Under new tax law, sales by foreign partners of U.S. partnership interests are once again taxable.
In an August 2017 posting we reported that the U.S. Tax Court had held that, notwithstanding an IRS revenue ruling to the contrary, the sale by a foreign partner of his interest in a U.S. partnership was not a taxable transaction to him (assuming he was not otherwise a U.S. taxpayer), just as the sale of stock in a U.S. corporation is not a taxable transaction to a foreign shareholder. (“Tax Court: Foreign investors not taxable on sales/liquidations, of U.S. partnership interests.”)
We cautioned that Congress might overrule the decision in the tax legislation that was then under consideration.
In fact in the 2017 tax reform bill the Congress has done just that. The new law provides that a foreign partner who sells his interest in a U.S. partnership recognizes gain on the sale to the same extent that, had the partnership sold its assets, the foreign partner would have been allocated income from the sale that was effectively connected with a U.S. trade or business. For a partnership that conducts business only in the U.S. (so that all of its assets are connected to U.S. income), the new rule effectively means that the foreign partner is taxed on all of the gain from the sale of his partnership interest. The 2017 law reinstates the revenue ruling (Rev. Rul. 91-32) that the Tax Court overturned.
Foreign partners in U.S. partnerships that conduct business both within and without the U.S. will want to make sure that the partnership correctly allocates assets, and their values, between the U.S. and the non-U.S. business, since if the foreign partner does sell his partnership interest the amount of gain he recognizes will depend on that allocation.
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