IRS to Issue Guidance on Sale of Partnership Interests by Non-U.S. Persons
August 2013On August 9 the IRS released its priority guidance plan for 2013–2014. The plan lists 324 projects that are priorities for the allocation of the government's resources during the twelve-month period from July 2013 through June 2014. Of particular interest to non-U.S. Investors is the government's plan to issue guidance under section 864 relating to sales of certain partnership interests by non-U.S. persons.
In 1991, the IRS issued Rev. Rul. 91-32 addressing such sales. That revenue ruling provides that when a non-U.S. person sells an interest in a partnership that is engaged in a U.S. Trade or business, the gain from the sale of the partnership interest is treated as income effectively connected with the U.S. Trade or business of the partnership. As a consequence, the partner is taxed on the gain realized on the sale at graduated U.S. rates.
Prior to the ruling some tax advisors had believed that the better answer was that the partner realized a capital gain on the sale that was not effectively connected income and that would ordinarily not be taxable by the United States. After the ruling was issued many advisors advised their clients to follow the revenue ruling and pay tax on the gain. Some advisors, however, took the position that the reasoning of the Revenue Ruling was not valid and no tax was due.
The purpose of the project described in the business plan appears to be to issue regulations under section 864 in order to bolster the legal basis for the conclusion of Rev. Rul. 91-32. The fact that the IRS intends to issue regulations on this topic suggests the government may view the analysis of the revenue ruling as weak and potentially susceptible to a successful challenge in the courts. In the meantime, non-U.S. person selling an interest in a U.S. partnership should consult their U.S. tax advisor as to whether tax is due.
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