US Inbound: Sale of US partnership interest by non-resident alien

Jim Fuller		David Forst

FAA 20123903F, an IRS field attorney advice, holds that a non-resident alien's gain from the sale of her interest in a US partnership constituted effectively connected income subject to US tax. The FAA applied Rev. Rul. 91-32, which is directly on point.

The taxpayer disagreed, stating that she "strongly disagrees" with the approach taken in the revenue ruling. She argued that under section 741, the sale of a partnership interest is treated as the sale of a capital asset. Capital gains are not taxable under section 871(a)(2) unless the foreign person is present in the US 183 days or more, which is not the case here.

The taxpayer's argument certainly has substantial merit, and in our view is correct, although it would be quite surprising, to say the least, if the FAA did not apply the revenue ruling at this level. The FAA is also consistent with the Obama administration's 2013 budget, which proposes to codify the result in Rev. Rul. 91-32. (Of course, if the IRS's conclusion in Rev. Rul. 91-32 were well-grounded in existing law, there would be no need to codify the result.)

The sales agreement and promissory note provided that principal need not be paid with respect to the sale before Date 2. Thus, under the installment sales rules, the tax is deferred until that date. While the tax on the sale of the partnership interest is deferred until Year 2, the FAA states that the taxpayer must pay interest each year on the deferred tax in accordance with section 453A(a)(1).

The taxpayer disagreed with this conclusion on the grounds that Subchapter N (sections 861-991), which contains the US's international tax rules, provides no authority to apply section 453A to a non-resident alien.

The IRS attorney stated that the installment method of section 453 is a statutorily prescribed method of accounting used for determining taxable income from an installment sale. Thus, the installment method of accounting for taxable income, within the limitations set forth in section 453, is applicable to the determination of taxable income as determined under section 871(b).

The FAA states that section 453A is a subset of special rules applicable to section 453. If section 453 permits installment reporting in particular situations, then section 453A applies to limit the benefits of the installment method reporting. The FAA states that the application of the rules in section 453A are not limited by Subchapter N in the determination of a nonresident alien's income.

Jim Fuller (jpfuller@fenwick.com)
Tel: +1 650 335 7205
David Forst (dforst@fenwick.com)
Tel: +1 650 335 7274
Fenwick & West
Website: www.fenwick.com

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