Courts Confirm Foreign Partner Gain from Disposition of a U.S. Partnership Doesn’t Mean U.S. Tax Liabilities
- Tuesday, July 2, 2019
The window for non-U.S., or foreign, investors to claim they are not subject to U.S. tax on gains stemming from the disposition of an interest in a U.S. partnership remains open. On June 11, 2019, the D.C. Court of Appeals ruled in favor of the taxpayer in Grecian Magnesite Mining Industrial & Shipping Co. SA v. Commissioner, upholding a July 13, 2017, decision by the Tax Court. The Court of Appeals decision could be significant for foreign investors in U.S. partnerships who took a position contrary to Revenue Ruling 91-32 prior to the enactment of the Tax Cuts and Jobs Act (TCJA).
Revenue Ruling 91-32 Pre-TCJA
Prior to the TCJA there was uncertainty about whether or not a foreign partner investing in a U.S. partnership engaged in a U.S. trade or business faced potential U.S. tax exposure if the partnership was disposed of at a gain. Under Revenue Ruling 91-32, it seemed the foreign partner would be liable for U.S. tax. Specifically, the ruling states that any gain or loss from the disposal of a partnership interest — where the underlying activity came from a fixed place of business in the U.S. — would be considered effectively connected income (ECI) from a U.S. trade or business and subject the foreign partner to U.S. tax.
Courts Object to Revenue Ruling 91-32
The U.S. Tax Court weighed in on this issue in July 2017, essentially rejecting the IRS view in Revenue Ruling 91-32 as lacking the “power to persuade” under current law. On June 11, 2019, the D.C. Circuit Court of Appeals decision in Grecian upheld the Tax Court’s decision that a foreign investor’s gain from its disposition of a U.S. partnership interest is not U.S.-sourced and, therefore, not taxable under U.S. law.
The Fate of Revenue Ruling 91-32 — After the TCJA
It is important to note the Tax Cuts and Jobs Act of 2017 enacted Section 864(c)(8), which reflects an aggregate approach, codifying the IRS position in Revenue Ruling 91-32. For foreign investors in U.S. partnerships that took a position contrary to Revenue Ruling 91-32 prior to the enactment of the TCJA, the D.C. Circuit Court’s opinion is significant, as it means those taxpayers can confidently maintain their position.