FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT (FIRPTA)

(as amended by the Deficit Reduction Act of 1984)

A. Citations.

1. FIRPTA - 96 Stats. 2682

2. Deficit Reduction Act ("DRA") - Sec. 129 of Tax Reform Act of 1984, Pub. L. 98-369

3. Withholding Provisions - 26 USCA Sec. 1445

4. IRS Regulations

a. Income Taxes: Taxation Of Foreign Investment In United Real Property Interests, 26 C.F.R. Sec. 1.1897-1, et seq.; 49 F.R. 50689, et seq. (Final Regulations)

b. Withholding Upon Disposition of U.S Real Property Interests By Foreign Persons, 26 C.F.R. Sec. 1.1445-1T, et seq., 49 F.R. 50667, et seq. (Temporary Regulations).

B. Overview.

1. Effective January 1, 1985 the transferee of real property or an interest in an entity which owns real property is required to withhold 10 percent of the amount realized by the transferor (the sales price) and remit the same to the Internal Revenue Service Center, Philadelphia, PA. 19255 with IRS Forms 8288 and 8288-A if:

a. The transferor is a foreign person,

b. The transferee is acquiring a United States Real Property Interest and

c. The transfer takes place on or after January 1, 1985.

2. In general, the transferee must report and pay over the tax withheld by the tenth day after the date of transfer, that being the first date on which consideration is paid or liability is assumed by the transferee. The payment of a contract down payment is not deemed to be the date of transfer.

A transferee that does not deduct and withhold tax when required is subject to liability for the amount of the tax, and to possible penal ties where, in fact, tax is due and not paid by the transferor. Corporate officers may be subject to civil penalties equal to the amount that should have been withheld and paid over.

In certain entity transactions, as discussed herein, the transferor will withhold and remit the tax to the IRS.

3. Ten percent of the amount realized must be withheld regardless of the cash involved in a transfer unless reduced withholding is authorized in advance by the IRS as discussed herein.

C. Transferor Is A Foreign Person.

1 Includes a nonresident-alien individual, a foreign corporation (unless it elects to be taxed as a domestic corporation), foreign partnerships, foreign trusts and foreign estates.

2. A resident alien individual will be treated as a United States resident for tax purposes if he meets a "green card" or a "substantial presence"- test. See "FIRPTA Withholding - Tax Rules - Lawyers' , Realty Brokers' Liability", by Arthur Wittenstein and Suzanne Leonard, - New York Law Journal, October 31,1984, Page 1, Column 3.

D. United States Real Property Interest.

1. Regulations provide that local law will not be controlling for purposes of determining the meaning of the term real property.

2. Any interest other than an interest solely as a creditor in

a. Real property located in the United States or the Virgin Islands

1. Interests in real property itself, improvements and personal property associated with the use of real property.

2. Includes land and buildings, mines, wells and other unsecured natural deposits, time-sharing interests, condominium and cooperative units, life estates, options, contract rights, rights of first refusal, leaseholds, etc. Unclear as to whether the assignment and/or granting of ground leases and subleases are subject to withholding and how tax would be computed.

b. An interest in a domestic corporation unless the corporation was not a United States Real Property Holding Corporation within the past five years prior to the date of transfer or, if shorter, the period in which the interest was held by its present-holder, and an interest in a partnership, estate or trust that owns a United States Rea1 Property Interest.

A corporation is a United States Real Property Holding Corporation if the fair market value of its United States Real Property Interests equals or exceeds 50 percent of the total fair market value of its United States Real Property Interests, interests in foreign real property and trade or business assets.

3. Interest Other Than Solely As A Creditor

a. If a person ho1ds interests in a United States Real Property Interest or an entity owning a United States Real Property Interest as a creditor and otherwise the person will be considered as holding the creditor's interest solely as a creditor if the creditor interest did not arise for a principal purpose of avoiding tax.

b. A lender's right to share in the appreciation or cash flow of a property is not an interest solely as a creditor.

c. The right to a commission or brokerage fee will be other than an interest solely as a creditor if the total payment is contingent on appreciation or profit arising after the date of the transaction.

d. The purchaser at a foreclosure sale is required to withhold the lesser of 10 percent of the amount realized by the debtor or the amount realized by the debtor in excess of the debts secured by the property at the time of the foreclosure. The transferee must provide a notice of foreclosure and remit the tax to the IRS by the tenth day after his acquisition of the property.

E. Distributions By Corporations, Partnerships, Trusts and Estates.

In the transactions below the transferor will withhold tax and remit the same to the IRS -

1. If a domestic partnership, trust or estate disposes of a United States Real Property Interest and any partner, beneficiary or substantial owner of the entity is a foreign person, the partnership or fiduciary must withhold a tax of ten percent of each foreign person's proportionate share.

2. A foreign corporation that distributes a United States Real Property Interest must generally withhold 28 percent of the corporation's recognized gain.

3. Any domestic corporation that distributes any property in redemption of stock or in a corporate liquidation to- a foreign person that holds a United States Real Property Interest in the corporation must withhold 10 percent of the fair market value of the property distributed.

4. Withholding is not yet required on certain taxable distribution by domestic or foreign partnerships, trusts and estates under 26 USCA Secs. 1445(e) (4) and (e) (5) pending further Treasury Department action. Sample non-foreign person certifications for these situations are to be found at 49 F.R. 50674.

F. Exemptions.

1. The transferor is an integral part of or a controlled entity of a foreign government or international organization and the subject property has not been used for commercial activity but for investment or diplomatic purposes.

2. The purchase of property by the transferee as a residence where the sales price does not exceed $300,000.00. To claim the exemption the transferee must have definite plans for he or his family to reside at the property for at least 50 percent of the number of days that the property is in use during each of the first two twelve month periods following the date of transfer. If actual residence is not as intended the transferee will be liable for the tax, if due and unpaid, unless there was a change of circumstances that could not reasonably have been foreseen.

3. The transferee is not required to withhold if notified by the transferor in writing that it is not required to recognize any gain or loss for the transfer under a tax treaty or income tax regulations. By the tenth day after the date of transfer the transferee must provide a copy of that notice to the Director, Foreign Operations District, Washington, D. C.

The transferee is not entitled to rely on the notice if it is related to the transferor or has reason to know the statement is untrue.

4. The transferor furnishes to the transferee a certification executed by it under penalty of perjury stating that the transferor is not a foreign person. The certification need not be filed with the IRS but it must be retained for submission to the IRS on request until the end of the fifth taxable year after the date of the transfer.

The transferee may not rely on a certification if it has actual notice that the certification is false or it receives notice from a transferor's agent or transferee's agent that the certification is false. Notice received after the transfer will only require withholding as to consideration remaining to be paid. Sample certifications are attached hereto.

5. Transfer of an interest in an entity by a foreign person.

a. On the transfer of an interest in a non- publicly traded domestic corporation on there will be no withholding required if the corporation furnishes to the transferee a certification that the interest being transferred is not a United States Real Property Interest (the corporation is not a United States Real Property Holding Corporation) and that the corporation has attached a statement that it is not a United States Real Property Holding Corporation to its tax return.

The corporation must respond in writing to a request for such a statement within thirty days of receiving the request. The statement may be relied on for thirty days from its date of execution.

Alternately, a foreign person may also establish that the interest being transferred is not a United States Real Property Interest by requesting and obtaining a determination to that effect from the Director, Foreign Operations Division, Washington, D. C.

b. Also exempt is the transfer of a share or shares of stock in a domestic corporation that is regularly traded on an established securities market, except where the transferor of the stock has owned more than 5 percent of the class of stock being transferred during the shorter of five year period ending on the date of disposition of the stock or the period since June 18, 1980 (the effective date of FIRPTA). Publicly traded partnerships and trusts are subject to the same rules as publicly traded corporations.

6. The transferor receives a "withholding statement" from the IRS stating that the transferor either

a. Has reached agreement with the IRS (or such agreement has been reached by the transferee) for payment of the tax with security being provided to ensure payment, or

b. Is exempt from payment of any tax on the disposition of the United States Real Property Interest being transferred, and

c. The transferor or transferee has satisfied any unsatisfied liability of the transferor relative to its acquisition of the property interest being disposed of or has provided adequate security to cover such liability.

If on the date of transfer an application for a withholding certificate is pending with the IRS, the transferee must nevertheless withhold 10 percent of the amount realized. If, however, the application was submitted not later than the thirtieth day prior to the date of transfer the amount withheld need not be reported and paid over to the IRS until the tenth day following the IRS determination on the application.

G. Agent Liability.

1. A transferor's or transferee's agent is a person who represents the transferor or transferee, as the case may be, in any negotiation with another person or another person's agent relative to the transaction or in settling the transaction.

2. If the transferee is furnished with a non-United States Real Property Interest Statement or a non-foreign certification that the transferor's agent or transferee's agent knows is false, the agent must so notify the transferee in writing as soon as possible. A transferee receiving such a notice that fails to withhold may be liable for tax found to be due and unpaid. The agent is liable for the failure to provide notice up to the amount of consideration which the agent receives for the transaction.

There is no requirement that an agent make reasonable inquiry concerning the transferor's status.

3. If after the date of transfer the agent learns that the statement or certification is false, the agent must notify the transferee within three days from the date of discovery. The agent must also forward a copy of that notice to the IRS. The notice need not disclose the information on which the notice is based.

H. The Title Company.

The definition of transferor's agent or transferee's agent does not include a person solely performing one or more of the following: the receipt and disbursement of any portion of the consideration for a transaction, the recording of any document in connection with the transaction, or typing, copying or clerical tasks.

CERTIFICATION OF FOREIGN STATUS

(Individual)

Section 1445 of the Internal Revenue Code provides that a transferee (buyer) of a U.S. real property interest must withhold tax if the transferor (seller) is a foreign person. To inform the transferee (buyer) that withholding of tax is not required upon my disposition of a U.S. real property interest. I, _____________ hereby certify the following:

1. 1 am not a nonresident alien for purposes of U.S. income taxation

2. My U.S. taxpayer identifying number is ___________________________, and

3. My home address is _______________________________________________

I understand that this certification 'nay be disclosed to the Internal Revenue Service by the transferee and that any false statement I have made here could be punished by fine, imprisionment1 or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete.

Dated: ___________________________

Signature of Seller _____________________________

CERTIFICATION OF FOREIGN STATUS

(Corporation, Partnership, Trust or Estate)

Section 1445-of the Internal Revenue Code provides that a transferee of a U.S. real property interest must withhold tax if the transferor is a foreign person. To inform the transferee that withholding of tax is not required upon the disposition of a U.S. real property interest by ________________________ (name of transferor), the undersigned hereby certifies the following on behalf of ____________________ (name of transferor):

1. ___________________________ (name of transferor) is not a foreign corporation, foreign partnership, foreign trust, or foreign estate (as those terms are defined in the Internal Revenue Code and Income Tax Regulations);

2. __________________________ 's (name of transferor) U.S. employer Identification number is _______________________________________,

3.__________________________ 's (name of transferor) office address is __________ _________________________________.

_____________________________ (name of transferor) understands that this certification may be disclosed to the Internal Revenue Service by transferee and that any false statement contained herein could be punished by fine, imprisonment, or both.

Under penalties of perjury I declare that I have examined this certification and to the best of my knowledge and belief it is true, correct and complete, and I further declare that I have authority to sign this document on behalf of ____________________________ (name of transferor).

Dated: __________________

Signature: _______________________________

Name: __________________________________

Title: ___________________________________

By: Michael J. Berey
Dated: January 29, 1985