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Tax Court Invalidates Revenue Ruling 91-32

Jul 17, 2017

In its highly anticipated decision in the Grecian Magnesite Mining v. Commissioner case, the Tax Court on July 13, 2017 effectively invalidated IRS Revenue Ruling 91-32. That revenue ruling holds that the gain realized by a foreign partner on disposing of its interest in a U. S. partnership should be analyzed asset by asset, and that, to the extent the assets of the partnership would give rise to effectively connected income if sold by the entity, the departing partner’s pro rata share of such gain should be treated as effectively connected income. Commentators have generally been of the opinion that the IRS position is simply wrong.

The Tax Court rather bluntly observed:

“Rev. Rul. 91-32 is not simply an interpretation of the IRS’s own ambiguous regulations, and we find that it lacks the power to persuade. Its treatment of the partnership provisions discussed … is cursory in the extreme, not even citing section 731 (which, as we set out, yields a conclusion of “gain or loss from the sale or exchange of the partnership interest” (emphasis added)). The ruling’s subchapter K analysis essentially begins and ends with the observation that “[s]ubchapter K of the Code is a blend of aggregate and entity treatment for partners and partnerships.” … We decline to defer to the ruling. We will instead follow the Code and the regulations to determine whether the disputed gain is effectively connected income.”

It is important to note that although the Tax Court invalidated Revenue Ruling 91-32, a non-resident alien individual or foreign corporation that sells an interest in a partnership (or limited liability company (LLC) taxed as a partnership) is subject to U.S. tax on gain attributable to U.S. real property interests, under IRC Section 897(g).

The facts of Grecian Magnesite are as follows:

  • Grecian Mining was a privately-owned corporation organized under the laws of Greece.
  • From 2001 through 2008, it was a member of a U.S. LLC that was engaged in the business of extracting, producing, and distributing magnesite.
  • In 2008, Grecian Mining’s interest in the LLC was completely redeemed; a transaction treated as a sale or exchange of the membership interest.
  • Grecian Mining did not maintain an office of its own in the U.S. and did not employ individuals located in the U.S.
  • Of a total gain of $6.2 million, $2.2 million was allocated to U.S. real property. The taxpayer did not dispute that the portion allocated to U.S. real estate was subject to U.S. taxation. The only amount in dispute was the $4 million gain attributable to business assets other than real estate.

The Tax Court held that the $4 million gain was not U.S. source income and was not effectively connected with a U.S. trade or business.


The importance of this case cannot be overstated. Many transactions have been or will be completed where nonresidents and/or foreign corporations have sold interests in U.S. businesses held through partnerships or entities treated as U.S. partnerships for tax purposes.

The invalidation of Revenue Ruling 91-32 should enable taxpayers who were advised to pay a tax on the basis of that ruling to seek a refund.

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