Grecian Magnesite Mining, Indus. & Shipping Co. v. Comm'r of Internal Revenue Service, 926 F.3d 819

Background

Grecian Magnesite Mining, a Greek corporation, held ~15% of Premier Chemicals, a U.S. partnership that mined magnesite in the United States.
In 2008 Grecian redeemed its partnership interest, realizing > $6 million gain; Grecian conceded ~$2 million derived from U.S. real property, leaving ~$4 million disputed.
The IRS audited and treated the disputed gain as U.S.-source and taxable as effectively connected income (ECI); Grecian disputed that sourcing in Tax Court.
No specific rule for partnership-interest dispositions applied at the time; general sourcing for sale of personal property (I.R.C. § 865) and the U.S. office rule (§ 865(e)(2)) governed.
Tax Court held (1) the partnership interest was an indivisible capital asset (entity theory) and (2) the disputed gain was not attributable to Grecian’s U.S. office under the U.S. office rule; the Commissioner appealed only the U.S. office rule holding.
The D.C. Circuit affirmed, adopting a transaction-focused reading of the U.S. office rule and concluding Premier did not “regularly carry on activities” of the type (redemptions) at its U.S. office, so the gain was foreign-source for that rule.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether income from redemption of a partnership interest is U.S.-source under the U.S. office rule	Grecian: attribution focuses on the sale/redemption transaction; the redemption occurred outside U.S. offices so income is foreign-source	Commissioner: attribution looks to activities that produced appreciation (Premier’s U.S. operations); those activities are attributable to U.S. office so income is U.S.-source	Held: statute focuses on the sale; income must be attributable to U.S. office via the sale itself; here it was not, so disputed gain not U.S.-source under §865(e)
Whether Grecian’s partnership interest is treated under the aggregate or entity theory for sourcing	Grecian: entity theory — interest is single capital asset	Commissioner: aggregate theory — treat as sale of underlying assets	Tax Court ruled entity theory; Commissioner did not appeal this holding
Whether Revenue Ruling 91-32 (IRS position attributing partnership-interest dispositions to U.S. office) is entitled to deference	Commissioner: relied on Rev. Rul. 91-32 to support attribution	Grecian: challenged the Ruling’s reasoning and applicability	Court declined to defer to Rev. Rul. 91-32 (not persuasive)
Whether Premier’s activities ‘‘regularly carry on’’ redemptions such that the third prong of §864(c)(5) is met	Commissioner: partnerships and their offices regularly manage member transactions including redemptions	Grecian: Premier’s ordinary business is magnesite mining/processing, not partnership-interest redemptions	Held: third prong not met — Premier did not regularly carry on redemption-type activities, so attribution fails

Key Cases Cited

Byers v. Comm’r, 740 F.3d 668 (D.C. Cir.) (standard of review for Tax Court legal determinations)
Del Commercial Props., Inc. v. Comm’r, 251 F.3d 210 (D.C. Cir. 2001) (weight accorded agency interpretations under Skidmore)
Mellow Partners v. Comm’r, 890 F.3d 1070 (D.C. Cir. 2018) (consideration of agency guidance on tax dispositive issues)
Barnhart v. Thomas, 540 U.S. 20 (2003) (interpretive canons including last-antecedent/nearest-referent)
Lockhart v. United States, 136 S. Ct. 958 (2016) (limits on interpretive canons)
Skidmore v. Swift & Co., 323 U.S. 134 (1944) (standard for deference to agency interpretations)
Davis v. United States, 495 U.S. 472 (1990) (weight given to contemporaneous agency constructions)