Remember that for U.S. estate taxation we are trying to identify exactly “where” something is–inside the United States (thus taxable) or outside the United States (thereby escaping estate taxation).

The view of the U.S. tax authorities is that a partnership interest will be U.S. situs property (subject to the U.S. estate tax on nonresident aliens) when the partnership is engaged in a U.S. trade or business.

The IRS says if death of the partner terminates the partnership, then the decedent’s pro rata share of partnership assets will be U.S. situs assets. If death does not terminate the partnership, then situs is where the partnership does business.

In summary, the taxpayer loses, no matter what:

If the partnership agreement says that the partnership terminates on the death of a partner, then the deceased nonresident is taxed on his or her pro-rata share of the underlying real estate will be subject to U.S. estate tax.

Example.

The nonresident is a 25% partner in a partnership that owns an office building in the United States. The partnership interest says that the partnership will terminate when one of the partners dies.

When the nonresident dies, he or she will be subject to estate tax just as if he or she owned a direct 25% interest in the office building.

If the partnership agreement says that the partnership continues after the death of a partner, then the deceased nonresident’s partnership interest is treated as located in the United States. Thus, it is subject to estate tax.

Example.

The nonresident is a 25% partner in a partnership that owns an office building in the United States. The partnership interest says that the partnership will continue in existence when one of the partners dies.

When the nonresident dies, he or she is treated as owning a asset–partnership interest located in the United States–that is subject to U.S. estate tax. The value of that partnership interest is calculated, and the nonresident’s heirs must pay estate on that partnership interest.