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  1. I assume that IRS will not agree, since they presumably would dislike the idea of an NRA’s being able to avoid the gift tax when giving away an indirect interest in US real estate. Whether they can defend the position I assume they’ll take, however, is another matter. I have a client challenging Rev. Rul. 91-32 (purporting to treat income on sale of partnership interest as ECI where the partnership is engaged in a US business) against an IRS audit, and I can’t wait to see what the IRS argument will be. Thanks for the reply.

  2. Michael,

    The question of partnership assets being intangible personal property? That is an interesting one. I can’t put my hands on it right now but the last time I looked at the IRS “no ruling” list they specifically said that this was something they wouldn’t issue a PLR about. You and I both think a partnership interest is intangible personal property. The IRS is being coy about it for gift tax purposes.

    Given the Suzanne Pierre case and all of the FLP litigation, I agree with you. The correct analysis should be to look at the partnership interest as it is defined under State law, then take that character into the gift tax realm. The fact that the partnership owns U.S. real estate should not affect the conclusion for gift/estate tax purposes. Whether the IRS agrees is another matter entirely. 🙂

    Phil

  3. Re: the estate tax issue, many advisors favor corporate structures, but the income tax cost is substantial. If the properties are held through a partnership (preferably a non-US partnership), there is at least the argument that US estate tax doesn’t apply, since there’s no rule indicating whether (or when) a partnership interest is considered to have a US ‘situs’ for US estate tax consequences. Also, one might give away interests in the partnership during his or her lifetime, since gifts by nonresident aliens of intangibles (even US-situs intangibles) are not subject to US gift tax. I believe that, on appropriate facts, the IRS would have a difficult time arguing that the partnership interest is not an intangible merely because the sole or principal asset of the partnership is US real estate.

    Any comments?

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