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.