Tax Court rejects IRS’s position in Rev. Rul. 91-32 - KPMG United States
Share with your friends

Foreign partners: Tax Court rejects IRS’s position in Rev. Rul. 91-32

Tax Court rejects IRS’s position in Rev. Rul. 91-32

A recent U.S. Tax Court case rejects the IRS’s position in Rev. Rul. 91-32 that a foreign partner’s capital gain from the sale of an interest in a partnership that is engaged in a U.S. trade or business is treated as gain that is effectively connected to a U.S. trade or business and therefore subject to U.S. federal income tax.


Related content

In Grecian Magnesite Mining, Co. v. Commissioner  [PDF 200 KB], the Tax Court held that a foreign corporation was not subject to U.S. federal income tax on the gain that it realized upon the redemption of its interest in a U.S. domestic entity (LLC) treated as a partnership that was engaged in the conduct of a U.S. mining business (except to the extent that gain was attributable to the U.S. real property interests held by the LLC).  

The case marks the first time that a court has addressed directly the IRS’s controversial position in Rev. Rul. 91-32—that gain realized by a foreign person with respect to a disposition of a partnership interest is to be treated as effectively connected income to the extent that partnership assets are used or held for use in a U.S. trade or business. 

KPMG initial analysis

The holding of Rev. Rul. 91-32 has been controversial since its issuance. Many commenters agree that the holding is correct from a policy perspective, but most question whether it is supported by existing law. For its part, the IRS has consistently maintained that the holding is correct under existing law and has in recent years added an item to its Priority Guidance Plan under section 864 “implementing Revenue Ruling 91-32 relating to sales of certain partnership interests.” In addition, the Obama Administration had proposed codifying the holding of the ruling as a revenue raiser in various budget proposals.

In this case of first impression, the Tax Court soundly rejected both the analysis as well as the holding of the revenue ruling. While the court’s opinion remains subject to appeal, it represents the Tax Court’s views and supports the position that, under most facts and circumstances, such gain is not subject to U.S. federal income tax solely as a result of the partnership being engaged in a U.S. trade or business.


Read a July 2017 report [PDF 1.4 MB] prepared by KPMG LLP: Foreign partners: Tax Court rejects the IRS’s position in Rev. Rul. 91-32

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


Request for proposal