When tax exempt organizations invest in partnerships with debt-financed property, it is important to understand whether gain or loss upon the sale of the partnership is unrelated business taxable income. A recent court case in the international tax area may provide useful insight. Specifically, the US Tax Court ruled in Grecian Magnesite Mining, Industrial & Shipping Co., SA, v. Commissioner, 149 T.C. No. 3 (Grecian Magnesite) that a non-US partner’s gain from the redemption of a partnership interest should be governed by “entity”, not “aggregate” principles. Therefore, such redemption did not result in Effectively Connected Income (ECI) to the non-US partner. Although the Tax Court’s opinion focuses on ECI, Grecian Magnesite potentially is relevant to the determination of whether a tax-exempt organization should recognize unrelated business taxable income from disposition of a partnership interest where debt-financed property is held within the partnership.
US Tax Marketing Leader, PwC US