A hotel and resort company delayed the planned acquisition of a vacation ownership business as a result of new understandings of the tax consequences of the deal. In an SEC Form 8-K filing, the company indicated that any gain realized by a non-U.S. shareholder on the disposition of the vacation ownership business common stock in the merger would be subject to the Foreign Investment in Real Property Tax Act ("FIRPTA"). The parties had been advised previously that the proposed acquisition would qualify as a tax-free reorganization.
FIRPTA provides generally that the disposition of "U.S. real property interest" ("USRPI") by a non-U.S. shareholder is subject to U.S. federal income tax as income if it is connected with the conduct of the U.S. trade or business of such non-U.S. shareholder. (Corporate stock can be USRPI, for example.) Although the exchange of one USRPI for another in an otherwise tax-free reorganization is not subject to tax under FIRPTA, shareholders under the proposed transaction would not qualify for this exception. As a result, a non-U.S. shareholder generally would be subject to tax on any gain realized in connection with the transaction, and would be required to file a U.S. federal income tax return.
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