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According to Law360, the U.S. Department of Treasury on December 20, 2018 proposed rules to treat income from the sale of a foreigner's interest in a U.S. partnership as taxable U.S.-sourced income, overturning a U.S. Tax Court decision that mandated the opposite result.

Section 864(c)(8) of the Tax Cuts and Jobs Act effectively re-establishes that the sale of a foreigner’s interest in a partnership owning U.S. trade or business assets is effectively connected income, a portion of which is taxable by U.S. authorities. That result was consistent with the Internal Revenue Service's position in a 1991 revenue ruling and contradicted the result in the 2017 Tax Court case Grecian Magnesite v. Commissioner of Internal Revenue.

The Tax Court had found the Greek mining firm was not liable for tax on $4 million of interest in a Pennsylvania magnesite company because the business was conducted through its foreign offices and thus was foreign-sourced.

The TCJA explicitly defined such income as U.S.-sourced, so long as the partner would have received a share of the gain had the overall partnership been sold.

The regulations specified the rule would only apply to partnership gain otherwise recognized in the code, although the law allows Treasury to go further. The tax code normally does not recognize gain or loss in a partnership from the contribution of property in exchange for interest.

Treasury solicited comments from stakeholders about whether to broaden the rules.

"The Treasury Department and the IRS recognize, however, that certain nonrecognition transactions may have the effect of reducing gain or loss that would be taken into account for U.S. federal income tax purposes," the department said in the regulations' preamble.

The proposed regulations also conform to double taxation treaties that might also cover partnerships held by a foreign entity, specifying that permanent-establishment clauses would not prevent the application of the section. But the regulations also stated assets exempted from taxation by tax treaties as a permanent establishment, such as ships or aircraft, would also not be taken into account for the determination of a partnership gain or loss.

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A district court has held that the monetary limit on the penalty for willfully failing to file a Report of Foreign Bank and Foreign Accounts (FBAR) is an annual one. The court found that, in reaching this conclusion, it was not required to consider the ongoing split of court opinions in previous cases about whether the limit on the penalty is defined by statute or reg.

 There is now disagreement amongst district courts as to whether the 2004 statutory amendment invalidated the $100,000 cap established by 31 C.F.R 1010.820. Among the courts that have held that the statutory amendment merely increased the maximum but did not require IRS to in any case impose the maximum, and thus held that the limit contained in the reg. was the maximum penalty that IRS could impose, were Colliot, (DC TX 2018) 121 AFTR 2d 2018-1834, and Wadhan, (DC CO 2018) 122 AFTR 2d 2018-5208. However, there is also Norman, Ct. Fed. Cl. Dkt 15-872, where the Court held that the taxpayer Norman was liable for the FBAR willful penalty and this Court rejected the Colliot holding that the FBAR willful penalty was limited to a maximum of $100,000, because the regulations had not been changed to reflect the statutory amendment increasing the maximum FBAR willful penalty. 

The taxpayer, Mr. Shinday had foreign bank accounts for which he was required to file an FBAR, and for which he didn't file an FBAR, for 2005 through 2011. The balances in those accounts, for 2005 through 2011, varied from approximately $380,000 to $1,031,548.

IRS assessed willful FBAR penalties against Shinday for the tax years 2007 to 2011. The aggregate amount of these penalties was $257,888, which represented 25% of the combined 2006 year-end balance of Shinday's foreign bank accounts, which equaled $1,031,548.  This total was then divided equally, in order to apply penalties equally for each year starting in 2007 and ending in 2011.

Shinday argued that IRS's claim to reduce Shinday's penalty assessments to judgment must be dismissed because IRS assessed penalties which exceeded the $100,000 penalty cap established by 31 C.F.R. 1010.820.  Relying on Colliot and Wahdan, Shinday contended that 31 C.F.R. 1010.820's cap controls because it is consistent with 31 U.S.C. 5321, the statute under which it was issued.
Court OKs IRS calculation. The court approved IRS's calculation.

The court said that neither of the cases cited by Shinday supported his position. In Colliot, the court found that IRS could not assess FBAR penalties exceeding the $100,000 cap promulgated under 31 C.F.R. 1010.820, but that court only considered FBAR penalties that exceeded $100,000 in a given year. Similarly, the court in Wahdan concluded that IRS "is not empowered to impose yearly penalties in excess of $100,000 per account."

The court here said that the facts of Colliot and Wahdan were thus inapposite to this case because the five penalties assessed against Shinday were individually all less than $100,000. Although in the aggregate the penalties against Shinday totaled $257,888, the yearly, individual penalties were each approximately $51,578. Each time Shinday willfully failed to timely file an FBAR, IRS assessed a penalty. The penalties were imposed for separate, if successive, alleged FBAR violations resulting from Shinday' failure to file FBAR reports in 2007, 2008, 2009, 2010, and 2011.

Finally, the court noted that, in arriving at its decision, it did not need to reach the issue of whether 31 USC 5321 invalidates the Department of Treasury's implementing regs., because there was no year in which Shinday was penalized more than $100,000. (Shinday DC CA 12/4/2018 122 AFTR 2d ¶ 2018-5483).

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