On August 19, 2025, the Department of the Treasury and the Internal Revenue Service (IRS) issued Notice 2025-45 (the Notice), announcing forthcoming proposed regulations under sections 897(d), 897(e), and 368(a)(1)(F). In keeping with recent trends, this guidance would remove barriers preventing companies from coming to the United States. The Notice would achieve this by revising ill-fitting rules in temporary regulations under sections 897(d) and (e) (FIRPTA) that currently inhibit publicly traded foreign corporations from redomiciling to the United States through inbound reorganizations described in section 368(a)(1)(F) (an F Reorganization). 

The forthcoming proposed regulations would also clarify the "identity of stock ownership" requirement for F Reorganizations by permitting sales or exchanges of stock that take place during the transaction steps comprising the F Reorganization but are not part of the plan of reorganization. This clarification ensures, for example, that a publicly traded corporation will not fail the F Reorganization requirements solely because shareholders continue to buy or sell its stock on the open market, provided those transactions are not part of the plan of reorganization. 

The forthcoming proposed regulations will apply to distributions, transfers, or exchanges occurring on or after August 19, 2025, and taxpayers may rely on the Notice until those regulations are published (subject to consistency requirements for the section 897 rules). This is welcome guidance that recalibrates the regulations under section 897 to reflect the realities of public capital markets, while also providing valuable certainty for F Reorganizations generally.

Covered Inbound F Reorganizations

Section 897(a) treats certain dispositions of U.S. real property interests (USRPI) by nonresident alien individuals or foreign corporations as giving rise to effectively connected gain or loss, which is taxable under section 871(b)(1) (for nonresident alien individuals) or section 882(a)(1) (for foreign corporations). Section 897(c) defines a USRPI as including, in addition to an interest in real property located in the United States, an interest in a domestic corporation that holds USRPIs (i.e., a U.S. real property holding corporation). Section 897(c) includes indirect interests in real property to prevent "cleansing" transactions that could otherwise avoid section 897 by exchanging a USRPI for stock in a corporation. Section 897(c)(3) provides an exception to USRPI status for stock in publicly traded corporations held by foreign persons that own five percent or less of the stock of that corporation (the Small-Shareholder Exception). 

Sections 897(d) and (e) provide specific transactional rules for distributions by foreign corporations and nonrecognition transactions, respectively. Section 897(d) generally requires a foreign corporation to recognize gain on the distribution of a USRPI, unless the distributed USRPI would be taxable in the hands of the distributee and the distributee does not receive a tax-free basis increase (each, a Statutory Condition). Treas. Reg. §1.897-5T(c) supplements section 897(d) by requiring gain recognition upon a distribution of a USRPI by a foreign corporation unless its shareholders meet the Statutory Conditions and the foreign corporation complies with certain procedural requirements. Section 897(e) attempts to coordinate the policies of section 897 with those underlying nonrecognition provisions by requiring that, to avoid recognition, a USRPI be exchanged for property that would be subject to tax in the United States. As a general matter, this rule ensures the exchanged property, which will reflect the USRPI's value, remains taxable by the United States after the exchange. Treas. Reg. §1.897-6T(a) narrows this exception to recognition by establishing a "hot-for-hot" requirement under which a USRPI must be exchanged for a USRPI, rather than property that would be subject to tax in the United States other than as a USRPI, while generally keeping the filing rules of Treas. Reg. §1.897-5T. Treasury and the IRS announced changes in Notice 89-85 and Notice 2006-46 that would soften these exceptions, though at the cost of significant complexity and compliance burden. To preserve nonrecognition treatment, for example, the guidance imposes a "toll charge" that requires a foreign corporation to pay U.S. tax (plus interest) on stock sales by its shareholders in the prior ten years as if the foreign corporation had been domestic. These rules are particularly difficult for public companies to comply with. 

The Notice would remove some of these hurdles for "covered inbound F reorganizations," defined as an F Reorganization in which a publicly traded foreign corporation becomes a publicly traded domestic corporation. The "publicly traded" requirement is met if the foreign transferor corporation has been publicly traded for three years prior to the F Reorganization and the domestic resulting corporation remains publicly traded for at least one year following the F Reorganization. A distribution by the resulting domestic corporation (other than cash and its stock) to its shareholders within a year of the F Reorganization will negate an otherwise valid covered inbound F reorganization unless the distribution is less than one percent of the foreign corporation's total asset value at the time of the reorganization. For the transferor foreign corporation, changes to Treas. Reg. §1.897-6T will ease the hot-for-hot requirement in a covered inbound F reorganization by preserving section 361(a) nonrecognition on a transfer of a USRPI to a resulting domestic corporation even if the stock of the resulting domestic corporation is not a USRPI. These changes acknowledge that the policy concerns underlying section 897 are significantly limited in the case of widely held public corporations. 

Small-Shareholder Exception

The Notice also facilitates covered inbound F reorganizations by making various changes and clarifications to the Small-Shareholder Exception. First, the proposed regulations will clarify that the toll charge under Notice 89-85 and Notice 2006-46 does not include dispositions during the look-back period by shareholders meeting the Small-Shareholder Exception at the time of the disposition. Next, the proposed regulations will provide that, in a covered inbound F reorganization, a shareholder that meets the Small-Shareholder Exception will be treated as meeting the Statutory Condition that the property received remains subject to tax in the United States. This not only confirms the resulting domestic corporation stock is not a USRPI, but also protects the transferor foreign corporation from gain recognition under Treas. Reg. §1.897-5T. Finally, the proposed regulations will reduce the compliance burden on foreign corporations by limiting filing requirements to shareholders that the foreign corporation knows or has reason to know own more than five percent of its stock. For this purpose, the foreign corporation must use reasonable efforts to make that determination, including by researching publicly available information, but a foreign corporation will not have to obtain information from each of its shareholders. This is a helpful, practical change that prevents a foreign corporation from having to obtain declarations from scores of public investors. 

General Clarification for F Reorganizations

The proposed regulations will also clarify the "identity of stock ownership" requirement for F Reorganizations. Specifically, F Reorganization treatment under Treas. Reg. §1.368-2(m) will not be jeopardized by certain dispositions of transferor or resulting corporation stock — like ordinary trading in public markets — that are not part of the plan of reorganization. This clarification addresses longstanding uncertainty, particularly for public companies, by confirming that routine shareholder activity should not undermine the identity of stock ownership requirement.

Applicability Date and Request for Comments

The proposed regulations will apply to distributions, transfers, or exchanges occurring on or after August 19, 2025. Taxpayers may rely on the rules before those proposed regulations are published, subject to consistency requirements for covered inbound F reorganizations. Treasury and the IRS request comments by October 20, 2025.

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

David W. Zimmerman, dzimmerman@milchev.com, 202-626-5876

Chadwick Rowland, crowland@milchev.com 202-626-1589

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