On November 9, 2023 we posted DC Circ.Told Foreign Partner Liable For $6.5M In Gains Attributable To Inventory where we discussed that the Tax Court held that a foreign citizen living abroad who sold her share in a U.S. partnership that sold 5-Hour Energy drinks owed federal income tax on $6.5 million in gains stemming from the partnership's sale of inventory.
Now according to Law360, The D.C. Circuit found On July 23, 2024 that a Canadian citizen's $6.5 million in gains from her sale of a U.S. partnership interest in a company that sold 5-hour Energy drinks was not federally taxable as inventory income, reversing a U.S. Tax Court ruling.
In a per curiam decision, a three-judge panel including Chief Judge Sri Srinivasan said Indu Rawat's gain under Internal Revenue Code Section 751(a) was a gain from the sale of a partnership interest, not a gain from the sale of inventory, and therefore exempt from U.S. tax.
Her Partnership Interest Is Foreign-Source Income,
As To Which She Owes No Taxes,"
Judge Srinivasan Wrote In The Opinion For The Panel.
Rawat, a nonresident alien, had asked the appellate court to overturn the Tax Court's denial last year of her request for a $2.9 million refund for taxes and penalties she paid on gains connected with selling her 29% interest in a partnership, Innovation Ventures LLC. Her partnership interest is her personal property, which should make the inventory gain also her personal property, which should be taxed where she lived, she had argued.
The Tax Court had adopted the Internal Revenue Service's understanding of Section 751's language, which says inventory items from a partnership "shall be considered as an amount realized from the sale or exchange of property."
But the appellate court found the IRS' argument "difficult to square with the text of Section 751(a), properly understood," Judge Srinivasan said in the opinion.
"A mandate that inventory gain be considered 'ordinary income' differs from a mandate that inventory gain be considered income 'from the sale of inventory,'" the judge said.
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