United States: U.S. Tax Court Bounces Rev. Rul. 91-32: Sales Of Partnership Interests By Foreign Partners May Not Be Subject To U.S. Tax

The practice of tax law is an exercise of statutory interpretation. A recent opinion of the U.S. Tax Court, Grecian Magnesite Mining, Indust. & Ship. Co. v. C.I.R., 149 T.C. No. 3 (July 13, 2017), is illustrative. Grecian Magnesite is also a highly anticipated decision that resolves a lingering debate over the proper U.S. tax treatment of the sale of a U.S. domestic partnership interest by a foreign partner.1 Grecian Magnesite held that a foreign partner's sale or exchange of an interest in a U.S. domestic partnership may (mostly) be excluded from U.S. income tax. In arriving at its conclusion, the Tax Court rejected a controversial Revenue Ruling, Rev. Rul. 91-32, 1991-1 C.B. 107.

Grecian Magnesite involved the redemption of a foreign partner's interest in a Delaware limited liability company, Premier Chemicals, LLC ("Premier"). Grecian Magnesite Mining ("GMM"), the foreign partner, was domiciled in Greece and engaged in foreign mining activities. Its sole U.S. activity consisted of owning a membership interest in Premier. Premier was engaged in the business of mining magnesite at mines located throughout the U.S. In 2008, Premier agreed to redeem GMM's membership interest in a transaction that ultimately produced $6.2 million in gain. Taking the position that the gain was not U.S. sourced or effectively connected income ("ECI") of a U.S. trade or business, GMM neither reported the gain nor paid U.S. tax on the gain.

A foreign business can be subject to U.S. taxation if it either has U.S. sourced income that is "fixed or determinable annual or periodic" income (so-called "FDAP income"), or the foreign business is engaged in a U.S. trade or business during a taxable year and has ECI of the U.S. trade or business.2

Rev. Rul. 91-32 and its Controversy

Rev. Rul. 91-32 was controversial since the date it was released some 26-years ago. The controversy stemmed from the Internal Revenue Service's position to treat a domestic partnership as an aggregate, rather than an entity. By applying an aggregate approach, the Service treated a foreign partner's sale or disposition of an interest in the partnership as if the foreign partner sold a portion of each asset owned by the partnership. As a result, when turning to the income-sourcing rules of the Internal Revenue Code of 1986, as amended (the "Code"), the Service concluded that any gain was U.S. sourced and subject to U.S. tax.

For the astute partnership tax attorneys, the Service's argument in Rev. Rul. 91-32 harkened back the historic policy debate of whether an entity or aggregate approach should be used in determining the U.S. tax of partnership activities. Under an entity approach, the partnership is treated as an entity on to itself. In contrast, the aggregate approach views each partner as a co-owner of the partnership assets. With the enactment of Subchapter K of the Code,3 Congress opted to mostly apply an entity approach to partnership taxation, however, limited exceptions exist to the entity approach. The exceptions force the application of an aggregate approach to certain items of partnership taxation. The treatment of unrealized receivables and inventory items under Section 751 of the Code is one example where the aggregate approach predominates.

To understand why applying the aggregate approach to a foreign partner was controversial, it is helpful to understand how Subchapter K treats the sale or exchange of a partnership interest. Code Section 741 offers a general rule that a sale or exchange of a partnership interest "shall be considered as gain or loss from the sale or exchange of a capital asset."4

Payments received upon a redemption and liquidation of a partnership are treated the same as a sale or exchange; however, the legal analysis requires weaving through three separate Code sections. First, Code Section 736(b) addresses the treatment of payments received by a partner upon liquidation of the interest. That section provides that liquidating payments are considered a distribution by the partnership. Second, the flush language of Section 731(a) provides that any gain or loss recognized upon a distribution shall be treated "as gain or loss from the sale or exchange of the partnership interest of the distributee partner." Third, since Section 731(a) directs that a distribution is to be treated as a sale or exchange of a partnership interest, Code Section 741 is operable. As noted above, Section 741 directs that a sale or exchange of a partnership interest is treated as a sale of a capital asset.

Turning back to Rev. Rul. 91-32, the Service's decision to apply an aggregate approach meant that the source and ECI character of the gain on the foreign partner's deemed sale of the partnership's assets was U.S. source income of a U.S. trade or business with a fixed place of business in the U.S. According to the Service, since the gain was U.S. sourced income of a U.S. trade or business, the gain recognized by the foreign partner was subject to U.S. tax.5

The Grecian Magnesite Decision

Rev. Rul. 91-32 had long been the bane to many tax attorneys. Not only did most tax lawyers disagree with the Service's strained interpretation of the tax law, there were several practical concerns. Most foreign partners exiting a U.S. trade or business were unlikely to willingly comply with Rev. Rul. 91-32. From the foreign partner's perspective, it was questionable whether the Service had jurisdiction to enforce payment of the purported tax. From the U.S. partnership perspective, it could face back-up withholding obligations and concerns with respect to its own consequences if it failed to comply with a back-up withholding obligation.6

From a partnership tax perspective, Grecian Magnesite confirms that the entity approach applies to the sale or redemption of a partnership interest -- even if the selling partner is a non-U.S. partner. From a statutory interpretation perspective, the court's conclusion is not surprising. As outlined above, the plain language of the Code would seem to dictate the exact outcome reached by the Tax Court.

After concluding the redemption of the partnership interest was a sale of a capital asset, the Service's path to taxing GMM's gain was to convince the Tax Court that the gain was ECI of a U.S. trade or business of Premier.7 What was the trade or business of Premier? Was GMM's gain on the sale of its membership effectively connected with Premier's trade or business? Whether the gain was ECI ultimately turned on the proper income sourcing of the gain.

The Code default rule sources a gain arising from the sale of personal property to outside the U.S. if the gain is recognized by a non-U.S. resident. Alternatively, gain can be sourced to a U.S. office if the U.S. office is a material factor in the production of income and the U.S. office regularly carries on activities of the type from which such gain is derived. While engaging in a technical application of the Code's income sourcing rules, the important take-away is that the Tax Court concluded GMM's gain from the sale of an interest in a U.S. partnership was foreign-sourced. Thus, the gain was not subject to U.S. tax, unless another specific tax law exception applied.

An exception did applying to a portion of GMM's gain -- which GMM conceded during trial -- that caused a portion of the gain to be subject to U.S. tax. The exception dealt with the Foreign Investment in Real Property Tax of 1980 (so-called "FIRPTA") rules, which cause the direct or indirect sale of U.S. real property interests to be subject to U.S. taxation.

Planning Opportunities

Grecian Magnesite settles the debate with regard to the proper U.S. tax treatment of a foreign partner's sale of an interest in a U.S. partnership. In many instances, any gain may properly be characterized as foreign-sourced income.

Grecian Magnesite also demonstrates traps for the unwary remain. The entity approach to partnership taxation can be called-off in some instances, with the consequence is that all or a portion portion of a gain derived from the sale of a partnership interest would be subject to U.S. taxation. For example, the FIRPTA rules cause a direct or indirect sale of a U.S. real property interest to be subject to U.S. income tax. For those structuring a foreign partner's sale of its interest in a U.S. partnership, Grecian Magnesite provides certainty with respect to whether the gain can be taxed in the U.S. and also warns the tax planner that individual assets of a partnership still need to be examined to assess whether there is , and the extent of, any U.S. tax exposure.


1. A "partnership" as used in this article refers to entities classified as a partnership for federal tax purposes, including multi-member limited liability companies. The terms "partnership" and "LLC" are used interchangeably.

2. It is noteworthy to stress that the second mechanism for a foreign business to have U.S. tax exposure is tested on an annual tax year basis and is not a permanent taint.

3. The mostly entity approach was originally adopted by Congress with the enactment of the 1954 version of the Internal Revenue Code. The entity approach continued with subsequent enactment of the 1986 Code.

4. Code Section 741 continues by acknowledging a caveat to the capital asset treatment of a sale of a partnership: "except as otherwise provided in section 751 (relating to unrealized receivables and inventory items." The Tax Court in Grecian Magnesite did point to this caveat in rejecting the Commissioner's argument that the aggregate approach should apply to a foreign partner's sale of a partnership interest by pointing out that Congress could have called off the entity approach by specifically directing an aggregate approach to apply such as was done by cross-referencing Code Section 751.

5. The courts and the Service both agreed that a different result is reached if the entity is a C corporation. In the context of the sale of stock of a C corporation by a foreign partner, the Service had conceded that gain would not be U.S. sourced and, thus, not subject to U.S. taxation.

6. There was likely not a basis under the U.S. tax law to impose a withholding tax on proceeds paid to a foreign partner that sold its interest in a U.S. partnership.

7. The Code attributes the trade or business of a partnership to the foreign partners. Thus, a foreign partner is treated as if it directly conducts the trade or business of the partnership.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.