Attorney-at-Law

IT’S NOT FIRPTA – BUT IT MIGHT AS WELL BE

In Uncategorized on 08/08/2018 at 16:03

Judge Buch has the answer when a partnership with onshore and offshore partners has effectively connected US income, and the partnership fails to withhold per Section 1446.

Here’s YA Global Investments, LP f.k.a Cornell Capital Partners, LP, Yorkville Advisors, GP LLC, Tax Matters Partner, and YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, Yorkville Advisors, LLC, Tax Matters Partner, 151 T. C. 2, filed 8/8/18.

YA claims it’s a passive investor. IRS says they’re securities dealers per Section 475. If YA is a dealer, all its income is active (not portfolio, as YA claims) and is effectively connected to a US trade or business, thus must withhold from distributions to its offshore partners, which it didn’t.

YA is fighting the Section 475 dealership fight, but claims there’s no jurisdiction over the Section 1446 withholding or the chops arising therefrom, as these are partner items.

IRS claims Section 6231(a)(3) makes the withholding a partnership item, and Section 1446 is one of the rare provisions that makes partnerships liable for withholding (like FIRPTA, Section 1445(c), which Judge Buch cites). And Section 1461 ropes in any partnership required to withhold tax.

Now Treasury could promulgate regulations expressly putting Section 1446 withholding as a partnership-level item.

Except Treasury didn’t.

Judge Buch: “Thus, at first blush, it might appear that the tax imposed by section 1446 is not treated as a partnership item.  But our inquiry does not end there.

“The tax imposed by section 1446 is brought within the scope of partnership items because that tax is a partnership liability.  ‘Partnership liabilities’ are included within the scope of the definition of partnership items.  Sec. 301.6231(a)(3)-1(a)(1)(v), Proced. & Admin. Regs.  Because section 1461 makes the partnership liable for any tax required to be withheld under section 1446, any tax required to be withheld under section 1446 is a partnership liability.  And the regulations are clear that partnership liabilities are partnership items.

“Most penalties cannot be partnership items.  Penalties are generally found in subtitle F, and to be a partnership item, an item must be in subtitle A.  But Congress expanded the scope of partnership-level proceedings to include ‘any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item’.  Sec. 6221.  And insofar as this Court’s jurisdiction is concerned, section 6226(f) explicitly includes determining any penalty, addition to tax, or additional amount that relates to an adjustment to a partnership item within the scope of our judicial review.  Consequently, the penalties included in the FPAAs are properly before the Court in this partnership-level proceeding.” 151 T. C. 2, at pp. 9-10.

Except, says YA, the partners aren’t here.

So what, says Judge Buch, this is a TEFRA FPAA, and we can determine these partnership chops.

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