YA Global, IRS to Answer More Questions at Special Conference

YA GLOBAL INVESTMENTS, LP F.K.A.
CORNELL CAPITAL PARTNERS, LP, ET AL,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

United States Tax Court
Washington, DC 20217

ORDER

In these cases, we review notices of final partnership administrative adjustment (FPAAs) in which respondent adjusted various partnership items reported by YA Global Investments, LP (YA Global, or the partnership) for the taxable years ended December 31, 2006, 2007, 2008, and 2009.¹ The FPAAs reflect respondent's determination that the partnership was engaged in a U.S. trade or business during those years and that, consequently, it was liable for withholding tax under section 1446 on the portion of the taxable income effectively connected with that trade or business that was allocated to foreign partners.² The partnership's tax matters partners timely filed petitions that assigned error to the FPAAs' determinations. We tried the cases during October 2020, and the parties have submitted posttrial briefs. The issues addressed at trial remain under consideration. Petitioners contend, among other things, that respondent, in determining the partnership's withholding tax liability, did not give appropriate effect to deductions available to YA Offshore Global Investments, Ltd. (YA Offshore), one of the partnership's foreign partners. Our consideration of petitioners' arguments has left us with questions that warrant discussion. We have already scheduled a remote Special Session on August 31, 2022, to discuss questions concerning another issue in the case. If time permits, we would like to consider at the August 31st Special Session the questions listed in this Order. Otherwise, we will make plans to address our latest questions at another time, either in the same or a different format. Regardless, we ask the parties' counsel to be prepared to address, in addition to the questions listed in our Order of August 10, 2022, the following questions regarding the implications on YA Global's liability for section 1446 withholding tax of deductions available to YA Offshore beyond its distributive share of the partnership's deductions:

1. Respondent has conceded that, “for 2009, YA Offshore's expenses as stipulated . . . exceed YA Global's ECTI [effectively connected taxable income] allocable to YA Offshore” and that, consequently, YA Global's liability for section 1446 withholding tax for 2009 does not include any amount attributable to YA Offshore's share of YA Global's ECTI. See Treas. Reg. § 1.1446-3(e). But respondent asserts that, “[i]n 2009, YA Global had several foreign partners.”³ And respondent observes that “[p]etitioners have not asserted any reduction or elimination of YA Global's section 1446 withholding tax liability with respect to any foreign partner, other than YA Offshore.” Do petitioners agree that, during 2009, YA Global had partners other than YA Offshore who were either foreign or from whom the partnership did not receive withholding certificates under Treasury Regulation § 1.1446-1(c)(2)? If so, do petitioners concede that, should the Court determine that YA Global was engaged in a U.S. trade or business during 2009, the partnership would be liable for withholding tax under section 1446 on the portion of its ECTI allocable to those other foreign (or deemed foreign) partners?

2. The parties stipulated that, “[i]n 2007, YA Offshore . . . directly incurred $12,081,846 in expenses related to its investment in YA Global.” Petitioners do not assert that those expenses were sufficient to offset in full YA Offshore's share of YA Global's ECTI for 2007. They contend only that those expenses would “reduce any income tax” owed for 2007. And petitioners do not allege that YA Offshore paid any Federal income tax for 2007. Do petitioners therefore agree that Treasury Regulation § 1.1446-3(e) has no bearing on the section 1446 withholding tax that YA Global would owe for 2007 should the Court determine that the partnership was engaged in a U.S. trade or business during that year?

3. Petitioners contend that any overpayment of withholding tax for 2007 would be refundable to YA Global “because no Section 1446 tax was 'actually withheld.'” Petitioners refer to the text of section 1464, which states: “Where there has been an overpayment of tax under this chapter, any refund or credit made under chapter 65 shall be made to the withholding agent unless the amount of such tax was actually withheld by the withholding agent.” Under Treasury Regulation § 1.1446-3(d)(2)(iv), however, a partnership can obtain a refund of section 1446 withholding taxes paid only if and to the extent that the amount paid exceeds the amounts reported on Forms 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax. Partnerships are required to pay section 1446 withholding tax in quarterly installments, Treas. Reg. § 1.1446-3(b)(1), which requires estimation of the partnership's ECTI for the year that will be allocable to foreign partners. If a partnership's actual ECTI exceeds the estimates used in making quarterly installment payments, the partnership could end up having paid withholding tax that cannot be associated with any foreign partner's share of the partnership's actual ECTI. The refund rule provided in Treasury Regulation § 1.1446-3(d)(2)(iv) reflects the drafters' recognition of that possibility. See T.D. 9200, 70 Fed. Reg. 28702, 28708 (May 18, 2005). By contrast, the amount of withholding tax that YA Global would be required to pay for 2007 if we determine that it was engaged in a U.S. trade or business for that year would be based on the partnership's actual ECTI. The prospect of an overpayment due to overstated estimates would not arise. Therefore, it is not clear that the rationale behind the applicable regulation would support requiring any refund arising from YA Global's payment of section 1446 withholding taxes for 2007 to be paid to it. Do petitioners dispute that, if YA Global was engaged in a trade or business during 2007, it was required for that year to report to YA Offshore on Form 8805 an amount of creditable tax that did not reflect any deductions available to YA Offshore outside the partnership? Do petitioners contend that YA Global's failure to have filed the required Form 8805 would allow it to obtain a refund under section 1464 that would otherwise be payable YA Offshore (or its successors)?

4. Petitioners go on to argue that, “[b]ecause the Court has exclusive jurisdiction to determine the correct amount of [YA Global's] section 1446 withholding tax liability as a partnership item, . . . the Court should take the consequences of section 1464 into account as part of this case.” Do petitioners claim that, as a matter of law, any refund to which YA Global would be entitled under section 1464 as a result of its payment of withholding tax under section 1446 is relevant to the determination of the amount of withholding tax the partnership owes? If so, on what authority do petitioners rely?

5. Is petitioners' argument grounded in practicality rather than applicable legal authority? In other words, does petitioners' position rest on the contention that no practical purpose would be served by requiring YA Global to pay withholding tax to the extent that the payment would entitle it to a refund?

6. Do petitioners contend that considerations of practicality can extend the statutorily defined bounds of the Court's jurisdiction? If not, do petitioners claim that any refund payable to YA Global in respect of withholding tax payments that the partnership has not made would not only be a “partnership item,” within the meaning of section 6231(a)(3), but would be a partnership item for 2007 or one of the other taxable years before us?

7. Do petitioners agree that, as indicated by the record,⁴ YA Global had foreign partners during 2007 (or partners from whom the partnership did not receive withholding certificates under Treasury Regulation § 1.1446-1(c)(2)) other than YA Offshore? If so, do petitioners concede that, should the Court determine that YA Global was engaged in a U.S. trade or business during 2007, the partnership would be liable for withholding tax under section 1446 on that portion of its ECTI allocable to those other foreign (or deemed foreign) partners?

8. In their opening brief, petitioners asserted that, “[e]ven if all the adjustments in the FPAAs are sustained by the Court, YA Offshore's income in 2008 . . . would be zero as a result of [its directly incurred] expenses and its NOL carryback[ ] from 2010.” Respondent, however, contends that “YA Offshore cannot have a zero tax liability for 2008.” According to respondent, YA Offshore's stipulated expenses for 2008 “are significantly less” than YA Offshore's share of YA Global's 2008 ECTI. Respondent acknowledges the prospect that YA Offshore could have reduced its 2008 taxable income by carrying back to that year a net operating loss incurred in 2010. But he argues that the record does not establish the amount of YA Offshore's net operating loss for 2010. Moreover, as respondent points out, any loss carryback from 2010 would not have eliminated YA Offshore's alternative minimum tax liability for 2008 because, under section 56(d), the net operating loss deduction allowed in computing alternative minimum taxable income (AMTI) generally cannot exceed 90% of the taxpayer's AMTI before the deduction. In their answering brief, petitioners seem to accept that Treasury Regulation § 1.1446-3(e) does not relieve YA Global of liability for section 1446 withholding tax for 2008. Instead, petitioners now claim that “[s]ection 1464 is relevant” for both 2007 and 2008. Are we correct in understanding that petitioners' current position in regard to 2008 is the same as their position in regard to 2007? If so, questions 3 through 6 above would be equally relevant to both taxable years.

9. The issues before us for 2007 and 2008 may differ in at least one respect. Respondent argues that YA Offshore is not entitled to any deductions for 2007 because it did not file a return for that year “on a timely basis.” See § 882(c) (“A foreign corporation shall receive the benefit of [allowable] deductions and credits . . . only by filing or causing to be filed . . . a true and accurate return.”); Treas. Reg. § 1.882-4(a)(3)(i) (providing that a return meets the “true and accurate” requirement only if filed “on a timely basis.”). But respondent, as far as we can tell, makes no similar argument in regard to YA Offshore's 2008 taxable year.

YA Offshore mailed its initial 2008 return on September 15, 2010, and respondent received it five days later. By contrast, YA Offshore did not mail its initial 2007 return until March 12, 2012, and respondent received it the following day.

If a foreign corporation was required to file a return for the preceding year but did not file one, the corporation's return for the current year meets the timely filed requirement only if filed

Treas. Reg. § 1.882-4(a)(3)(i). Under section 6072, the return of a corporation using the calendar year as its taxable year is due on March 15th of the following year. The filing deadlines provided in Treasury Regulation § 1.882-4(a)(3)(i) “may be waived if the foreign corporation establishes to the satisfaction of the Commissioner or his or her delegate that the corporation . . . acted reasonably and in good faith in failing to file a U.S. income tax return.”

YA Offshore requested a waiver of the timely filing requirement “to the extent that it would be applicable to any year that the IRS concludes that the taxpayer was engaged in the conduct of a trade or business in the United States.” In a letter denying the request, respondent interpreted the request as applicable to 2006, 2007, and 2008. In his opening brief, however, respondent describes the request for waiver as having been made “for the years 2006 and 2007.” The parties disagree as to whether respondent abused his discretion in denying the waiver request.

Under section 6072, YA Offshore's 2008 return would have been due on March 15, 2009. The parties agree that, “[i]n or around June 2009, respondent began an examination of YA Global's returns for 2006 and 2007.” They also agree that, in June 2010, respondent provided written notice to YA Offshore of its failure to have filed a 2006 return. But we find no communication in the record that would have terminated the grace period for the filing of YA Offshore's 2008 return earlier than September 15, 2010 (18 months after the due date specified in section 6072). Because the return was mailed on the due date, we assume it should be treated under section 7502 as having been delivered on that date, even though respondent did not actually receive it until five days later.

It is hereby

ORDERED that the parties' counsel be prepared to discuss the questions listed above, should time permit, at the remote Special Session scheduled to commence on Wednesday August 31, 2022, at 2:00 PM (Eastern Time). It is further

ORDERED that, should the scheduled Special Session prove to be inadequate for a full discussion of the questions listed in this order, the parties shall consult with the Court at that time regarding an alternative time and format for addressing these questions.

(Signed) James S. Halpern
Judge