IRS GLAM addresses the 5% FIRPTA exception for publicly traded stock held via a partnership

May 2023

In brief

Generally, shares held in a US Real Property Holding Company (USRPHC) are treated as US Real Property Interests (USRPI). However, an exception applies if the shares are publicly traded in the case of a person that holds 5% or less of the publicly traded shares (the Publicly Traded Exception). Previously, there had not been any guidance on how to apply the exception in the case of shares held by a partnership. However, on May 19, the IRS released generic legal advice memorandum (GLAM 2023-003) concluding that the 5% threshold for the Publicly Traded Exception applies at the partnership level. This issue has particular relevance for private equity investors, which often hold interests in US corporations through partnerships. 

Given the IRS’s conclusion in the GLAM that the 5% threshold applies at the partnership level, if a partnership owns more than 5% of a class of regularly traded stock, each foreign partner, regardless of their proportionate interest in the publicly traded company, would be required to report gain on the sale of the regularly traded stock by the partnership as income that is effectively connected with a US trade or business (ECI).   

Takeaway: Although the GLAM states that the advice may not be used or cited as precedent, it reflects the current view of the IRS on the stated issue, and foreign taxpayers that hold regularly traded stock in a USRPHC through a partnership should reevaluate their holdings to analyze whether those holdings may constitute a USRPI. Further, partnerships that have ECI attributable to foreign partners are subject to ECI withholding and reporting; accordingly, partnerships that are holding more than 5% of a publicly traded USRPHC also need to consider their ECI withholding obligations. 

Disposition of a USRPI 

Income (or loss) derived from the disposition of a USRPI by a nonresident alien individual (NRA) or a foreign corporation generally is treated as ECI under the Foreign Investment in Real Property Tax Act (FIRPTA). Any interest (other than solely as a creditor) in a US corporation is presumed to be a USRPI unless established that the corporation is not and has not been a USRPHC during the relevant testing period (the shorter of the ownership period or the five-year period ending on the date of disposition). A USRPHC is any corporation if the fair market value of its USRPIs equals or exceeds 50% of the fair market value of its USRPIs, foreign real property, and trade or business assets. 

Publicly Traded Exception 

The Publicly Traded Exception provides that a person who holds a 5% or less interest (throughout the testing period) in a class of stock of a corporation that is regularly traded on an established securities market is not treated as owning a USRPI. Thus, if the Publicly Traded Exception applies, any gain from the disposition of the regularly traded stock is not treated as ECI under the FIRPTA rules. 

Prior to the issuance of the GLAM, there was uncertainty as to how the Publicly Traded Exception applied when the interest in a publicly traded USRPHC was held by a partnership – i.e., whether the 5% threshold shoud be measured (1) at the partnership level (under an entity approach), or (2) at the partner level (under an aggregate approach).   

Entity approach to Publicly Traded Exception 

The GLAM states that because the Publicly Traded Exception applies to a ‘person’ and the Code generally defines person to include a partnership (the IRS also refers to the definition of a ‘foreign person’ contained in the FIRPTA temporary regulations, which includes a ‘foreign partnership’), the 5% measurement should be applied at the partnership level. 

The IRS justifies its position based on the application of an entity approach in other contexts “where, as here, the question is whether a partner's share of a partnership's income is subject to U.S. tax based on nexus.” The examples of those other contexts given by the IRS where US nexus is determined at the partnership level include the determination of whether a partner is engaged in a US trade or business and the attribution of a partnership’s permanent establishment to a partner. Notably, the GLAM does not distinguish the Publicly Traded Exception with the exception for distributions from publicly traded real estate investment trusts (REITs), which refer to distributions to NRAs and foreign corporations (i.e., a more straightforward look-through rule). 

Illustrative examples 

The GLAM provides two examples. In both examples, a partnership (PRS) owns stock in a publicly traded USRPHC (CORP). A NRA owns a 25% interest in the capital and profits of PRS.   

Example 1 

In the first example, PRS owns 8% of the outstanding stock of CORP, which then is disposed of by PRS. Because PRS owns more than 5% of CORP, the GLAM concludes that the Publicly Traded Exception does not apply and any gain (which is treated as ECI) on the disposition is allocated proportionately to each of PRS's partners, including NRA (although NRA proportionately owns only 2% of CORP’s stock). 

Example 2 

In the second example, NRA directly owns 4.5% of the outstanding stock of CORP. In addition, PRS owns 4% of CORP. Thus, NRA, which owns 25% of PRS, is treated as holding a total of 5.5% of the stock of CORP due to the attribution rules. The stock interest is therefore treated in the GLAM as a USRPI and any gain from the disposition of the stock interest will be ECI. 


Although it cannot be used or cited as precedent, the GLAM clearly shows the IRS’s position regarding the application of the Publicly Traded Exception to stock held through partnerships, thus addressing the uncertainty surrounding the application of this exception. However, the GLAM is silent as to the application of the Publicly Traded Exception to dispositions by foreign partners of interests in a partnership that holds more than a 5% interest in a publicly traded USRPHC if the foreign partner proportionately owns less than 5% of the publicly traded USRPHC.  

Generally, any gain from the disposition of a partnership is treated as ECI to the extent attributable to a USRPI.  There is no clear guidance on how to determine the amount of gain attributable to a USRPI. Yet, if (1) gain is determined by a hypothetical sale of the assets of the partnership and (2) based on the approach of the GLAM, the Publicly Traded Exception is treated as applying at the partnership level to determine whether any stock held by the partnership in a publicly traded USRPHC qualifies as a USRPI, then such sale would be deemed to result in ECI.  

Alternatively, the FIRPTA regulations provide that a person holding an interest in a partnership is treated as holding a proportionate share of the assets held by the partnership.  Under this approach, if the partner’s proportionate share of a publicly traded corporation held by the partnership is less than 5%, the partner potentially would be eligible to seek to apply the Publicly Traded Exception upon disposition of the partnership interest such that the corresponding gain would not be deemed ECI. This approach might be viewed as consistent with the legislative history, which suggests that a foreign investor should be taxable on the disposition of a partnership interest to the extent that the gain represented the investor’s pro rata share of appreciation in the value of USRPIs of the partnership (i.e., by looking at what the partner is treated as owning). This is an issue that taxpayers should further consider since it is not addressed in the GLAM but could have been addressed in Example 2 by treating the NRA as only owning a partnership interest rather a direct interest in the USRPHC and subsequently disposing of the partnership interest – particularly because there seems to be little ambiguity in the application of the attribution rules under the Publicly Traded Exception where a NRA owns a direct interest as well as an indirect interest in a publicly traded USRPHC.  

The IRS position in the GLAM may give rise to an additional layer of filing and withholding obligations for partnerships with foreign partners, as such partnerships generally must withhold on effectively connected taxable income that flows through the partnership and is allocable to a foreign partner. Accordingly, partnerships that hold more than 5% of a publicly traded USRPHC also need to analyze their potential withholding obligations. 

Note: The GLAM provides long-awaited guidance as to the IRS thinking on an issue that could have been addressed in Treasury regulations. However, in lieu of issuing formal guidance, the IRS has chosen to discuss the uncertainty around the application of the Publicly Traded Exception through a legal advice memorandum, possibly as a way of addressing the issue in light of the length of the normal rulemaking process -- the trade-off being that, as expressly noted in the memorandum, it cannot be cited as precedent.  

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Krishnan Chandrasekhar

Krishnan Chandrasekhar

US Tax Leader, PwC US

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