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US Inbound: Sale of partnership interest

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The IRS lost in court but the result the IRS wanted is now codified

The Tax Cuts and Jobs Act (2017 Act) overturned Grecian Magnesite v Commissioner, which held that the sale by a foreign person of its interest in a partnership engaged in a US trade or business was not subject to US tax.

The 2017 Act adds new Code Sec 864(c)(8), providing that if a non-resident alien individual or foreign corporation owns, directly or indirectly, an interest in a partnership that is engaged in any trade or business within the US, gain or loss on the sale or exchange of all (or any portion of) such interest will be treated as income that is effectively connected with the conduct of a US trade or business (ECI). This is the end result that the IRS advocated in Rev Rul 91-32. The IRS lost in court, but the result the IRS wanted is now codified.

The amount of gain or loss that is ECI is: (i) The portion of the partner's distributive share of the amount of gain or loss that would have been ECI, if the partnership had sold all of its assets at their fair market value as of the date of the sale or exchange of such interest; or (ii) Zero, if no gain or loss on such deemed sale would have been ECI. The status of the partnership as US or foreign does not matter; the relevant point is whether the partnership is engaged in a US trade or business. A partner's distributive share of gain or loss on the deemed sale is determined in the same manner as such partner's distributive share of the non-separately stated taxable income or loss of such partnership.

New section 1446(f)(1) provides that if any portion of the gain on any disposition of an interest in a partnership would be treated under new Sec 864(c)(8) as effectively connected with the conduct of a trade or business within the US (effectively connected gain), then the transferee must withhold a tax equal to 10% of the amount realised on the disposition. Future guidance will be issued on how to withhold, deposit, and report the tax withheld.

Presumably these new withholding rules will use the Foreign Investment in Real Property Tax Act (FIRPTA) rules as a precedent, in which the purchaser of a US real property interest from a non-resident seller must withhold 10% of the purchase price. The FIRPTA rules contain an exemption to the extent the seller can demonstrate that the withholding of 10% of the purchase price would exceed the seller's tax on the disposition. Absent rules under section 1446, as a matter of prudence presumably buyers will withhold whenever there is a foreign seller of a partnership interest. Further, the partnership will need to exercise caution that it is not treated as a 'backup' withholding agent.

While a seller can provide a 'non-foreign affidavit' to certify that they are not a foreign person (and thus avoid withholding), the statute does not provide for a certification that the partnership does not have a US trade or business. Hopefully, regulations will authorise such an exception from withholding.

In addition, commentators expressed concern that in the case of a disposition of a publicly traded partnership interest, applying new section 1446(f) presents substantial practical problems. In response, the Treasury and the IRS determined that withholding under section 1446(f) is not required for any disposition of an interest in a publicly traded partnership until regulations or other guidance has been issued. The temporary suspension is limited to dispositions of interest that are publicly traded and does not extend to non publicly traded interests.







Jim Fuller ( and David Forst (

Fenwick & West


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