United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 9, 2018 Decided June 11, 2019

No. 17-1268

GRECIAN MAGNESITE MINING, INDUSTRIAL & SHIPPING CO.,

SA,

APPELLEE

v.

COMMISSIONER OF INTERNAL REVENUE SERVICE,

APPELLANT

On Appeal from the Decision 

of the United States Tax Court

Deborah K. Snyder, Attorney, U.S. Department of Justice, 

argued the cause for appellant. With her on the briefs were 

Travis A. Greaves, Deputy Assistant Attorney General, and 

Gilbert S. Rothenberg and Richard Farber, Attorneys.

Michael J. Miller argued the cause for appellee. With him 

on the brief was Ellen Brody.

Before: ROGERS and SRINIVASAN, Circuit Judges, and 

GINSBURG, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge SRINIVASAN.
2

SRINIVASAN, Circuit Judge: Grecian Magnesite Mining, a 

foreign corporation, realized substantial income when it 

redeemed its interest in a U.S. partnership. At the time, Grecian 

operated entirely outside the United States, save for its interest 

in the partnership. The question we face is whether the

geographic origin of the redemption income—its “source”—is 

within or without the United States.

Under the Internal Revenue Code’s general rule, the 

income would be sourced according to the residence of the 

taxpayer. But that general rule is subject to an exception 

known as the U.S. office rule. Under that exception, income 

from any sale of personal property attributable to a 

nonresident’s U.S. office is sourced in the United States. See 

I.R.C. § 865(e)(2). 

The Tax Court held that the U.S. office rule is not satisfied 

in this case, reasoning that the proper focus in the 

circumstances is where the redemption itself occurred, as 

opposed to where the activities causing appreciation of the 

redeemed partnership interest occurred. The redemption itself, 

the Tax Court determined, should not be attributed to Grecian’s 

U.S. office, and the income therefore should be treated as

foreign source. We affirm the Tax Court’s decision.

I.

A.

Appellee Grecian Magnesite Mining (Grecian) is a 

privately held corporation organized under the laws of Greece. 

Grecian’s business involves mining, processing, and selling the 

mineral magnesite, and it conducts its business in Greece. 
3

In 2001, Grecian acquired a roughly 15% interest in 

Premier Chemicals (Premier). Premier is headquartered in the 

United States and is a Delaware limited liability company 

classified as a partnership for U.S. tax purposes. Like Grecian, 

Premier is in the business of mining and processing magnesite. 

Unlike Grecian, Premier extracts its ore exclusively from sites 

in the United States and conducts its operations entirely 

through fixed places of business in the United States. 

On July 21, 2008, Grecian entered into an agreement with 

Premier to redeem its interest in the partnership. The 

redemption resulted in a gain of over $6 million for Grecian, 

spread over 2008 and 2009. Grecian did not include any of the 

gain on either its 2008 or 2009 tax returns. The Internal 

Revenue Service (IRS) initiated an audit and determined, inter 

alia, that the entire capital gain from the redemption was 

subject to U.S. tax. 

Grecian brought suit in the Tax Court contesting the IRS’s 

determination. Before trial, Grecian conceded that 

approximately $2 million of the $6 million gain derived from 

U.S. real property interests and thus was subject to U.S. tax 

under a section of the Internal Revenue Code not at issue in this 

appeal. The present dispute concerns the remaining $4 million, 

which we will refer to as the “disputed gain” consistent with 

the practice of the Tax Court and the parties. 

B.

Under the Internal Revenue Code, a foreign corporation 

such as Grecian may be subject to tax in the United States on 

its “income which is effectively connected with the conduct of 

a trade or business within the United States,” or ECI (for 

“effectively connected income”). I.R.C. § 882; see also id.

§ 881. Not all U.S.-source income is ECI, and not all ECI is 

U.S.-source income. Yet the parties agree that, in this case, the 
4

disputed gain is within the class of income that is ECI (and 

therefore taxable) if and only if it is U.S.-source income. As a 

result, the sole question before us is the source of the disputed 

gain. 

No specific sourcing provision governed income derived 

from the disposition of a partnership interest at the time of the 

redemption. Instead, the general sourcing rules for the sale of 

personal property applied. See I.R.C. § 865. Under the general

rule, income realized on the sale of personal property is sourced 

wherever the taxpayer resides. See id. § 865(a). But that 

general rule is subject to several statutory exceptions, including 

one known as the U.S. office rule. See id. § 865(e)(2)(A).

Under the U.S. office rule, “if a nonresident maintains an 

office or other fixed place of business in the United States, 

income from any sale of personal property (including inventory 

property) attributable to such office or other fixed place of 

business shall be sourced in the United States.” Id. To 

determine whether those conditions are met, the “principles of 

section 864(c)(5) shall apply.” Id. § 865(e)(3). The

cross-referenced subsection, in turn, says in relevant part that 

income “shall not be considered as attributable to an office or 

other fixed place of business within the United States unless 

such office or fixed place of business is a material factor in the 

production of such income, gain, or loss and such office or 

fixed place of business regularly carries on activities of the type 

from which such income, gain, or loss is derived.” Id. 

§ 864(c)(5)(B). 

The Commissioner raised two principal arguments before 

the Tax Court. First, he contended that the disposition of a 

partnership interest should be treated like a sale of the partner’s 

distributive share of each of the partnership’s underlying 

assets. That argument drew on the theory of partnerships
5

known as the “aggregate theory,” under which partners are 

viewed as directly owning the partnership’s assets. Second, he 

argued in the alternative that the disputed gain was attributable 

to Grecian’s U.S. office (Premier) under the U.S. office rule—

and therefore was U.S.-source income—because all activities 

leading to the appreciation of the partnership share occurred in 

the United States through Premier’s successful operations. 

Grecian countered that the partnership interest should be 

viewed as a single, indivisible capital asset, building on a 

competing theory of partnerships known as the “entity theory.” 

Grecian further argued that the income was not attributable to 

Premier because the relevant attribution rules focus on the 

redemption transaction itself, not on the conduct generating the 

asset’s appreciation. The transaction itself, Grecian contended, 

was attributable to its offices in Greece rather than any U.S. 

office. 

The Tax Court sided with Grecian on both arguments 

advanced by the Commissioner. The court rejected the 

application of the aggregate theory, holding that Grecian’s 

interest in the partnership was a single, indivisible capital asset. 

The Court also rejected the Commissioner’s alternative 

argument, holding that the income from the redemption was not 

attributable to the U.S. office under the U.S. office rule. It 

adopted Grecian’s view that the attribution inquiry under the 

U.S. office rule focuses on the redemption transaction rather 

than the appreciation of the partnership’s value, and that 

Grecian’s U.S. office neither was a material factor in that 

transaction nor regularly carried on activities of that type. 

The Commissioner does not challenge the Tax Court’s 

first holding on appeal. Consequently, the only question is 

whether the disputed gain is attributable to a U.S. office of 

Grecian under the U.S. office rule. 
6

II.

“We review decisions of the Tax Court ‘in the same 

manner and to the same extent as decisions of the district courts 

in civil actions tried without a jury.’” Byers v. Comm’r, 740 

F.3d 668, 675 (D.C. Cir. 2014) (quoting I.R.C. § 7482(a)(1)). 

There are no disputed issues of fact in this appeal, and “we 

apply de novo review to the Tax Court’s determinations of 

law.” Byers, 740 F.3d at 675.

At the outset, we note that the issue in this case is of little 

prospective significance. After the Tax Court’s decision, 

Congress enacted legislation establishing that the aggregate 

theory (rather than the entity theory) governs the disposition of 

a partnership interest. See Tax Cuts and Jobs Act of 2017 

§ 13501(a)(1), I.R.C. § 864(c)(8). That legislation enshrines a

position the Commissioner (unsuccessfully) advanced before 

the Tax Court but did not appeal here. The amended provision

will control the treatment of analogous income in future 

disputes, but the parties agree that the provision applies only 

prospectively and thus does not govern this case.

With regard to the issue the Commissioner does appeal,

concerning the application of the U.S. office rule, we note that 

the Tax Court assumed without holding that Premier should be 

considered Grecian’s U.S. office, and Grecian has not 

challenged that assumption. We thus bypass any inquiry into

whether Grecian maintains a U.S. office or fixed place of 

business at all and proceed to consider whether, assuming 

Grecian does, the disputed gain is attributable to that office.

A.

1. The longstanding position of the Internal Revenue 

Service, set out in Revenue Ruling 91-32, is that “[i]ncome 

from the disposition of a [U.S.] partnership interest by [a] 
7

foreign partner will be attributable to the foreign partner’s fixed 

place of business in the United States.” Rev. Rul. 91-32, 

1991-1 C.B. 107, 108. We defer to the Revenue Ruling’s 

interpretation of the Revenue Code to the extent it has “the 

‘power to persuade.’” Del Commercial Props., Inc. v. Comm’r, 

251 F.3d 210, 214 (D.C. Cir. 2001) (quoting Christensen v. 

Harris Cty., 529 U.S. 576, 587 (2000)); see also Mellow 

Partners v. Comm’r, 890 F.3d 1070, 1077–79 (D.C. Cir. 2018). 

The Ruling’s persuasive force “depend[s] upon the 

thoroughness evident in its consideration, the validity of its 

reasoning, [and] its consistency with earlier and later 

pronouncements.” Skidmore v. Swift & Co., 323 U.S. 134, 140 

(1944); see also Davis v. United States, 495 U.S. 472, 484 

(1990) (“[W]e give an agency’s interpretations . . . considerable 

weight where they involve the contemporaneous construction 

of a statute and where they have been in long use.”). The 

Revenue Ruling, if accepted, would dispose of this case, as it 

specifically addresses the precise question before us.

While the Revenue Ruling has the benefit of longevity—it 

has been the IRS’s unchanged position for some thirty years—

little else militates in favor of deferring to it. The pertinent 

portion comprises a single unreasoned sentence in a Ruling that 

spans four pages of the Cumulative Bulletin. See 1991-1 C.B. 

at 108. That sentence cites the relevant statute, § 865(e)(3), but 

without any elaboration. And it also cites a Tax Court decision, 

Unger v. Comm’r, 58 T.C.M. (CCH) 1157, 1159 (1990), which

neither involved nor purported to opine on the attribution of 

income from the sale of personal property by a foreign partner. 

See Kimberly S. Blanchard, Rev. Rul. 91-32: Extrastatutory 

Attribution of Partnership Activities to Partners, 97 Tax Notes 

Today 173–69 (Sept. 8, 1997) (calling the citation to Unger 

“pointless” and the Revenue Ruling’s critical sentence “purely 

tautological”). We thus do not defer to the Ruling and proceed 

to consider the question afresh. 
8

2. The U.S. office rule provides: “if a nonresident 

maintains an office or other fixed place of business in the 

United States, income from any sale of personal property 

(including inventory property) attributable to such office or 

other fixed place of business shall be sourced in the United 

States.” I.R.C. § 865(e)(2)(A). The interpretive dispute hinges 

in large part on what conduct must be “attributable to such [i.e., 

the U.S.] office.” According to the Commissioner, it suffices 

that the activity that generated the appreciation in Premier’s 

value—namely, the successful operation of its magnesite 

mining business—is attributable to the U.S. office. Grecian 

responds that the transaction itself must be attributable to the 

U.S. office and that the redemption here is not. 

The parties each seek to support their respective positions 

with competing understandings of what is modified by the 

central statutory phrase “attributable to such office or other 

fixed place of business.” The Commissioner contends that the 

phrase modifies the noun “income,” whereas Grecian reads the

phrase to modify the noun “sale.” Grecian’s interpretation

would tend to support its view that it is the redemption 

transaction as the “sale,” rather than the appreciation of the 

interest in Premier, that must be “attributable to” Grecian’s

U.S. office for the income to be U.S.-source income.

We think Grecian has the better reading of the statute. 

Grecian invokes the “rule of the last antecedent,” under which 

“a limiting clause or phrase . . . should ordinarily be read as 

modifying only the noun or phrase that it immediately 

follows.” Barnhart v. Thomas, 540 U.S. 20, 26 (2003). 

Technically, Grecian’s position is an application not of the lastantecedent rule (which applies only to pronoun antecedents) 

but rather of the related nearest-reasonable-referent canon. See 

Antonin Scalia & Bryan A. Garner, Reading Law: The 

Interpretation of Legal Texts 152 (2012). Labels aside, the 
9

point is the same: ordinarily, and within reason, modifiers and 

qualifying phrases attach to the terms that are nearest.

Grecian’s interpretation of the statute, one might note,

does not in fact point to the nearest possible referent. That is

because “personal property,” not “income” nor “sale,” is the 

non-parenthetical term immediately preceding “attributable to 

such office or other fixed place of business.” Neither party, 

though, suggests that the latter phrase could modify “personal 

property,” and common sense would preclude such an

interpretation. “Sale” thus is the nearest reasonable referent.

To be sure, the nearest-reasonable-referent canon—like its 

cousin, the last-antecedent rule—“is not an absolute and can 

assuredly be overcome by other indicia of meaning.” Lockhart 

v. United States, 136 S. Ct. 958, 963 (2016) (quoting Barnhart, 

540 U.S. at 26). But here, other indicia of meaning all point in 

the same direction, fortifying the conclusion that the sale is the 

proper focal point of the attribution inquiry. 

Most tellingly, in setting out where to look for the relevant 

rules of attribution when applying the U.S. office rule, the 

statute again directs attention to the “sale”: “The principles of 

section 864(c)(5) shall apply in determining . . . whether a sale 

is attributable to such an office or other fixed place of 

business.” I.R.C. § 865(e)(3) (emphasis added). The title of 

the statutory section underscores the centrality of the sale, 

reading: “Special rules for sales through offices or fixed places 

of business.” Id. § 865(e) (emphasis added); see also id. 

§ 865(e)(3) (“Sales attributable to an office or other fixed place 

of business.”). And in establishing an exception to the U.S. 

office rule, the statute provides that the rule “shall not apply to 

any sale of inventory property which is sold for use . . . outside 

the United States if an office . . . in a foreign country materially 

participated in the sale.” Id. § 865(e)(2)(B) (emphasis added). 
10

If the exception turns on a foreign office’s participation in the 

“sale,” the rule presumably turns on a U.S. office’s 

participation in the sale. 

In all those ways, the statute frames the rule as applying to 

sales rather than income-generating activity. The statute’s 

emphasis on the transaction, rather than on the appreciation of 

the underlying asset, is manifest. 

Nothing in § 864(c)(5), the cross-referenced source of the 

attribution rules, points in a different direction. According to 

that provision, “income, gain, or loss shall not be considered as 

attributable to an office or other fixed place of business within 

the United States unless such office or fixed place of business 

is a material factor in the production of such income, gain, or 

loss and such office or fixed place of business regularly carries 

on activities of the type from which such income, gain, or loss 

is derived.” Id. § 865(c)(5)(B). The Commissioner claims that 

“the production” of the disputed gain includes the mining 

activities of Premier that led to the partnership’s change in 

value. In our view, though, both the provision’s interaction 

with the U.S. office rule and its context within § 864 weigh 

against the Commissioner’s reading.

As an initial matter, § 865(e)(3) incorporates by reference 

not the text of § 864(c)(5) but rather its “principles.” Id.

§ 865(e)(3). For that reason, we are disinclined to clinically 

parse § 864(c)(5) in search of any conceivable override of 

§ 865(e)’s focus on the sale transaction. The better approach is 

to read § 864(c)(5) at a higher level of generality, as supplying 

a two-pronged test: first, the U.S. office must be a “material 

factor” in the relevant activity, and second, the office must 

“regularly carr[y] on activities of [that] type.” Id. 

§ 864(c)(5)(B).
11

Even if we were inclined to dissect the provision’s text in 

the manner urged by the Commissioner, his construction still 

would not convince us. True, the word “production” is 

capacious enough to encompass value creation as well as sales. 

But it is capacious by design not because the provision compels 

considering every kind of “production” in any given case, but 

rather because, across cases, the provision applies to varied 

contexts in which the relevant forms of income “production”

can differ. By its terms, § 864(c)(5) governs the attribution of 

income from rents or royalties from intangible property; 

“dividends, interests, or amounts received for the provision of 

guarantees of indebtedness”; and certain sales of personal 

property. Id. § 864(c)(4)(B). The sense in which a taxpayer 

produces the income, gain, or loss differs across those contexts. 

The specific terms of § 865(e)(5), including their focus on the 

sale, thus carry considerably more weight than the umbrella 

term “production” in § 864(c)(5). 

The regulations interpreting § 864(c)(5) confirm that the 

provision does not mandate considering income production in 

each and every sense in any given case. The regulations 

provide that, in applying the material-factor test to “[r]ents, 

royalties, or gains on sales of intangible property,” “[a]n office 

or other fixed place of business in the United States shall not 

be considered to be a material factor in the realization of 

income, gain, or loss for purposes of this subdivision merely 

because the office or other fixed place of business . . . 

[d]evelops, creates, produces, or acquires and adds substantial 

value to, the property which is leased, licensed, or sold, or 

exchanged.” 26 C.F.R. § 1.864-6(b)(2)(i). By enabling the 

attribution inquiry to focus on the site of the transaction rather 

than the site of the value creation in the context of rents and 

royalties, the regulation generally supports our understanding 

that the provision it interprets—§ 864(c)(5)—does not 

countermand the U.S. office rule’s focus on the sale.
12

Finally, the U.S. office rule’s legislative history further

supports our interpretation. Under the preexisting regime, the 

default rule for sales of personal property was the so-called 

“title-passage rule.” That rule called for income from sales of 

personal property to be sourced where title to the property 

literally passed. See H.R. Rep. No. 99-426, at 359 (1985). That 

formalistic regime was vulnerable to manipulation, id. at 360, 

spurring Congress to replace the title-passage rule with 

§ 865(a), which generally sources income according to the 

residence of the taxpayer. 

In ordinary cases, a focus on the taxpayer’s residence

would be difficult if not impossible to manipulate. Yet the rule

left open a loophole in the special case in which a foreign 

resident maintained a U.S. office or fixed place of business. In 

that event, “some foreign corporations with U.S. branches” 

could “engage in significant business operations through a 

fixed place of business in the United States and avoid paying 

U.S. tax.” S. Rep. 99-313, at 330 (1985). Congress evidently 

responded with the U.S. office rule, sourcing income from sales 

occurring through domestic offices according to the “location 

of the economic activity” giving rise to the sale. H.R. Rep. 

No. 99-426 at 359. The House Committee Report explains the 

operation of the U.S. office rule in terms that support Grecian’s 

interpretation: “If the seller maintains a fixed place of business 

outside the seller’s country of residence which materially 

participates in a sale, however, the committee generally 

believes that the level of economic activity with respect to the 

sale that is associated with that place of business is high enough 

such that” the income should be sourced at that location. Id. at 

360–61 (emphasis added); see also id. (showing concern with 

“sales activities” and “selling activity”). 

The Commissioner submits that, if Congress sought to 

create a regime less susceptible to manipulation, it would have 
13

avoided a rule based on such formalisms as the locus of the 

sale. But Congress’s evident desire to enact a less formalistic 

regime does not necessarily mean it enacted the least 

formalistic regime. And the provisions at issue apply not only 

to the disposition of partnership interests but also to the sale of 

myriad other personal property. It is doubtful that Congress 

would have intended to source income according to the

innumerable forces that change the market value of most 

personal property. In that light, Congress’s choice to 

emphasize the sale struck an understandable balance between 

its dual aims of administrability and avoiding manipulation. 

Cf. id. at 360 (“[S]ource rules should operate clearly without 

the necessity for burdensome factual determinations, limit 

erosion of the U.S. tax base and . . . generally not treat as 

foreign income any income that foreign countries do not or 

should not tax.”). 

In sum, the U.S. office rule’s focus, as indicated by its text, 

structure, regulations, and legislative history, is directed to the 

transaction rather than the appreciation of the asset. 

B.

We now turn to the rule’s application in this case. The test 

comprises three prongs: first, whether Grecian has a U.S. office 

or fixed place of business; second, whether Grecian’s U.S. 

office was a “material factor” in the redemption transaction; 

and third, whether Grecian’s U.S. office “regularly carries on 

activities of the type from which such income, gain, or loss is 

derived.” I.R.C. § 864(c)(5). All three prongs must be satisfied 

for the income to be treated as U.S.-source income. 

As noted, Grecian does not dispute that Premier is its U.S. 

office, satisfying the first prong. Grecian contends that neither 

the second nor third prong is met. We agree with Grecian as to 
14

third prong and we therefore have no reason to consider the 

second one.

In assessing whether a U.S. office “regularly carries on”

an activity, both parties evidently understand the requirement 

(as do we) to incorporate some sense that the activity in 

question falls within the ambit of the office’s typical course of 

business. The question, then, is whether the redemption 

transaction was within the ordinary course of business for 

Premier, Grecian’s U.S. office. Grecian argues that Premier is 

in the magnesite-mining business, not the 

partnership-interest-redemption business. The Commissioner 

responds that partnerships regularly carry on activities like 

redemptions because partnerships are inherently engaged in the 

business of managing transactions with members.

We agree with Grecian’s approach. It is not 

Premier-as-partnership that matters. Instead, it is 

Premier-as-office-or-fixed-place-of-business—i.e., its 

headquarters, mines, and the other tangible, fixed places of 

business in the United States—that matters. The U.S. office 

rule speaks in terms of the concrete “office or fixed place of 

business” and that office’s or place’s “activities,” not about its 

corporate form. Under the Commissioner’s understanding, the 

prong would do little work. Just as managing transactions with 

partners inheres in the corporate form of a partnership, so too 

does managing a business’s property inhere in the operation of 

any business. Any sale of personal property thus could be said 

to be the type of activity in which an office regularly engages. 

We reject that understanding and instead opt for the 

commonsense notion that Premier’s underlying business 

activities should be the focus. Premier was engaged in the 

business of magnesite mining, extraction, and processing, not 

in the business of redemption. Because the third prong
15

therefore is unsatisfied, the disputed gain is unattributable to 

Grecian’s U.S. office.

* * * * *

For the foregoing reasons, we affirm the decision of the 

Tax Court. 

So ordered.