A recent U.S. Tax Court case, Grecian Magnesite (149 T.C. No. 3, July 13, 2017), has declared invalid the long-standing U.S. government position that a non-U.S. person’s sale of an interest in a partnership (in this case, a U.S. limited liability company that was treated as a partnership for U.S. income tax purposes) doing business in the United States is automatically subject to U.S. federal income tax. This decision, if not overturned on an appeal, opens the door to different, potentially more tax-efficient structures for non-U.S. persons investing in U.S. partnerships that are doing business in the United States.
By way of background, Internal Revenue Service Revenue Ruling 91-32 held that, if a partnership is engaged in a trade or business within the United States, any gain from a sale of an interest in that partnership by a non-U.S. person would be considered income effectively connected with a trade or business within the United States, and thus fully subject to U.S. federal income tax. The Tax Court in the Grecian Magnesite case, however, declined to defer to the Revenue Ruling and concluded that absent specific statutory guidance to the contrary (e.g., as in the case of U.S. real property gains), gain from the sale of such a partnership interest by a non-U.S. person would generally constitute capital gain that was not from a U.S.-source or effectively connected with a U.S. trade or business, and thus would not be subject to any U.S. federal income tax.
The implications are meaningful for non-U.S. persons considering investments in U.S. partnerships doing business in the U.S., as well as for how such businesses should be sold. If you have any questions concerning these developing issues, please contact the authors below or the Dechert tax lawyer with whom you are accustomed to speaking.