Tax Court: Foreign investors not taxable on sales/liquidations, of U.S. partnership interests
The U.S. Tax Court has ruled that a foreign investor in a U.S. (non-real estate) partnership is not taxable on his gain from the liquidation of the partnership. The Court ruled that the transaction was essentially the same as a sale of stock in a U.S. corporation (which is also not taxed when the stockholder is not a U.S. person). Grecian Magnesite Mining, Industrial & Shipping Co., SA v. Com’r, 149 T.C. No. 3, July 13, 2017. The decision has no impact on liquidations of interests in real estate partnerships, which are always taxable under FIRPTA.
The facts of the case did not involve a sale of a partnership interest (as opposed to a liquidation) by a foreign investor, but the Court made it clear that a sale would also be tax-free. In fact the decision specifically discredited a 1991 IRS Revenue Ruling holding that such sales were taxable — a ruling that has caused U.S. partnerships to withhold federal taxes on liquidating transactions for the last 25 years.
What happens next is unclear. The IRS can appeal the decision to the appropriate circuit court of appeals and, even if it loses there, continue to enforce its revenue ruling in other jurisdictions. It could also acquiesce in the decision, reversing its position of 25 years. And Congress may act on the issue itself if it ever gets around to tax reform.
Non-U.S. investors in U.S. partnerships who have paid taxes, or had them withheld, on sales or liquidating distributions should consider filing a protective claim for a refund in case the Tax Court’s decision becomes the law of the land. Such refund claims must be filed within two years of the payment (or withholding) of the tax or, if a return reporting the income was filed, within three years of the filing of the return, whichever occurs later.
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