Sale of Non-resident Alien’s U.S. Partnership Interest Was Taxable

The IRS has determined that the sale of an interest in a U.S. partnership by a non-resident alien was subject to U.S. income taxes, where the partnership was engaged in a U.S. trade or business (FAA 20123903F). The sale of the partnership interest was effectively connected income regardless of whether the individual was never present in the United States for 183 days of more.

The taxpayer, a non-resident alien, was a partner in a U.S. partnership that developed and sold consumer products. As a partner, she filed income tax returns (Form 1040NR) and reported her income from the partnership. In the tax year at issue, she sold her partnership interest in exchange for a promissory note, but did not report any U.S. gain from the sale. The promissory note did not provide for any payments until a “maturity date” in the future; thus, any tax was deferred until that date.

Upon examination, the IRS determined that the taxpayer’s gain from the sale was effectively connected income under Rev. Rul. 91-32, 1991-1 CB 107, because the partnership conducted a business through a fixed place of business in the Unites States. Any gain was U.S.-source gain effectively connected with a U.S. trade or business to the extent that the partner’s share of unrealized gain of the partnership would be attributable to U.S. source property.

The taxpayer argued that the gain was capital gain and was not taxable, since she was not present in the Unites States for 183 days or more. The IRS examination officer, however, concluded that gain from the sale was subject to U.S. income taxes under the installment sale method. He also ruled that the 183-day rule did not apply since the income was effectively connected income, and that the IRS could charge interest on the deferred tax liability from the installment sale.

Comment

The sale of a partnership interest is treated as the sale of a capital asset. Capital gains are generally not taxable to a foreign taxpayer, unless the taxpayer is present in the U.S. for 183 days or more.

The IRS agreed that the gain was income effectively connected with a U.S. trade or business. Since the partnership was engaged in a U.S. trade or business, the foreign partner was likewise engaged. Rev. Rul. 91-32 provides that a partnership interest is an effectively connected income asset of the foreign partner. Under the aggregate theory, the sale of the interest was a sale of a share of the partnership’s underlying assets.

Rev. Rul. 91-32 is consistent with current law and applies to this case, the IRS concluded. Furthermore, the taxation of a foreign taxpayer’s effectively connected income is not dependent on the alien’s presence in the U.S. in excess of 183 days. Effectively connected income from a U.S. trade or business is taxed like income of any U.S. citizen.

Reference: PTE §37,010.20