Tax Court Rejects Revenue Ruling 91-32 Relating to Inbound Investments in US Partnerships


    On July 13, 2017, the United States Tax Court issued its decision in a case involving a major IRS ruling position relating to the US tax treatment of dispositions of inbound investments in US partnership interests, Grecian Magnesite Mining, Industrial & Shipping Co. v. Commissioner.  The Tax Court held that under the facts of the case a non-US person’s gain upon the redemption (or other disposition) of an ownership interest in a US partnership is not subject to taxation in the US. This decision contradicts the longstanding position of the IRS set forth in Revenue Ruling 91-32.


    A longstanding principle of US cross-border taxation is that a non-US person’s foreign source income not effectively connected with a US trade or business generally is not subject to US taxation.  Therefore, a non-US person’s capital gains are often exempt from US taxation as foreign source income.

    For some US tax purposes, partners in partnerships are treated as if they collectively owned the assets of the partnership and were collectively engaged in its activities.  For example, in Revenue Ruling 91-32, the IRS asserted the position that US partnerships with foreign partners should be treated as “aggregates” for the purpose of treating the foreign partners’ investment gains as being subject to US taxation, as if the foreign partners had sold their distributive shares of the partnership’s separate US trade or business assets, resulting in US source gains, effectively connected with the partnership’s US trade or business.

    While such an “aggregate” theory of partnerships is applied in certain situations that are specified by the Internal Revenue Code, it has long been the general rule under the Code to treat partnerships as separate legal entities for most US tax purposes.

    The Tax Court noted the lack of legal analysis in Revenue Ruling 91-32 and held that it does not constitute a persuasive IRS interpretation of the relevant statutory language.  Therefore, the Court did not defer to the IRS position in Revenue Ruling 91-32 and decided that the foreign partner’s redemptive disposition of its US partnership interests was in essence a sale of a capital asset, not effectively connected with the conduct of a US trade or business, resulting in foreign source gain exempt from US tax.

    What Does CohnReznick Think?

    The Grecian Magnesite decision is a welcome rebuttal of the controversial IRS Revenue Ruling 91-32, as many tax advisers disagreed with its basic reasoning.  It is unclear whether the Tax Court’s rejection of the longstanding IRS ruling position for inbound investments in US partnership interests will be appealed.  However, the outcome is very significant for non-US partners of US partnerships.  Such investors may wish to re-evaluate their US partnership investments and those who have sold interest and paid tax on a gain might consider seeking a refund of US taxes for years that are still open.


    For more information, please contact Robert Richardt, Partner, at or 646-625-5736 or James Wall, Principal, at or 646-254-7460 or Dave Macall, Senior Manager, at or 646-601-7774.


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