On July 13, 2017, the U.S. Tax Court (Tax Court) issued a 55-page opinion rejecting the long-standing position of the Internal Revenue Service (IRS) as set forth in Revenue Ruling 91-321 concerning the sale by a foreign person of an interest in a partnership that is engaged in a U.S. trade or business for U.S. federal income tax purposes.2 Specifically, in this taxpayer victory, the Tax Court held that the foreign partner’s gain from the redemption of its partnership interest by a U.S. partnership (to the extent it was not attributable to U.S. real estate) was not U.S.-source income and was therefore also not gain effectively connected with a U.S. trade or business, thereby exempting such gain from U.S. taxation. This opinion, which the IRS may challenge on appeal, is potentially good news for foreign investors in U.S.-focused investment funds, joint ventures or investments in U.S. operating companies treated as partnerships for U.S. tax purposes.
Sidley Austin provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Furthermore, this Tax update was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.
Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300; One South Dearborn, Chicago, IL 60603, 312.853.7000; and 1501 K Street, N.W., Washington, D.C. 20005, 202.736.8000.