108 F.4th 891
D.C. Cir.2024Background
- Indu Rawat, a nonresident alien, sold her 29.2% partnership interest in Innovation Ventures, LLC (a U.S. entity) in 2008 for $438 million.
- Approximately $6.5 million of the sales proceeds were attributable to a gain on the partnership’s inventory.
- Rawat treated this $6.5 million as ordinary income but claimed it was foreign-source and thus not taxable by the United States.
- The IRS (Commissioner) asserted the gain was U.S.-source income and taxable, assessing Rawat $2.3 million in taxes, which she paid, then sought a refund in Tax Court.
- The Tax Court agreed with the Commissioner, holding the inventory gain was U.S.-source and taxable; Rawat appealed to the D.C. Circuit.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Does § 751(a) treat inventory gain from a partnership-interest sale as taxable U.S.-source income for a nonresident alien? | Rawat: § 751(a) only changes the character of the gain to ordinary income, not its source; no U.S. tax on a foreign-source partnership sale. | Commissioner: § 751(a) deems the gain as from a sale of inventory, making it U.S.-source and taxable. | No: § 751(a) does not treat inventory gain as from a sale of inventory; it is foreign-source income, not taxable. |
Key Cases Cited
- Grecian Magnesite Mining, Indus. & Shipping Co. v. Comm’r, 926 F.3d 819 (D.C. Cir. 2019) (applying pre-TCJA rules for sourcing income from partnership interest sales by nonresident aliens)
- Swiren v. Comm’r, 183 F.2d 656 (7th Cir. 1950) (discussing attempts to convert ordinary income to capital gains through partnership sales)
- Helvering v. Smith, 90 F.2d 590 (2d Cir. 1937) (addressing the character of income derived from partnership-interest transfers)