Proposed 60% Excise Tax Targets Some Foreign Buyers of US Land

The proposed Build It in America Act, approved by the House Ways and Means Committee in June, contains Section 5000E, a new section of the tax code that would impose a 60% federal excise tax on the acquisition of US agricultural interests by disqualified persons.

Disqualified persons include citizens of a country of concern unless such individuals hold dual US citizenship, are lawful permanent residents of the US, or are domiciled in Taiwan. Section 5000E focuses on acquirers whose ultimate owners are citizens of or entities domiciled in a country of concern, or any country engaged in conduct adverse to US security. This includes China (not including Taiwan), Russia, Iran, Cuba, North Korea, and the Maduro regime in Venezuela.

Companies domiciled in a country of concern are also disqualified persons, as are any country of concern or its political subdivisions. A US or foreign entity in which any of the above owns more than a 10% interest by market value—or, in the case of a corporation, owns more than 10% of the market value or voting power—generally also is a disqualified person.

US agricultural interest is defined by reference to the definition of agricultural land in the Agricultural Foreign Investment Disclosure Act of 1978. The Joint Committee on Taxation staff description indicates that the Department of Agriculture’s regulations defining agricultural land will apply.

For example, under 7 CFR 781.2(b), idle land that hasn’t been used for agricultural purposes for up to five years before the acquisition and won’t be used for agricultural purposes after the acquisition generally is characterized as agricultural land. (Take, for instance, recently agricultural but now vacant suburban land bought by a home builder or office park developer.) Section 5000E includes land used for livestock production as agricultural land.

Where an acquiring entity is a disqualified person, the tax is imposed at the entity level. In situations where the disqualified ownership is less than 50%, the tax is applied only on a pro-rata basis based on the fraction of ownership by disqualified persons. Because the tax is imposed at the acquiring entity level, unrelated partial owners of acquirers of a US agricultural interest may wish to make indemnity agreements between themselves to shift the economic responsibility for any potential Section 5000E tax to the disqualified persons.

Section 5000E incorporates a rule based on a modification of the Foreign Investment in Real Property Tax Act rule in Section 897(c) of the tax code that characterizes the acquisition of US corporate stock as an acquisition of a US agricultural interest, unless the absence of such characterization is established by the taxpayer. Stock is a US agricultural interest if at the time of the stock acquisition, the fair market value of the corporation’s agricultural land equals or exceeds the combined value of the corporation’s real property located outside the US, plus any other US or foreign corporate assets used or held for use in a trade or business. Exceptions apply to certain publicly traded corporations.

Many large US farms are owned by US partnerships or by multiple-member US LLCs classified as partnerships for tax purposes. It isn’t clear whether Section 5000E’s reliance on Section 897(c) will impose tax on an acquisition by a disqualified person of a greater than 10% partnership interest in an existing US partnership owning agricultural land.

Section 897(c) doesn’t treat an interest in a US real estate partnership as a US real property interest. As interpreted by IRS Notice 88-72, Section 897(g) treats the gain on sale of a real estate partnership interest as gain on sale of a US real property interest. Section 5000E refers to Section 897(c) but doesn’t refer to Section 897(g).

The new tax code section differs from Section 897 in other ways, although both sections may apply to the same transaction. For example, the Section 5000E tax applies to a US or foreign acquirer, whereas the Section 897 tax only applies to a foreign transferer. Section 5000E applies only to US agricultural interests, whereas Section 897 also includes nonagricultural US real property.

The Section 5000E tax is 60% of the entire gross acquisition price, whereas the Section 897 tax is merely the US income tax rate times the transferer’s net gain. Section 897 tax typically is collected by withholding under Sections 1446 or 1445, whereas Section 5000E doesn’t have a withholding regime.

Section 5000E doesn’t address possible conflicts with pre-existing US international agreements. For example, in Notice 2015-35 the IRS conceded that the non-discrimination article of the US–Venezuela income tax treaty prohibits the imposition of a US excise tax on Venezuelan nationals that wouldn’t be imposed on a US national engaged in the same transaction.

The bill also contains another proposed new section of the tax code, Section 6050AA. That section would impose reporting rules on attorneys or others who close transactions involving acquisitions of US agricultural interests, unless the acquirer supplies an affidavit that it is not a disqualified person. Sections 5000E and 6050AA are proposed to be effective for acquisitions on or after the date of enactment.

The Joint Committee staff characterizes Section 5000E as a security measure to protect the US supply chain and estimates that revenue would be “negligible.” However, Section 5000E would add private data collection and IRS investigative resources in the area.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Alan S. Lederman is a shareholder at Gunster, with a focus on income tax planning and controversies, including those related to international transactions.

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