On July 13, the U.S. Tax Court, issued a decision that is of major importance to non-U.S. investors. In Grecian Magnesite Mining, Industrial & Shipping v. Commissioner (Grecian), the court held that if a non-U.S. person sells an interest in a partnership that is engaged in business in the United States, the non-U.S. seller is not subject to U.S. federal income tax on the gain from the sale. By so holding, the Tax Court, in no uncertain terms, rejected a long-standing IRS ruling to the contrary.

Background

Under the Internal Revenue Code (the code), a non-U.S. person is subject to U.S. tax on income that is “effectively connected” with the conduct of a “trade or business in the United States” (referred to as “effectively connected income”). Furthermore, under the code, if a non-U.S. person is a partner in a partnership that earns effectively connected income, the non-U.S. partner is taxed, on an annual basis, on its share of the partnership's effectively connected income.