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Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

Grecian Magnesite Put to Bed: Tax Court Ruling Affirmed on Appeal

The battle is over. It is agreed that the emporer’s new clothes are made of fairy dust, and Rev. Rul. 91-32 is not worth the paper on which it was printed in the I.R.S. Cumulative Bulletin for 1991. In June, the Court of Appeals for the D.C. Circuit affirmed the 2017 Tax Court ruling in the matter of Grecian Magnesite Mining v. Commr., which held that a foreign corporation was not liable for U.S. tax on the gain arising from a redemption of its membership interest in a U.S. L.L.C. treated as a partnership. In their article, Galia Antebi and Stanley C. Ruchelman address the history of the I.R.S. position and the disdain given to it by the courts. However, they caution that the taxpayer victory applies only to sales, exchanges, and dispositions effected through November 26, 2017. Thereafter, new Code §864(c)(8) modifies the law by adopting a look-thru rule when determining the character of gain from the sale of a membership interest. Win some, lose some.

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Proposed Code §864(c)(8) Regulations Codify Tax on Gain from Sale of Partnership Interest

Proposed Code §864(c)(8) Regulations Codify Tax on Gain from Sale of Partnership Interest

Enacted as part of the Tax Cuts and Jobs Act, Code§864(c)(8) codifies the holding in Rev. Rul. 91-32 and overturns the result ofthe Grecian Magnesite case. In late December 2018, the I.R.S. released pro- posed regulations containing guidance under new Code §864(c)(8). Among the points addressed in the proposed regulations are (i) rules to compute the amount of E.C.I. gain or loss, (ii) coordination with F.I.R.P.T.A. tax and withholding, (iii) interaction with income tax treaties, and (iv) anti-abuse rules. Fanny Karaman and Nina Krauthamer discuss these and other aspects of the proposed regulations.

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New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

New U.S. Tax Law Adopts Provisions to Prevent Base Erosion

Following the lead of the O.E.C.D. and the European Commission (“E.C.”), the T.C.J.A. adopts several provisions designed to end tax planning opportunities.  In some instances, the new provisions closely follow their foreign counterparts.  In others, the provisions that are specific to U.S. tax law.  Among these changes are (i) the introduction of the G.I.L.T.I. minimum tax on the use of foreign intangible property by C.F.C.’s, (ii) the total revamp of Code §163(j) so that it reflects an interest ceiling rather than an earnings stripping provision, (iii) the restriction of tax benefits derived from the use of hybrid entities and transactions, (iv) the broadened scope of Subpart F through definitional changes, (v) legislative reversals of judicial decisions in which I.R.S. positions in transfer pricing matters were successfully challenged, and (vi) legislative reversals of a judicial decision invalidating Rev. Rul. 91-32 regarding the sale of partnership interests by foreign partner.  Sheryl Shah and Stanley C. Ruchelman discuss these provisions and place them in context. 

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Foreign Partner Not Subject to U.S. Tax on Gain from Redemption of U.S. Partnership Interest

Foreign Partner Not Subject to U.S. Tax on Gain from Redemption of U.S. Partnership Interest

Hurray!  After three years, the U.S. Tax Court ruled that gain from the sale of a partnership interest or the receipt of a liquidating distribution by a retiring partner is not subject to U.S. income tax even though the partnership conducts business in the U.S.  Neha Rastogi, Elizabeth V. Zanet, and Nina Krauthamer explain the reasoning behind the decision and the magnitude of the defeat for the I.R.S. Unless the case is reversed on appeal, the decision invalidates the I.R.S. position announced in Rev. Rul 91-32.

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Sale of a Partnership Interest by a Foreign Partner – Is Rev. Rul. 91-32 Based on Law or Administrative Wishes?

Sale of a Partnership Interest by a Foreign Partner – Is Rev. Rul. 91-32 Based on Law or Administrative Wishes?

The I.R.S. has a long history in misapplying U.S. tax rules applicable to a sale of a partnership interest.  For U.S. tax purposes, a partnership interest is treated as an asset separate and apart from an indirect interest in partnership assets.  In Rev. Rul. 91-32, the I.R.S. misinterpreted case law and Code provisions to conclude that gains derived by foreign investors in U.S. partnerships are subject to tax.  No one thought the I.R.S. position was correct, but then, in a field advice to an agent setting up an adjustment, the I.R.S. publicly stated that the ruling was a proper application of U.S. law when issued and remains so today. The adjustment was challenged in the Tax Court, and the tax bar is eagerly awaiting a decision.  Stanley C. Ruchelman and Beate Erwin examine the I.R.S. position, the string of losses encountered by the I.R.S. when challenged by taxpayers, and the Grecian Magnesite case awaiting decision.

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