How Form 8865 Exclusion 2023-2024

Music, we're talking today about a ruling that is a tax court case that just came down, overturning an IRS ruling from 26 years ago. We boys thought it was wrong. This involves foreign investment into US partnerships where the partnership is engaged in trade or business. It questions whether the sale or disposition of that interest in the partnership has to be treated as effectively connected income, as the assets of the partnership were used in the trade or business in the United States. In ruling 91-32, the IRS took the position that the sale game was determined by reference to pure aggregate principles. The IRS asserted that a foreign investor who sold its indirect interest in assets of a trade or business would be subject to US tax. However, the Tax Court ruled last week that Revenue Ruling 91-32 was not correct. It took a very strong entity view of partnership redemptions, which are analogous to sales of partnership interest, to conclude that the gain was from the sale of a capital asset. This issue frequently arises in the asset management world, especially when foreign persons invest in US partnerships or LLCs engaged in creative business in the United States. It also comes up outside of the asset management world. Now that the Tax Court has determined that the entity theory applies, the next part is whether the income is effectively connected. The court examined whether an office of the foreign partner was actively or materially involved in the sale and concluded it was not. To summarize, the detailed analysis resulted in the income being considered foreign source income. Most foreign source income is not effectively connected in the United States. This is good news for investors who have previously believed they had US taxable ECI in connection with the...