YA Global Ordered to Submit Brief on Foreign Partners Argument

YA GLOBAL INVESTMENTS, LP F.K.A. CORNELL CAPITAL PARTNERS, LP, ET AL.,
Petitioners
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, 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 that 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 and supplemental briefs. The issues addressed at trial remain under consideration.

On September 16, 2022, we held a remote Special Session to address petitioners' contention 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. As we noted in an order dated August 12, 2022 (August 12th order), respondent had 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 asserted that, “[i]n 2009, YA Global had several foreign partners.” And we noted in the August 12th order that the record supported respondent's assertion: YA Global's 2009 Form 1065, U.S. Return of Partnership Income, includes Schedules K-1 for four “special purpose vehicles” (SPVs) that are identified as foreign.³ Respondent also observed on brief that petitioners had “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.”

The August 12th order listed questions that we expected the parties to be prepared to address at the remote Special Session. Among those questions were (1) whether petitioners “agree[d] 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)?” and (2) if so, whether “petitioners concede[d] 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?”

At the remote Special Session, we asked petitioners' counsel whether, “if we determine that YA Global was [in] a U.S. trade or business in 2009, the partnership would owe some withholding tax liability in regard to those foreign partners other than YA Offshore.” Petitioners' counsel responded: “Technically, I think it is correct. . . . I think technically [the foreign SPVs] were partners, and I can't think of any good reason around it. So I'm going to say yes.”

Following the remote Special Session, we issued an order directing the parties to submit written reports addressing the questions discussed during that session. In the report they submitted, petitioners argued that the foreign SPVs would not be allocated any ECTI for 2009 either because they were co-owners of property with YA Global rather than partners in YA Global or because any income allocations they received were not made to them in their capacity as partners.

In his response to petitioners' report, respondent asserts that “[p]etitioners' undue delay in raising” their argument that the foreign SPVs either were not partners or, in any event, would not be allocated any ECTI of the partnership would place respondent “at a disadvantage and result[ ] in unfair surprise and prejudice.” Respondent contends that “[p]etitioners did not plead this issue, even when they sought to amend their petition five months before trial.” On the premise that the issue was not pleaded, respondent concludes that we “should not entertain” what he describes as “petitioners' new position.”

In both their initial and amended petitions, petitioners alleged that “the Commissioner erred in determining that . . . the partnership is liable for withholding tax [for 2009] in the amount of $6,748,616.” In a conference call on January 5, 2023, respondent's counsel acknowledged that the record does not provide details of how respondent computed the withholding tax liability for 2009 but also advised us that part of that amount is attributable to the foreign SPVs. And petitioners' counsel confirmed respondent's counsel's claim that petitioners had been provided those details several years before trial.

The assignments of error in petitioners' petitions are sufficiently broad to encompass the question of whether any liability for 2009 withholding tax ultimately determined should include amounts attributable to the foreign SPVs. Therefore, petitioners may not be seeking to raise a new issue not previously pled but instead raising for the first time after their submission of multiple briefs a new argument in regard to an issue that has been in the case from the outset. Rule 151(e)(5), however, requires a party's brief to contain a statement of the party's argument, setting forth and discussing “the points of law involved and any disputed questions of fact.” Arguments not made on brief may be treated as having been conceded. See, e.g., Gregory v. Commissioner, T.C. Memo. 2018-192, at *10-11; Remuzzi v. Commissioner, T.C. Memo. 1988-8, aff'd on other grounds, 867 F.2d 609 (4th Cir. 1989).

In the report they submitted following the remote Special Session, petitioners offered no explanation of why they had failed to raise in either their opening or answering brief their argument that no ECTI of YA Global for 2009 would be properly allocable to the foreign SPVs. Before deciding whether to consider petitioners' argument, we will give them the opportunity to explain why we should not treat them as having conceded the argument and why raising the argument for the first time more than two years after trial is not untimely.

Therefore, it is hereby

ORDERED that petitioners may, on or before February 13, 2023, submit a supplemental brief setting forth any arguments they wish to make concerning why the Court should entertain their claim that no ECTI of YA Global for 2009 would be properly allocable to the foreign SPVs and also supplementing, to the extent they wish, the substantive arguments on that point that petitioners made in their report dated November 16, 2022. It is further

ORDERED that, should petitioners submit a supplemental brief in accordance with the previous paragraph, respondent may, within 30 days after service of that brief, submit a response.

(Signed) James S. Halpern
Judge