Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Favorable rulings do happen in international tax

tax, international tax, income, businessI’m sure you all stay updated on your international tax court cases… oh wait, you don’t? That’s weird. The tax court recently ruled in favor of a company known as Grecian Magnesite Mining. Court Case: Grecian Magnesite Mining v. Commissioner, 149 T.C. 3 (2017).

To give you a brief synopsis, Grecian Magnesite Mining (referred to as GMM, a foreign company) was a partner in Premier, LLC (U.S. Partnership). Premier conducts U.S. trade or business of mining and selling magnesite. (You don’t say?!) Premier redeemed GMM’s partnership interest which caused what!?… Yes! You’re right, a gain (or loss), in this case, on partnership interest. The gain was $6.2 million. Two point two million was attributable to U.S. real property interests and was therefore taxable, leaving the other $4 million in question. Was the other $4 million effectively connected income and subject to U.S. Income tax?

GMM argued that Premier was in the business of selling and mining (not in the business of buying and selling partnership interests) and therefore:

  • Did not satisfy the ordinary course requirement
  • Was not U.S. sourced income
  • Was not subject to U.S. tax.

The IRS looked towards *Code Sec. 865(e)(2)(A), where it states, “any sale of personal property” and argued that it was broad enough to cover all sales of personal property, including occasional sales.

The court looked through the rules and moved through the Code Sections 865(e) and 864(c) to help determine what tax items are “attributable to” a U.S. office. They found that income is attributable to a U.S. office only if:

  1. The U.S. office is “a material factor in the production of such income”, AND
  2. The U.S. office “regularly carries on activities of the type from which such income, gain, or loss is derived.”

Long story short, the court concluded that the disputed gain of $4 million was not “regularly” carried on and therefore, was not “attributable to” the U.S. office and that it was not effectively connected income. The income was considered foreign sourced capital gain and not subject to U.S. tax.

As you probably know, tax court cases are often lengthy and this is a very brief summary of the tax court case. If you are interested in reading the entire case or want to know more, then you can find the case by clicking here.

Another point (that I don’t really have to point out, but I’m going to) is that the rules for sourcing income can often be confusing and unclear. It is highly recommended that you consult with a professional for all your tax needs; especially in regards to foreign reporting items because the rules can be convoluted and interpreted differently as seen in this court case.

Chris Morrison, CPA

*Code Sec. 865(e)(2)(A) is considered the “U.S. office rule” and states that income from any sale of personal property attributable (key word) to such office or other fixed place of business shall be sourced in the United States.