149 T.C. 63
T.C.2017Background
- Grecian Magnesite Mining (GMM), a Greek corporation, owned a 12.6% membership interest in Premier (a U.S. LLC treated as a partnership) from 2001.
- In 2008–2009 Premier redeemed GMM's interest in two payments, producing total gain ≈ $6.2 million; $2.2 million was conceded FIRPTA (U.S. real property) gain; ≈ $4 million was the "disputed gain."
- GMM reported partnership allocable items on its 2008 Form 1120-F but, following CPA advice, did not report any gain from the redemption on its 2008 return and filed no 2009 return.
- IRS issued a deficiency notice and a substitute for return for 2009, treating the full redemption gain (other than conceded FIRPTA portion) as U.S.-source and effectively connected under Rev. Rul. 91-32 and applicable sourcing rules.
- Tax Court held the disputed gain was capital gain from sale of a partnership interest (entity theory), therefore foreign-source under section 865 unless attributable to a U.S. office; court found it was not attributable to Premier’s U.S. office and thus not effectively connected or U.S.-taxable.
- Court also excused penalties (sec. 6662 and sec. 6651 additions) because GMM reasonably and in good faith relied on competent CPA advice.
Issues
| Issue | GMM's Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Character/source of disputed gain: is gain from redemption U.S.-source and effectively connected? | Gain is capital from sale of a single partnership interest (entity theory) and therefore foreign-source under sec. 865(a). | Treat the redemption as sale of underlying partnership assets (aggregate theory); Rev. Rul. 91-32 treats pro rata asset gains as effectively connected and U.S.-source. | Held for GMM: gain is capital from sale of partnership interest (entity theory) and not U.S.-source or effectively connected. |
| Applicability of Rev. Rul. 91-32 / deference to IRS ruling | Argues subchapter K mandates entity treatment; revenue ruling lacks persuasive force here. | Asserts Rev. Rul. 91-32 controls and should be given deference to treat partner’s asset-by-asset gain as effectively connected. | Court declined to defer to Rev. Rul. 91-32 and found it unpersuasive. |
| Application of the U.S. office rule (sec. 865(e)) — was Premier’s U.S. office a material factor and ordinary-course contributor to the redemption gain? | Even if Premier’s operations created business value, those activities were not a material factor in realization of the redemption gain, nor was the redemption realized in Premier’s ordinary course of business. | Premier’s U.S. office materially produced value that led to GMM’s gain; regular partnership business supports attribution. | Held for GMM: office not a material factor; redemption was not in ordinary course of Premier’s business, so gain not attributable to U.S. office. |
| Penalties (sec. 6662 accuracy-related and sec. 6651 additions) | Reasonable cause and good-faith reliance on experienced CPA (recommended by counsel) excused penalties. | Asserts negligence and failure to file/pay warrant penalties. | Held for GMM: reliance on competent CPA satisfied reasonable-cause defense; penalties and additions not imposed. |
Key Cases Cited
- Welch v. Helvering, 290 U.S. 111 (establishes burden of proof presumption in deficiency cases)
- United States v. Boyle, 469 U.S. 241 (reasonable‑cause reliance on tax adviser can excuse late filing/payment)
- Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir.) (Commissioner must produce substantive evidence of unreported income before presumption applies)
- Pollack v. Commissioner, 69 T.C. 142 (Tax Ct.) (section 741 supports entity treatment—sale of partnership interest is sale of a single capital asset)
- Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43 (Tax Ct.) (three‑part test for reasonable reliance on tax adviser to avoid accuracy‑related penalty)