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Don’t Believe the Hype; No Tax Holiday For Foreign Partners In U.S. Partnerships

Articles with controversial headers have flooded the usually stoic accounting community upon a recent Tax Court decision.

“Non-US Partner’s Gain on Disposition of US Partnership Interest Not Taxable in US”,

“Tax Court Declines to Follow Revenue Ruling that Sale of Partnership Interest Creates Effectively Connected Income”

The list goes on.

The hype arose when a Tax Court recognized that the petitioner, Grecian Magnesite Mining (“GMM”), may exclude a $4 million capital gain from its US taxable income. The gain resulted from the disposition (sale) of GMM’s interest in the U.S. Partnership Premier Chemicals (Premier).

Precedent-setting rule — premature and excessive

While we have seen other commentators label this “A precedent-setting ruling that changes the way foreigners are taxed in the US” – we believe this is premature and excessive. These are a few muted factors that need to be taken into account.

The total capital gain from the disposition of interest by GMM in the U.S. Partnership was $6.2M, of which $2.2M were treated as U.S.-sourced capital gain attributable to the sale of U.S. real estate. This part was mutually agreed by the Petitioner and the Commissioner.

The remaining $4M was the matter of discussion. The tax court sustained this portion from disposition of partnership interest as a foreign-sourced gain.

However, the treatment of gains from the disposition of partnership interest as foreign-sourced is not universal and aforementioned Tax Court opinion does not override prior IRS ruling on disposition of partnership interest.

Whole Story at TFX.

From → TFX Articles