Continuing our series on Famous Tax Quotes (quotes from court opinions and rulings with language that is colorful or that concisely states an important tax principle) today's tax quote is from Rawat v. Commr., T.C. Memo 2023-14.
In Rawat, the Tax Court held that a partnership should be treated as an aggregate for purposes of Code §751 with respect to “inventory items”. By treating the partnership as an aggregate for this purpose, the inventory sourcing rule in Code §865(b) applied to the gain. If the gain was U.S.-source income, it would be effectively connected income (“ECI”) under the limited force of attraction rule in Code §864(c)(3).
The taxpayer argued that the partnership should be treated as an entity, and not as an aggregate, under Grecian Magnesite v. Commr., 149 T.C. 63 (2017), aff’d, 926 F.3d 819 (D.C. Cir. 2019). The Tax Court held that the partnership should be treated as an entity for purposes of Code §741, but not for purposes of Code §751. To emphasize this distinction, the court stated:
[T]o tautologize, section 741 applies only where it applies. As we have noted, section 741 has an explicit exception: “except as otherwise provided in section 751 (relating to unrealized receivables and inventory items).” Section 751 provides that the “inventory items” portion of proceeds “shall be considered as an amount realized from the sale or exchange of property other than a capital asset”. Section 741, by its own terms, does not apply to the “inventory items” portion addressed by section 751, to which section 741 yields. The singular “capital asset” treatment of section 741 is thus partially disaggregated by section 751.