Senate Tax Proposal Would Override ‘Grecian Magnesite’ Decision

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By Allyson Versprille

The Senate tax reform proposal seeks to override the policy implications of the U.S. Tax Court’s Grecian Magnesite decision, which dealt with the tax consequences of a foreign investor selling its interest in a partnership engaged in a U.S. trade or business.

Under the Senate plan, a foreign partner would generally be subject to U.S. tax on gain from the sale of an interest in a partnership to the extent the gain is attributable to U.S. trade or business assets of the partnership.

The proposal provides that gain or loss from the sale or exchange of a partnership interest by a foreign partner would be effectively connected with a U.S. trade or business—and thus subject to U.S. tax—to the extent that the non-U.S. investor would have had effectively connected gain or loss if the partnership had sold all of its assets at fair market value as of the date of the sale or exchange, according to a Joint Committee on Taxation description of the proposal released late Nov. 9. (For a road map comparing key provisions in the House tax reform bill ( H.R. 1) and the Finance Committee version, read Bloomberg Tax’s analysis.)

The provision, which would go into effect Jan. 1, 2018, would reinforce the stance taken by the Internal Revenue Service in Revenue Ruling 91-32, practitioners told Bloomberg Tax. “Congress is clearly trying to codify the conclusion in Rev. Rul. 91-32 so that the government doesn’t have to be concerned about challenges like in Grecian Magnesite,” Jonathan Talansky, a partner at King & Spalding LLP in New York, said in an email.

In that Tax Court case, the judge ruled that Grecian Magnesite Mining, Industrial & Shipping Co. SA—a Greek mining company—didn’t have to pay tax on the gain it realized on the redemption of its partnership interest in a Pennsylvania-based company because the gain wasn’t U.S.-source income ( 2017 BL 243353, 149 T.C. No. 3, 7/13/17).

“The Senate’s proposal attempts to over-rule the Grecian entity theory of partnerships approach by codifying essentially the aggregate theory of partnerships approach taken in” Rev. Rul. 91-32, Aaron P. Nocjar, a partner at Steptoe & Johnson LLP who specializes in the taxation of passthroughs, said in an email.

‘Statutory Fix’

Rev. Rul. 91-32 has always been controversial, in part because tax code Section 741—which governs recognition of gain or loss on the sale or exchange of a partnership interest—applies entity principles, said Glenn Dance, a managing director in partnership taxation at Grant Thornton LLP in Washington.

Section 741 also treats the sale of a partnership interest as the sale of a capital asset, which is often treaty-protected from U.S. tax for foreign partners, Dance, who recently left the position of special counsel to the IRS associate chief counsel (Passthroughs and Special Industries), said in an email.

Long before Grecian Magnesite was decided, the Treasury Department’s “Green Book” called for a legislative solution to the issues covered in the Tax Court case, he said.

“In light of Grecian Magnesite, I think the Senate has decided it’s time to make this statutory fix,” Dance said.

Applying Different Code Section

Eric B. Sloan, a partner with Gibson, Dunn & Crutcher LLP in New York, agreed that the Senate proposal attempts to override the result in Grecian Magnesite.

However, Sloan said he doesn’t necessarily view the proposal as a codification of Rev. Rul. 91-32.

“I wouldn’t really call it an affirmation of Rev. Rul. 91-32,” he said in an email. “Rather, it looks to me like the application of the principles of Section 751(a) to sales of interests by non-U.S. investors.”

Section 751 is a specific exception to Section 741 that causes unrealized receivables and inventory items to be addressed separately from the remainder of a partnership interest when it is sold or liquidated.

Withholding Tax

Another component of the Senate proposal is that it would require the person or entity receiving a partnership interest in a sale or exchange to withhold 10 percent of the amount realized on the disposition unless the transferor certifies that it isn’t a nonresident alien or foreign corporation.

“Imposing a withholding requirement is critical,” Sloan said.

“Otherwise, it is possible that non-U.S. investors would end up not paying the tax (it’s not intuitive to non-U.S. investors that they could be subject to tax in the U.S. when they sell an interest in a company),” he said.

To contact the reporter on this story: Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

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