign investor contributes U.S. real estate to a U.S. corporation in exchange for stock, nonrecognition may apply because the stock of the domestic corporation is treated as a USRPI. Conversely, if the property is exchanged for stock not subject to FIRPTA (e.g., a foreign corporation’s stock), gain must generally be recognized.
In addition, the foreign transferor must satisfy certain filing requirements, including reporting the transaction and attaching prescribed statements to a U.S. tax return, to secure nonrecognition treatment. Failure to comply with such reporting rules can trigger recognition of gain.
4. F Reorganizations (Section 368(a)(1)(F))
An F reorganization is defined as a “mere change in identity, form, or place of organization” of a corporation. These transactions often occur when a foreign corporation redomiciles into the United States or when a company changes its legal form for business or regulatory reasons. Current regulations under §1.368-2(m) impose several requirements for qualification, including the “identity of stock ownership” test, which mandates that the same persons own all of the stock of the transferor immediately before and of the resulting corporation immediately after, and in identical proportions.
This ownership continuity rule has created uncertainty in practice, particularly in the context of publicly traded corporations. Because shareholders regularly buy and sell stock on the open market, it is not uncommon for transfers of stock to occur in close proximity to the steps of an F reorganization. Taxpayers and practitioners have questioned whether such incidental transactions, if not formally part of the reorganization plan, could nonetheless disqualify the transaction from F reorganization treatment.
Proposed Changes in Notice 2025-45
1. Exception for Covered Inbound F Reorganizations
The proposed regulations create a new framework for “covered inbound F reorganizations,” where a publicly traded foreign corporation (with stock traded on an established securities market for at least three years) redomiciles into the United States as a publicly traded domestic corporation (with at least one year of trading history). In these cases, the IRS and Treasury recognize that the typical FIRPTA concerns, such as the risk of USRPI escaping taxation, are minimal because public shareholders are widely dispersed and already subject to section 897(c)(3) limitations, as further discussed below. To reflect this lower risk, the rules provide targeted exceptions from gain recognition and certain compliance burdens.
However, the exceptions will not apply if, as part of a plan, the resulting domestic corporation transfers property (other than cash) to its shareholders within one year of the reorganization, unless such transfers are de minimis (less than 1% of the total fair market value of the assets).
2. Clarification of Section 897(c)(3) Application
Section 897(c)(3) provides an exception from FIRPTA for small shareholders of publicly traded corporations. Specifically, stock in a publicly traded USRPHC is not treated as a USRPI with respect to a shareholder who owns (applying attribution rules) 5% or less of that class of stock. This rule reflects the view that small, widely dispersed investors should not be subject to FIRPTA on dispositions of stock, while larger shareholders (above 5%) remain within the regime.
A key feature of the proposal is the alignment of FIRPTA’s USRPI exception for small shareholders with inbound F reorganizations. Specifically, the determination of whether a shareholder would otherwise recognize gain depends on whether the stock would have been treated as a USRPI under section 897(c)(3), that is, whether the shareholder held more than 5% of the relevant class of publicly traded stock. Foreign corporations undertaking these reorganizations must make “reasonable efforts” to identify shareholders exceeding the 5% threshold, which may include reviewing shareholder reports, regulatory filings, and other publicly available information. This approach balances administrability with the government’s interest in ensuring that significant shareholders remain subject to FIRPTA.
3. Streamlined Filing Requirements
Currently, FIRPTA regulations impose declaration obligations on distributees to ensure continued U.S. taxation of USRPIs. The proposed regulations would significantly narrow these requirements. Specifically, only shareholders who do not qualify for the section 897(c)(3) exception must provide declarations. This change would eliminate a major compliance hurdle for inbound F reorganizations of publicly traded companies, where it has often been impractical to obtain declarations from a large and shifting shareholder base.
4. Nonrecognition Treatment under Section 897(e)
The proposed regulations also coordinate with section 897(e), ensuring that covered inbound F reorganizations qualify for nonrecognition treatment even if the stock of the resulting domestic corporation is not itself a USRPI. This reflects the policy judgment that the U.S. tax base is not eroded when foreign shareholders exchange stock in a foreign public company for stock in a comparable U.S. public company, provided that FIRPTA protections continue to apply to large shareholders. The only condition is compliance with applicable filing requirements.
5. Clarification of ‘Identity of Stock Ownership’ in F Reorganizations
The proposed regulations clarify an issue that has caused uncertainty in practice: the “identity of stock ownership” continuity rule for F reorganizations. The proposed changes confirm that incidental stock dispositions not part of the plan of reorganization, such as trading on an exchange that happens to occur between reorganization steps, will not jeopardize qualification. This clarification is particularly important for publicly traded corporations, where routine shareholder activity should not undermine the intended tax treatment.
Practical Implications for Taxpayers
1. Facilitating Redomiciliations
The proposed changes are intended to remove tax and compliance barriers for publicly traded foreign corporations seeking to redomicile into the U.S. for valid business reasons. This is particularly relevant for multinational groups and foreign public companies with significant U.S. operations or investor bases.
2. Reduced Compliance Burden
By limiting the scope of required declarations and filings, the proposed rules would ease the administrative burden on both corporations and shareholders, especially in the context of widely held, publicly traded entities.
3. Certainty in Planning
The clarification regarding the “identity of stock ownership” requirement provides greater certainty for taxpayers planning F reorganizations, ensuring that unrelated stock sales do not inadvertently disqualify a transaction.
4. Resolution of the ‘Subject to Tax’ Concern
A key practical challenge under the existing regulations has been the “subject to tax” requirement for nonrecognition. Because most shareholders of a publicly traded corporation hold less than 5%, their stock would generally not constitute a U.S. real property interest under section 897(c)(3). This technicality risked creating a mismatch between the intended policy and the compliance outcome, potentially forcing gain recognition even when no tax base was eroded. The proposed rules effectively eliminate this “foot fault” by aligning FIRPTA’s small-shareholder exception with inbound F reorganizations, ensuring that transactions are not inadvertently disqualified simply because the vast majority of public shareholders do not hold USRPIs.
5. Foreign Tax Considerations
While the Notice eases U.S. federal tax treatment for inbound F reorganizations, taxpayers should be mindful that favorable U.S. rules do not automatically extend to other jurisdictions. A redomiciliation may trigger corporate exit taxes, shareholder-level taxation, or other consequences (such as stamp duties) under foreign law. Accordingly, companies should consult local counsel to evaluate potential non-U.S. tax implications before undertaking such transactions.
Effective Dates and Reliance
The proposed regulations would apply to transactions occurring on or after Aug. 19, 2025. However, taxpayers may rely on the rules described in the notice for earlier transactions, provided they are applied consistently and in their entirety.
Next Steps and Comments
Treasury and IRS are soliciting comments on the proposed rules, with a deadline of Oct. 20, 2025. Taxpayers considering or planning inbound F reorganizations should review these developments carefully and may wish to submit comments or consult with their tax advisors regarding the potential impact.