Tax Court Rejects Controversial IRS Ruling Taxing Foreign Investors on Sales of Partnership Interests

19 July 2017
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Key takeaways

  • The United States Tax Court ruled that a foreign investor did not have to pay U.S. federal income tax on gain realized on the sale of an interest in a partnership engaged in a U.S. business (except in respect of gain on U.S. real estate owned by the partnership).
  • The ruling rejected the IRS’s long-standing position, set out in a 1991 ruling, that gains of foreign investors on the sale of interests in operating partnerships are income effectively connected with a U.S. trade or business (“ECI”).
  • If sustained, the case creates a pathway for foreign investors to sell interests in operating LLCs and partnerships without paying U.S. federal income taxes, although foreign investors in U.S. operating businesses will still recognize ECI from partnership operations.
  • Although foreign investors may still prefer to set up “blocker structures” shielding them from current tax on ongoing partnership income, foreign blockers may now be more attractive.