Power plants in the United States are not “US real property,” the IRS has decided.

Foreigners are sometimes reluctant to buy shares in American corporations for fear that they will have to pay US taxes on their capital gains when they resell the shares. The United States does not ordinarily collect taxes from foreigners on their capital gains. However, in the early 1980’s, Congress changed the law to require that taxes must be paid on gains from the sale of “US real property.” It did so under pressure from American farmers who complained that foreign investment in US farmland was driving up the prices of farms.

Taxes must be paid by anyone investing not only directly in US real property, but also indirectly. For example, a foreign shareholder in a corporation at least 50% of whose assets were US real property on any of several testing dates during a 5-year “lookback period” will be taxed on his capital gains.

Congress did not say whether it intended power plants to be treated as US real property for this purpose. IRS regulations in this area are unclear.

However, the IRS branch with responsibility for the issue said in May that it has tentatively concluded that US power plants are not US real property, at least not ones that burn fossil fuels. It is less sure about power generating equipment that is built into hydroelectric dams. No one has asked the IRS yet to put this in writing.

Keith Martin