Oh, the title? At the poker table, when there is a designated dealer, the normal rotation of dealer between each hand is shown by a circular token, called “the button” placed before the player who would be the dealer. That player is said to be “on the button.”

I’ve gotten lots of blogfodder from 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, 161 T. C. 11, filed 11/15/23. But it looks like we’re nearing the end of the trail. And YA is on the button.

Of course, with Judge James S. (“Big Jim”) Halpern taking us on the trail, we have 133 (count ’em, 133) pages of somber reasoning and copious citation of precedent. But that’s not all; at the end of the opinion, Judge Big Jim promises us another opinion on the last of the four (count ’em, four) years at issue.

Briefly, can the activities of the TMP be attributed to YA? If so, was the TMP engaged in a trade or business in (or effectively connected with) the US of A, so as to rope YA into Section 1446 withholding requirements for its offshore partners?

Spoiler alert: the answers are yes.

YA had enough command and control to rope in TMP, who ran its onshore investments, as its agent. YA was a hedgefund, and TMP did its finding, buying and selling, enough to rope YA into the mark-to-market regime of Section 475(a)(2).

YA claims TMP was a service provider. OK, merely acting for the benefit of an offshore doesn’t bring the offshore onshore. But a service provider gets instructions at inception, and is not under day-to-day control. And though a POA from YA to TMP, stated to be irrevocable and coupled with an interest, could be a security device that doesn’t create a true agency, here there is no identifiable interest that the POA protects.

TMP was buying stock in start-ups and special situations as a hedgefund does, and Judge Big Jim tells us how these deals are done, 161 T. C. 11, at pp. 14-19. And the deals TMP made weren’t options, 161 T. C. 11, at pp. 33-35.

TMP was doing more than just investing and making a profit from investments, It was seeking deals, structuring deals, and providing services to the target companies. And TMP was doing this on a regular, continuous, for-profit basis.

The Reg. Section 1.864-2(c)(2)(i)(c) safe harbor for traders and investors is unavailable to YA, because its agent TMP did more than that.

YA, via TMP, was a dealer in securities, because it bought the stock or other securities of the target companies, who were its customers.

YA, via TMP, had to mark its records to show that a security was purchased for investment when acquired, specifically citing Section 475, to avoid mark-to-market, lest YA get a free ride to decide at year-end whether to mark-to-market or not.

Section 1446 withholding for offshores extends to all YA’s income, as its source is its onshore operations. The withholding obligation may well exceed the offshore partner’s actual liability, but that’s the breaks, and doesn’t result in an overpayment of tax. Deductions from income tax have no bearing on liability for withholding.

SOL founders on failure by YA to file Form 8804 with its 1065s. IRS needs the information from the unfiled Forms 8804 that it couldn’t get from the 1065s.

Finally, if you’re going to rely on expert advice for a reasonable cause defense, make sure you can prove you reasonably relied (had no adverse knowledge) before you sue your expert when their advice proves wrong. Watch the testimony of YA’s experts on the trial (after the lawsuit); don’t be surprised if you get the same in like circumstances. And that there is much uncertainty and no clear guidance from IRS is no excuse when you rely on experts.

YA loses.