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to the Tax Court, this conclusion is also that, similar to Sec. 865(b), they the partner’s distributive share of the
supported by Regs. Secs. 1.751-1(a)(1) applied to inventory gain as described amount of gain would have been ef-
and (a)(2). in Sec. 751(a). As Rawat’s motion for fectively connected if the partnership
The court then applied the sourc- summary judgment was based on her had sold all of its assets at their fair
ing rules to the inventory gain. Having contention that the sourcing rule for market value as of the date of the sale
found that the inventory gain was the inventory gain is the general rule of or exchange of such interest. If this
excepted from Sec. 741 and that, under Sec. 865(a)(2), the court concluded it provision had been in effect at the time
Sec. 751(a), this portion of the gain was must deny Rawat’s motion. of the sale, a much larger portion of
“attributable to … inventory items,” Rawat’s total gain on her sale of the
the court determined that Rawat could Reflections interest in IV LLC would have been
not follow the general rule of Sec. Although Rawat ended up paying effectively connected income and sub-
865(a) that sales of personal property some tax, she overall did much better ject to U.S. tax.
of nonresidents are sourced outside the from a U.S. tax standpoint than she Rawat, T.C. Memo. 2023-14 ■
United States. Instead, she was required would have if she had sold her interest
to follow the exception in Sec. 865(b) in IV LLC 10 years later. In response
for “income derived from the sale of to the decisions in Grecian Magnesite, Contributor
inventory property.” Sec. 865(b) directs Congress enacted Sec. 864(c)(8), which
James A. Beavers, CPA, CGMA, J.D.,
the taxpayer to the sourcing rules for applies the aggregate theory to sales
LL.M., is The Tax Adviser’s tax technical
the inventory gain in the provisions of of partnership interests by foreign
content manager. For more information
“sections 861(a)(6), 862(a)(6), and 863.” taxpayers by making the gain on the
about this column, contact
After analyzing the rules in those sale of an interest effectively connected
thetaxadviser@aicpa.org.
three subsections, the Tax Court found income to the extent the portion of

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