Disposition of an interest in a U.S. partnership by a foreign person: The saga of revenue ruling 91-32

Rev. Rul. 91-32 treats the sale of a partnership interest by a foreign partner under the aggregate approach. Gain or loss is determined by the distributive share of gain or loss arising from a hypothetical sale of the partnership’s assets. To the extent gain is attributable to assets that are effectively connected to a U.S. trade or business, they are U.S. source and subject to U.S. tax. In 2017, the Tax Court declined to apply Rev. Rul. 91-32 applying the entity approach instead. Under this approach, the foreign partner has no U.S. source income from the sale of her partnership interest and is not subject to U.S. tax on any gain. Congress responded by codifying the aggregate approach in the Tax Cuts and Jobs Act. This paper looks at the history of taxing partnership sales by foreign persons and provides analysis on the state of the current law. JEL Classifications: B17; F23; M16; H25.