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of Internal Revenue Service Appellate.

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Ms.

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Snyder for the appellate, Mr. Miller for the appellate.

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Good morning.

[00:00:34] Speaker 04:
Good morning.

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May it please the court?

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When Grecian redeemed its interest in the United States partnership that conducted all of its operations in the United States, the resulting gain was United States source income and was therefore taxable in the United States.

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The tax court's contrary decision is erroneous and should be reversed.

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In fact, under the tax court's ruling, what we have is a situation

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to a foreign country was nevertheless held to be foreign source income.

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The Internal Revenue Code does not support that anomalous result.

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Instead, as we've explained in our briefs, the disputed gain in this case was subject to tax under the U.S.

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Office Rule of Section 865 because the gain was attributable to Grecian's U.S.

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Office.

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Now, Grecian concedes that it had a U.S.

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office, essentially premier, the partnership of which it was a member.

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Grecian is considered to be engaged in Premier's trade or business, and Premier's U.S.

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office is also attributed to Grecian.

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So the remaining question in this case, of course, is whether the disputed gain was attributable to that U.S.

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office.

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If the gain was attributable to that office, then it's U.S.

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source income subject to tax in the United States.

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viewed this case as involving the intersection of everything you're talking about and the law on partnership.

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What difference does that make here?

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Not a lot, because as you can see from the way the tax court did its analysis, even if it held that an entity approach is more appropriate, which it did, you still need to then go on and apply the income sourcing rules of the code.

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I think the commissioner's position below is that the aggregate approach applies.

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And if that's true, then the commissioner would win because all the assets were in the United States.

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But even if it weren't true, and it doesn't matter, because even if you apply the entity approach, you still need to then evaluate the sourcing of that partnership interest under the income sourcing rules of the code.

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which is why on appeal the commissioner has not renewed the arguments about the aggregate or the entity approach because either way the commissioner would prevail under the income sourcing rules of the code.

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Right, so the way it's teed up for us I think is that we assume that the entity approach applies but then because you haven't contested that but then you argue that you still win even on the entity approach because of the way the statute

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because the question under the statute is whether the US office was a material factor in the production of the disputed gain and whether the office regularly engaged in activities from which the disputed gain was derived.

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So that's under 864.

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So can I just, under the text we start with, I think, is 865E2A.

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Right.

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Under that, there's a little bit of a back and forth between your side and the other side on whether attributable to such office modifies income or sale or potentially personal property.

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There's competing accounts of what that phrase goes to.

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Now, suppose just for argument purposes, and I know you resist this as a premise of your brief, but suppose for argument purposes,

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I thought that attributable to such office goes to sale.

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If I thought that, then your position is what?

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We still live.

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That's what's interesting about this case and your observation is completely correct that we believe that attributable to goes to income and there are certain other clues in the statute that tell us that

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But the interesting thing here is that even if you accept the premise, which we don't, that what you're looking at is the sale, not the income, the commissioner still prevails for two reasons.

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First of all, a sale is not an extraordinary event.

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It can be part of the regular

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conducted activities of the partnership.

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Partnerships have to, they have members come, they have members go.

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It's not that unusual.

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But even more interestingly in this case is that, so say under the interpretation where attributable to modifies sale,

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So then the U.S.

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office would have to be involved in the sale.

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In this case, the U.S.

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office was involved in the sale.

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And, you know, we don't think you have to get to this part of the analysis, but if you're looking at it, Premier drafted the Redemption Agreement and prepared the Redemption Agreement in the United States.

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Any communications between the regions?

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Yes.

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So, can I just ask you this question?

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So then it sounds like

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If I thought that attributable to modify sale, then I get the argument that you still win.

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But that argument doesn't have anything to do with the appreciation of the mining operations.

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Well, right, and that's the correct analysis.

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So in other words, at least for the purpose of your argument, you buy into the notion that your first order argument is, look, really what's going on here is the value of the asset went way up because the activity that was underlying it became more valuable.

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And the tax code should account for that.

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That's kind of your first order submission.

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That's our argument.

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Right.

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But then on this even if prong, which is that if attributable to modify sale rather than income,

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Then you're no longer relying on the notion that we should be looking at the appreciation of the underlying activity.

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You're saying that even if we just, we're not looking at that anymore.

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If we're talking about the sale, we're talking about the transaction itself.

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And then your argument is, if we look at the transaction itself, which means we don't look at the appreciation of the underlying stuff,

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Well, then it's still tied to this office because Premier was involved on one side of the transaction, and if you had to assign the transaction to either the domestic office or a foreign office, he'd still assign it to the domestic office.

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But we're not talking about appreciation of the underlying stuff anymore.

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Right.

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We're not talking about appreciation of the underlying stuff for that fallback argument, but I would submit that, properly read, the focus is actually on the sourcing of the income.

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These are the income sourcing rules of the code.

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Which is to get back to your first order argument.

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Right.

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I just want to make sure I understand where you are.

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And I think when Congress put this rule into the code,

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It was trying to get away from the kind of analyses where you have to look at who signed what where.

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And instead was turning the focus of the inquiry to the predominant location of the economic activity that generated the income.

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So Grecian's argument is basically, well, we signed the deal in Greece.

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We had our internal discussions about the deal in Greece.

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But that's not what the statute looks at.

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When you look at the material factor

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in the activities tests, they're looking at the origin of the income, not the formalities of the sale.

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The question is whether premier is a material factor in the production of the income and whether it regularly carried on activities of the type from which the income was derived.

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Derivation, looking at the origin of the income.

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The statute doesn't say you look at where the seller signed the deal.

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That's under 864.

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That's under 864.

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So under 865 though, 865E2, no, I'm sorry, 865E3.

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Yes.

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Which is how we look through to 864.

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Right, it says apply the principles of 864.

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Exactly.

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And so that's what tells us to apply the material factor test and the activities test.

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Right, and in that provision, E3, it speaks in terms of

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The principles of 864 shall apply in determining whether a taxpayer has an office and whether a sale is attributable to such an office.

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So it seems like 865E3, by not using the words income and focusing on the word sale, suggests that 865E2A is talking about a sale.

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I don't think so.

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Partly because 865 itself is an income sourcing rule and 865A sits out the general rule and it says income from the sale of personal property and talks about how that income should be sourced.

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And then 865E, as you mentioned, refers us to the material factor and activity test in 864.

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And then when you look at 864C5B, which is where those tests are found, it says, income, gain, or loss shall not be considered as attributable to a U.S.

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office unless it's a material factor and regularly carries on activities.

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So the actual test that we are applying

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talks about income gain or loss and where that is sourced.

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So I think the proper focus of the analysis is that this is a U.S.

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business.

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Premier was a partner in the U.S.

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business, the business was attributed to it, and all of Premier's activities were conducted in the United States.

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So the gain that Grecian realized when it redeemed its interest in Premier was just its pro rata share of the appreciation in Premier's business during the years that Grecian held an interest in it.

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Those two things are inseparable.

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So, and I mean, Premier, as we know, it had no foreign activities.

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It was headquartered in Pennsylvania.

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It had mines and other offices in Nevada, Florida, Pennsylvania.

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There were no foreign activities from which you could decide that this was foreign source income.

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Yeah, I think if the task is to look to see why the asset appreciated in value, then you've got

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pretty compelling case that everything that happened happened in the U.S.

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That just begs the question of whether that's the right place to look.

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and whether you should be looking at the activity that caused the asset to appreciate in value, or should you just be looking in isolation at the sale transaction?

[00:11:18] Speaker 04:
You should be looking at the activities that caused the asset to appreciate in value, because that's what Congress was intending to do.

[00:11:25] Speaker 01:
Well, the Congress was addressing this manipulable rule about the place of a closing or something, right?

[00:11:31] Speaker 04:
Right, under the title passage rule that had existed previously, you had something that was more easily manipulable because sourcing could be based on formalities as Grecian is basically suggesting you do here.

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So I think sourcing was based on where title passed from the

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seller to the buyer.

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And Congress expressed the concern that that kind of regime was too susceptible of manipulation.

[00:11:58] Speaker 01:
And I think... And it would be a focused response to that to say, no, let it depend upon the attribution rules for the sale.

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Well, what Congress said in the legislative history is that source rules should reflect the location of the economic activity generating the income.

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And we're not disputing that there are references to sales, because we're talking about income from the sale of personal property.

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But Congress said the location of the economic activity generating the income, because anything else is too easy to manipulate.

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I'd like to finish by saying maybe it's my rebuttal time.

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I guess an illustration of why that doesn't work is because take the facts of this case and assume that Grecian, instead of signing the deal in Greece, let's say it signed the deal when it came to the U.S.

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to attend one of Premier's board meetings.

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It would have to be U.S.

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source then, because their argument's based on where the seller signed the deal.

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If the seller signed the deal in the United States, it's U.S.

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source income.

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That's not how the income sourcing rules are supposed to work.

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So I have one quick question here.

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Yes.

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I think I know your general argument, but to the extent Greene is going to speak about the Treasury regulation.

[00:13:23] Speaker 00:
Yes.

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And the language there that talks about, you know,

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Right.

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Grecian's reliance on that regulation and the tax court's reliance on that regulation were essentially an over-extrapolation from a subsection of a regulation that is just not helpful in this context.

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And it's not helpful for two reasons.

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First, that regulation applies to certain income from sources without the

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United States, it presumes that we have foreign source income, and it asks whether that foreign source income has enough connection to the United States to bring it in, and the demon is being effectively connected to U.S.

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trade or business.

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The difference here is that there are no foreign source activities from which this income could be foreign source income.

[00:14:24] Speaker 04:
So, you know, the examples in the regulation, you might have situations where you're balancing and you're line drawing, you have licenses for patents outside the United States, but here it's actually a more straightforward case.

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You don't need the balancing and line drawing because this was all U.S.

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activities.

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And then the second reason the regulation is not really on point is that the subsection of the regulation that talks about value creation not necessarily being relevant, that subsection is specifically addressed to foreign source, rents, royalties, certain other properties that are not at issue here.

[00:15:02] Speaker 04:
So the regulation is not on point for both of those two reasons.

[00:15:07] Speaker 01:
What is your answer to the taxpayer's point about the last antecedent rule?

[00:15:17] Speaker 01:
The last antecedent being the sale not the income.

[00:15:21] Speaker 04:
Well, the last antecedent is actually personal property.

[00:15:24] Speaker 04:
That's why we're thinking that the last antecedent principle just doesn't really help the analysis in this case.

[00:15:30] Speaker 04:
And I think we touched on this in our brief, that what the statute says is that income from any sale of personal property attributed to such office.

[00:15:39] Speaker 04:
So the last non-parenthetical words before attributable to are actually personal property.

[00:15:45] Speaker 04:
But I think the better way to read the statute is that the phrase- Well, no, wait a minute.

[00:15:52] Speaker 01:
Personal property is, it can't be the operative word here.

[00:15:55] Speaker 01:
It's either income from personal property or sale of personal property.

[00:15:59] Speaker 04:
Right.

[00:16:00] Speaker 01:
Okay.

[00:16:01] Speaker 01:
So the latter antecedent is sale of personal property.

[00:16:06] Speaker 01:
Personal property is a constant.

[00:16:08] Speaker 01:
The variables are income or sale.

[00:16:10] Speaker 04:
Right, and income is the word that begins that phrase.

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It's talking about income from the sale of personal property, which is consistent with the fact that 865 itself provides source rules for the income from the sale of personal property.

[00:16:27] Speaker 04:
We're sourcing income under the income sourcing rules to determine whether it's United States source or foreign source income.

[00:16:34] Speaker 01:
Well, actually, going back to the purpose of the amendment, it was directed at the sale, not at the income.

[00:16:40] Speaker 04:
It was actually directed at income, at attaching U.S.

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source designation to economic activities that were United States activities.

[00:16:54] Speaker 01:
The other point is, the question is this, and I think the tax judge raised this briefly,

[00:17:01] Speaker 01:
What would be your position if the gain here were attributable to an increase in, say, the market value of Magnesite on the day after the purchase of the partnership interest, causing a sale on the second day after the purchase?

[00:17:18] Speaker 04:
Right.

[00:17:18] Speaker 04:
Well, that wouldn't help Grecian for two reasons.

[00:17:21] Speaker 04:
First of all, it's speculative.

[00:17:23] Speaker 04:
The evidence in the record, there's a trial testimony that you cited in our brief, was that Grecian, or that Premier, excuse me, the U.S.

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office, expanded its U.S.

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operations.

[00:17:32] Speaker 01:
No, there's seven years involved here.

[00:17:33] Speaker 01:
I'm asking you about the principle that you're using and asking you how it was applied to this one-day rise simply in the market value of the natural resource.

[00:17:45] Speaker 04:
Premier would have

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handled any appreciation or depreciation in the resource from its U.S.

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office.

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Any factors relating to the market affected its U.S.

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business, and its business was all in the United States.

[00:18:00] Speaker 01:
So it's not economic activities of the Premier then?

[00:18:03] Speaker 04:
Well, it is.

[00:18:04] Speaker 01:
You're really down to the clerical point, right?

[00:18:07] Speaker 01:
The Premier would be... Premier's making the bookkeeping entry on this movement of the shares, or partnership entry.

[00:18:13] Speaker 04:
Well, any activities that Premier engaged in with respect to the Magnesite market were part of its U.S.

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business.

[00:18:20] Speaker 01:
Well, it doesn't engage in any activities.

[00:18:22] Speaker 01:
It owns these Magnesite resources.

[00:18:25] Speaker 01:
The Grecian company becomes the resource value goes up and they sell their partnership.

[00:18:31] Speaker 01:
Premier doesn't do anything.

[00:18:32] Speaker 04:
It's still a U.S.

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business.

[00:18:34] Speaker 01:
The increase... What happens to activities?

[00:18:38] Speaker 01:
The word is activities.

[00:18:39] Speaker 04:
Well, Premier regularly conducted magnetite mining and processing activities in the United States.

[00:18:46] Speaker 01:
Over a period of seven years, but not in my hypothetical.

[00:18:50] Speaker 01:
All they did was stand by for a day and read the value from a change in the market.

[00:18:55] Speaker 04:
It was still a US business.

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A partnership interest is really inseparable from the partnership itself.

[00:19:01] Speaker 04:
So if the value of the partnership went up for that reason, it's still a US partnership.

[00:19:08] Speaker 04:
You know, there's no foreign activities that could have made this foreign source income.

[00:19:16] Speaker 01:
Except for the general rule of 865.

[00:19:19] Speaker 04:
Right, but if all you're looking at is where the seller signed the redemption agreement, which is Grecian's argument.

[00:19:27] Speaker 01:
Congress got away from that, right?

[00:19:29] Speaker 04:
Right.

[00:19:30] Speaker 04:
But if that's the argument, then basically what they're arguing for is the default rule.

[00:19:36] Speaker 04:
They're arguing for sourcing based on the residence of the seller, because they were in Greece.

[00:19:40] Speaker 04:
And if that were true, then this office rule would serve no purpose in the code.

[00:19:45] Speaker 04:
So that's another reason that can't come up.

[00:19:48] Speaker 02:
Okay, go ahead.

[00:19:49] Speaker 02:
I mean, it can still serve a purpose in other contexts.

[00:19:51] Speaker 02:
It's just in this particular kind of stylized context.

[00:19:54] Speaker 04:
In the partnership context.

[00:19:56] Speaker 02:
I don't know, it's just the partnership context, at least the partnership context when you're dealing with Redemptions.

[00:20:02] Speaker 02:
Right.

[00:20:03] Speaker 02:
So on that, can I just give one question?

[00:20:05] Speaker 02:
So as I understand it, going forward, this is no longer an issue.

[00:20:10] Speaker 02:
And so we're talking about an issue for the IRS looking back.

[00:20:17] Speaker 02:
Obviously, it affects this case.

[00:20:18] Speaker 02:
How big of an issue is it looking backwards?

[00:20:21] Speaker 04:
There are three related cases that are pending in the tax court that I believe are being held in abeyance pending the outcome of this case.

[00:20:30] Speaker 04:
I cited those on the first page of the statement of related cases in our brief.

[00:20:35] Speaker 04:
And there could potentially be administrative refund claims that could be filed if the tax court's decision were affirmed, which we don't believe to be true.

[00:20:46] Speaker 02:
Because taxpayers paid on the theory that your understanding was correct.

[00:20:51] Speaker 04:
Right.

[00:20:51] Speaker 04:
So, and I don't know what the potential impact is, but those could exist.

[00:20:58] Speaker 04:
So, yes, it has impact for this case, for some other pending cases, potentially other cases, but Congress has fixed the issue going forward.

[00:21:06] Speaker 01:
Well, what does it tell us then about the issue before, or the state of the law before they make this change?

[00:21:13] Speaker 01:
If they felt, you know, obliged to or advised by the Commissioner perhaps to make this change?

[00:21:17] Speaker 04:
No, because Congress, in the new tax law that was passed at the end of 2017, known as the Tax Cuts and Jobs Act, it basically says in the legislative history that the IRS's long-standing position was

[00:21:33] Speaker 04:
And so it then changed the law to codify what

[00:21:55] Speaker 04:
The 2017 decision was the one in this case.

[00:21:57] Speaker 04:
So Congress believed that something had gone awry.

[00:22:00] Speaker 01:
Well, that's – I mean, it's peculiar then not to just rely on the appellate process, isn't it?

[00:22:04] Speaker 01:
And to decide that they'll change the law just in case the appellate court gets it wrong.

[00:22:10] Speaker 04:
I suppose, or maybe if we didn't appeal, I don't – I guess that was December.

[00:22:15] Speaker 04:
Or – right.

[00:22:16] Speaker 02:
So if Congress doesn't trust the D.C.

[00:22:18] Speaker 02:
Circuit, does that –

[00:22:19] Speaker 04:
Or, well, maybe Congress needed a revenue raiser in that tax law.

[00:22:24] Speaker 04:
I really, I don't know.

[00:22:25] Speaker 03:
Let's not get into the politics of it.

[00:22:27] Speaker 03:
Right, exactly.

[00:22:28] Speaker 03:
All right.

[00:22:29] Speaker 03:
Let's hear from Grecian.

[00:22:31] Speaker 03:
Thank you.

[00:22:31] Speaker 03:
Thank you.

[00:22:36] Speaker 05:
Good morning.

[00:22:37] Speaker 05:
Good morning, Your Honors.

[00:22:38] Speaker 05:
May it please the court, Michael Miller for Grecian.

[00:22:41] Speaker 05:
I think I'd like to start by saying with respect to the tax law change in 2017, I think Congress wasn't concerned that you'd get it wrong.

[00:22:50] Speaker 05:
I think Congress was concerned that you'd get it right, and that's why they needed the change in the law.

[00:22:56] Speaker 05:
I'd also like to, after that, address Council's argument that the legislative history to Section 865

[00:23:04] Speaker 05:
tells you that Congress was trying to accomplish something more than what we think 865 and in particular 865E means.

[00:23:22] Speaker 02:
your client got a gain because the asset appreciated in value.

[00:23:27] Speaker 02:
And then the upshot of your argument is, okay, there was a gain, but we shouldn't have to pay tax on it in the U.S.

[00:23:32] Speaker 02:
And was there tax paid on it in Greece?

[00:23:34] Speaker 02:
There was.

[00:23:36] Speaker 02:
And so it was just treated as – the disputed amount of income was just treated as income for purposes of Greece and tax – Greece tax rules.

[00:23:46] Speaker 02:
And I don't know if it's capital gains tax or whatever.

[00:23:49] Speaker 05:
I don't know any details beyond the fact that they pay tax increase on the game.

[00:23:53] Speaker 03:
So you don't know anything about credits?

[00:23:56] Speaker 05:
I honestly don't know what they do or don't know.

[00:23:59] Speaker 05:
I apologize for my inadequacy on Greek law.

[00:24:03] Speaker 05:
Okay.

[00:24:04] Speaker 05:
So the opposing council argues that 865E couldn't possibly have been intended to mean as little as we think it means.

[00:24:12] Speaker 05:
And they cite the legislative history where Congress expressed a desire to ensure

[00:24:19] Speaker 05:
that the sourcing rules tax the place where the economic gain occurs.

[00:24:24] Speaker 05:
But with respect, that's a quotation of the legislative history that's rather out of context because if you look at other passages from the very same legislative history,

[00:24:34] Speaker 05:
you get a more clear idea that Congress had a very specific concern.

[00:24:38] Speaker 05:
They were not looking to have a broad look for the economic activity and then tax it rule.

[00:24:44] Speaker 05:
They were concerned with transactions where foreign taxpayers had sales offices in the United States.

[00:24:50] Speaker 05:
They would use these offices to do all the activities related to sales and then take advantage of something called the title passage rule to pass title to the goods outside the US.

[00:25:02] Speaker 05:
So under the old law,

[00:25:03] Speaker 05:
pre-1986 prior to getting Section 865.

[00:25:08] Speaker 05:
There was the abuse, if you will, of using a U.S.

[00:25:12] Speaker 05:
sales office by passing a title outside the U.S.

[00:25:14] Speaker 05:
to avoid U.S.

[00:25:15] Speaker 05:
tax on the game.

[00:25:17] Speaker 03:
Why isn't that what happened here?

[00:25:19] Speaker 05:
Because Grecian did not use a U.S.

[00:25:22] Speaker 05:
sales office.

[00:25:23] Speaker 03:
I understand that... No, no, no, but I mean the whole point Council was making.

[00:25:27] Speaker 03:
Suppose the Redemption Agreement had been signed in the U.S.?

[00:25:31] Speaker ?:
?

[00:25:31] Speaker 05:
If it had been signed in the U.S., then the material factor requirement would have been met.

[00:25:36] Speaker 03:
There would still be the question of the ordinary course requirement.

[00:25:55] Speaker 03:
But all I want to be clear about is Congress was concerned about manipulation of where a technical action occurs.

[00:26:08] Speaker 05:
Would you agree with that?

[00:26:11] Speaker 05:
They were concerned with specifically the technical action of where title passed.

[00:26:17] Speaker 05:
They were not concerned with the technical action of where one chose to locate the sales activities.

[00:26:23] Speaker 05:
I understand that maybe that was too narrow a focus, and of course we had a change in the tax law, at least in the context of sales of partnership interests at the end of last year, which is what happens if Congress

[00:26:35] Speaker 05:
feels they haven't gotten it right, they go back to the drawing board they try again.

[00:26:39] Speaker 03:
So you see no analogy between the manipulation under the passage of title and signing of a document

[00:26:49] Speaker 05:
I can see the broad tax policy analogy of saying that perhaps certain limited and discrete events shouldn't be that sufficient, and maybe the government's preferred value creation approaches better policy.

[00:27:06] Speaker 03:
No, this is just a question I couldn't in my own mind get clear.

[00:27:09] Speaker 03:
If I own something and I decide to sell it, and it is a U.S.

[00:27:15] Speaker 03:
investment, but I have my sale,

[00:27:20] Speaker 03:
I don't have to pay the U.S.

[00:27:25] Speaker 03:
tax.

[00:27:26] Speaker 03:
So now, in your case, the case before us, the decision

[00:27:45] Speaker 05:
I understand the concern with allowing taxpayers to manipulate the source of income by choosing where to locate certain activities.

[00:27:57] Speaker 05:
My only answer is that section 865 was very specifically designed to look at sales activities, and the legislative history confirms that.

[00:28:08] Speaker 03:
No, but that's the statutory language.

[00:28:09] Speaker 03:
It talks about any sale.

[00:28:11] Speaker ?:
Yes.

[00:28:12] Speaker 05:
Any sale, and it's clear under the statute, Your Honor, that, again, there's the less clear language of 865E2A and the fun discussions for law students about the rule of the last antecedent, which we think clearly points to the sale and not to the gain, but one doesn't have to raise the level of difficulty so high.

[00:28:35] Speaker 05:
One can take the easy road and look at section 865E3

[00:28:39] Speaker 05:
which tells us that we apply certain of the rules of 864, and we do so for two purposes.

[00:28:45] Speaker 05:
The first one has to do with whether or not there's a U.S.

[00:28:47] Speaker 05:
office, and the second one has to do with whether or not the sale is attributable.

[00:28:53] Speaker 05:
And I think it would be rather difficult even for the best lawyers to try to really find an ambiguity in that language in E3, which refers to whether the sale is attributable.

[00:29:05] Speaker 02:
If the parties are engaged in discussions about the redemption, and suppose they say, okay, you're located in – the Grecian says, okay, you're located in Pennsylvania, I think, and we're located in Greece.

[00:29:22] Speaker 02:
It'd really be helpful to meet face-to-face.

[00:29:25] Speaker 02:
Let's pick somewhere in between.

[00:29:26] Speaker 02:
And then say, okay, it's easy for me to go to New York.

[00:29:29] Speaker 02:
Well, maybe it's easy for you to go to London.

[00:29:32] Speaker 02:
Is the choice between meeting in London and New York to finalize the sale determinative of whether it's attributable to the U.S.

[00:29:43] Speaker 02:
for U.S.

[00:29:43] Speaker 02:
tax corporate or outside the U.S.?

[00:29:45] Speaker 05:
?

[00:29:45] Speaker 05:
Remind the court that there are two components to the test.

[00:29:49] Speaker 05:
One is the material factor test, which by the way, when you look at the version and the regulations, which of course we would contend the commissioners stuck with, as opposed to the little bit more vague language in the code, that language focuses on realization.

[00:30:03] Speaker 05:
And I said, yes, that one which talks about focuses on where the activities related to the transaction pursuant to which the gain is recognized, that's something that people can manipulate.

[00:30:14] Speaker 05:
You can decide whether or not to conduct your sales through a US office if you have one or elsewhere.

[00:30:21] Speaker 05:
That's simply what the law provides.

[00:30:23] Speaker 05:
Beyond that, even if Grecian had chose not necessarily as the best tax planning to come to Pennsylvania,

[00:30:30] Speaker 05:
you know, for extended negotiations and a big signing ceremony.

[00:30:34] Speaker 05:
There's the ordinary course requirement, which nevertheless we would argue that because Grecian was engaged through Premier in the business of mining, processing, and selling Magnesite, that an ordinary transaction and the conflict of that business isn't the sale of the partnership interest.

[00:30:50] Speaker 05:
But that's a separate requirement.

[00:30:52] Speaker 05:
But yes, there's a certain degree.

[00:30:54] Speaker 02:
Why isn't it just kind of, it's always possible with a partnership that a partnership interest can be sold.

[00:31:01] Speaker 02:
That's just part, it's part of engaging in an economic enterprise of any kind.

[00:31:05] Speaker 05:
It's just part of the enterprise that... Sure, I don't know that it's an ordinary course in terms of the conduct of the business, which again, the business is the underlying business conducted by Premier as opposed to, well, the disposition of the partnership interest is certainly something that everyone knows could happen at some point.

[00:31:24] Speaker 05:
I would contend that's not part of the conduct of the business itself, much less an ordinary course transaction.

[00:31:32] Speaker 05:
But, of course, you never need to get there once it's understood that what Section 865 is focusing on are sales that are attributable to a U.S.

[00:31:41] Speaker 05:
office.

[00:31:41] Speaker 02:
Why, I thought that if this, I thought you do need to get there, even if it's focused on sales.

[00:31:45] Speaker 05:
The government needs to get there because they need for both the material factor requirement and the ordinary course requirement to be satisfied.

[00:31:53] Speaker ?:
Right.

[00:31:54] Speaker 02:
So you still need to go to 864, even if you win the day on whether it's attributable to... Yes, absolutely.

[00:32:02] Speaker 05:
And perhaps that's a good segue to one point that I wanted to make, which is the government is very emphatic that the 864 rules deal with foreign source income, which with the appropriate U.S.

[00:32:15] Speaker 05:
connection could nevertheless be effectively connected, whereas Section 865E is a sourcing rule.

[00:32:22] Speaker 05:
rule that determines whether or not gain is U.S.

[00:32:25] Speaker 05:
source or foreign source in the first instance.

[00:32:27] Speaker 05:
The government, I think, takes that as sort of a license to not have to apply the 864 rules, including the example, which seems very, very clear.

[00:32:37] Speaker 05:
The example in the 864 regulations about being disinterested in value creation

[00:32:43] Speaker 05:
The example involves a foreign corporation that developed, or purchased, but let's assume developed, patents in the U.S.

[00:32:51] Speaker 05:
Under the government's view, all of the value would have been created within the U.S., and yet because the licensing transactions took place outside the U.S.,

[00:32:59] Speaker 05:
The example concludes that the material factor requirement isn't met.

[00:33:04] Speaker 05:
One would have expected that if value creation were so important to the government, at least in the context of 864, that the example would have come out the other way.

[00:33:13] Speaker 05:
But the example did not care that the patents were developed in the U.S.

[00:33:18] Speaker 05:
The example cared that the licensing transactions took place outside the U.S.

[00:33:25] Speaker 05:
Let me just add that section 865E3 tells us that we apply the principles of section 864.

[00:33:31] Speaker 05:
So 864C5 in particular.

[00:33:36] Speaker 05:
So while the government argues that we shouldn't pay so much attention to all of these detailed and taxpayer friendly rules in section 864, in particular the 864 regulations,

[00:33:48] Speaker 05:
What the government really wants is to apply different principles, but 865E3 tells us to apply the same principles that appear in 864.

[00:33:55] Speaker 03:
So Congress wrote a statute that said X, and then it said, but don't apply X. I mean, that's sort of odd.

[00:34:07] Speaker 05:
Well, I mean, I guess from our perspective, the 864 rules are very clear about focusing on the transaction pursuant to which the gain is realized, and the example in particular.

[00:34:15] Speaker 03:
So the whole effort to...

[00:34:19] Speaker 03:
focus on income sourcing.

[00:34:25] Speaker 05:
What was a useless act by Congress?

[00:34:29] Speaker 05:
I know the government has emphasized repeatedly that 865 is an income sourcing rule.

[00:34:35] Speaker 05:
So why do we focus on the sale?

[00:34:37] Speaker 05:
I don't know why there's any inconsistency there.

[00:34:40] Speaker 05:
Congress chose to craft an income sourcing rule that looks to whether or not the sale is attributable.

[00:34:49] Speaker 05:
If Congress made a mistake, then they can fix it.

[00:34:51] Speaker 05:
And perhaps they did that last year.

[00:34:54] Speaker 05:
But it's very difficult to read H65, I think, particularly in light of the more clear language in E3, which tells you, consult these other rules to determine if the sale is attributable to a U.S.

[00:35:07] Speaker 05:
office.

[00:35:08] Speaker 05:
The government has never explained, and I think they'll find it difficult to explain, why on earth Congress would have written those words if they didn't mean for the sale to have to be attributable to a U.S.

[00:35:19] Speaker 05:
office.

[00:35:20] Speaker 02:
The upshot of your position – I'm not saying this necessarily means you're wrong, but as I understand it, the upshot of your position is that with partnership redemptions, it doesn't matter.

[00:35:29] Speaker 02:
There's never going to be a case where a foreign entity that owns a partnership interest in a U.S.

[00:35:36] Speaker 02:
company will have a sale attributable to the U.S.

[00:35:40] Speaker 02:
office.

[00:35:40] Speaker 05:
Okay.

[00:35:41] Speaker 05:
I would say that's not necessarily true.

[00:35:43] Speaker 05:
One group of taxpayers that was very interested in this case, and they're not so interested since the law changed, but were funds, you know, investment funds that have offices in New York and Boston, and they own interests in many, many different partnerships, and they, you know, sell or redeem those interests from a U.S.

[00:36:03] Speaker 05:
office.

[00:36:04] Speaker 05:
Those funds with foreign partners, we're trying to figure out how much value they can get out of the Grecian case, given that we can point to the fact that Grecian's activities related to the sale occur outside the U.S., the activities of these funds occur within the U.S.

[00:36:23] Speaker 02:
But I thought you were placing some emphasis on the regularly carries on activities of the type.

[00:36:29] Speaker 05:
There's that as well.

[00:36:30] Speaker 05:
For such a fund, and by the way, the regularly carries on activities languages from the code, and while I don't dismiss the code, the formulation and the regulations is different, which talks about the gain being realized in the ordinary course.

[00:36:43] Speaker 05:
And the government, I think, is stuck with their regulations until Treasury changes it.

[00:36:46] Speaker 05:
I realize they may like the language of the code better.

[00:36:50] Speaker 05:
So depending upon the particular fund, they may have a weaker or perhaps an untenable argument as to whether or not they buy and sell partnership interests in the ordinary course of their business conducted through the U.S.

[00:37:03] Speaker 05:
office.

[00:37:04] Speaker 05:
That's a very different set of factual circumstances from Grecian's.

[00:37:08] Speaker 02:
So it's a company whose business is actually transacting these shares.

[00:37:12] Speaker 02:
as opposed to a company whose business is the underlying activity?

[00:37:16] Speaker 05:
Arguably, or they may have both.

[00:37:17] Speaker 05:
They may also have a business as a fund of dealing in shares or trading in shares, whereas Grecian didn't have any such business either directly or through Premier or otherwise.

[00:37:27] Speaker 01:
So these would be, for instance, master limited partnerships and pipelines and so on?

[00:37:33] Speaker 05:
I think that's correct.

[00:37:34] Speaker 05:
They're certainly partnerships that are funds.

[00:37:36] Speaker 05:
I confess I've never known exactly what an MLP is.

[00:37:43] Speaker 05:
Thank you.

[00:37:50] Speaker 04:
Just to respond to that last point, I think what Grecian's Council is suggesting is that the U.S.

[00:38:00] Speaker 04:
Office Rule could have an application if there were an entity that was basically in the business of buying and selling.

[00:38:07] Speaker 04:
But if that's what Congress meant when it wrote the U.S.

[00:38:11] Speaker 04:
Office Rule, there would have been a much easier way to write that rule.

[00:38:16] Speaker 04:
You know, or a much easier way to write 864 also, it could have said that income from a sale of personal property is attributable to a U.S.

[00:38:26] Speaker 04:
office if the U.S.

[00:38:27] Speaker 04:
office materially participated in the sale.

[00:38:30] Speaker 04:
But that's not what it said.

[00:38:31] Speaker 04:
It said that the U.S.

[00:38:36] Speaker 04:
office needs to be a material factor in the production of the income gain or loss, and that it regularly carry on activities of the type from which the income gain or loss is derived.

[00:38:49] Speaker 04:
So it did not circumscribe the statute in the way that Grecian's counsel suggests.

[00:38:55] Speaker 04:
I would also respond to the discussion regarding the examples under the 864 regulation.

[00:39:02] Speaker 04:
I think that when you, and of course our premise is that it's off point because this is a regulation about foreign source income and only a certain type of foreign source income at that.

[00:39:14] Speaker 04:
But when you look at the regulations, you see that there, the examples, there's substantial activity outside the United States.

[00:39:22] Speaker 04:
The first example, licenses for use of

[00:39:24] Speaker 04:
patents outside of the United States, negotiated by offices outside the United States, services performed by employees outside the United States.

[00:39:33] Speaker 04:
And the second one pertains to the distribution of films solely outside the United States, where foreign employees negotiated the licenses and provided services.

[00:39:43] Speaker 01:
So I think... Did you deal with the patent licensing example?

[00:39:46] Speaker 04:
Right, that was the first example.

[00:39:48] Speaker 04:
Licenses for patents that are used outside the United States, negotiated outside of the United States, and there are services performed by employees outside the United States.

[00:39:59] Speaker 04:
And so the question is, there's a U.S.

[00:40:01] Speaker 04:
business office, and where do you draw the line?

[00:40:03] Speaker 04:
How do you do the balancing?

[00:40:05] Speaker 04:
In this case, it's not necessary to do that kind of line drawing and balancing.

[00:40:10] Speaker 04:
because all of Premier's activities were located in the United States.

[00:40:16] Speaker 04:
Premier was considered to have conducted those activities.

[00:40:19] Speaker 04:
It was considered to have maintained the U.S.

[00:40:21] Speaker 04:
office.

[00:40:22] Speaker 04:
So the gain in this case is U.S.

[00:40:25] Speaker 04:
source income taxable in the United States.

[00:40:28] Speaker 04:
Does the court have any further questions?