1 5 1 T.C. No . 2

UNITED STATES TAX COURT

YA GLOBAL INVESTM ENTS, LP f.k .a. CORNELL CAPITAL PARTNERS, LP, YORKVILLE ADVISORS, GP LLC, TAX M ATTERS PARTNER, AND YA GLOBAL INVESTM ENTS, LP f.k .a. CORNELL CAPITAL PARTNERS, LP, Y ORKVILLE ADVISORS, LLC, TAX M ATTERS PARTNER, Pet i t i o ner v . COM M ISSIONER OF INTERNAL REVENUE, Res po n d en t

Do ck etNo . 1 4 5 46 -1 5
. Fi l edAu gu s t 8 , 2 0 1 8
.

R i s s u edFPAAs wi th res p ectt o Y, a p art n ers h i p . R d et erm i n ed th atY was l i ab l e fo r wi th h o l d i n g t ax es u n d er I.R.C. s ec. 1 4 46 an d m ad e ad ju s t m en t s i n t h e FPAAs t o refl ectth e wi th h o l d in g t ax l i ab i l i t i es as wel l as rel at edad d i ti o n s t o t ax an dp en al t i es . Y’ s t ax m at t ers p artn er (TM P) fi l eda p et i ti o n fo r read ju st m en t o f p art n ers h ip i t em s u nd er I.R.C. s ec. 6 22 6 (a). Y’ s TM P al s o fi l ed a m o t i o n t o d i s m i s s fo r l acko f ju ri s d i ct i o n as t o n o np art ners h i p i tem s. In th atm o t io n the TM P arg u es thatth e i s s u e o f l i ab i li ty u n d er I.R.C. s ec. 1 4 4 6 s ho u l db e d i s m i s s edfo r l acko f ju ri sd i ct i o n b ecau s e t h at l i ab i l i ty i s n o ta p art n ers h i p i t em an dth u s i s b ey o n d o u r ju ri s d i ct i o n u n d er I.R.C. s ec. 6 2 2 6 (f).-2
- Hel d : Un d er I.R.C. s ec. 1 4 6 1 an y p art y req ui redt o wi th h o l d t ax u n d er ch . 3 o f t h e In t ern al Rev en u e Co d e i s l iab l e fo r t h e t ax req u iredt o b e wi th h el d
. Hel d , fu rt h er, I.R.C. s ec. 1 4 4 6 i m p o s es a t ax wi th h o l d i n g req u irem en t o n p art n ers hi p s wi th res p ect t o effect i vel y co n n ect ed t ax ab l e i n co m e al l o cat edt o fo rei gn p art n ers , g i v i n g ri s e t o a p art n ers h i p l i ab i l it y . Hel d , fu rt h er, u n d er I.R.C. s ec. 6 22 6 (f) t h e Tax Co u rt h as juri s di ct i o n t o d et erm i ne p artners hi p i t em s i n cl u d i n g p art n ers hi p l i ab i l i t i es . Hel d , fu rt h er, a p art n ers h i p’ s l i ab i l i ty fo r wi th h o l d in g t ax u nd er I.R.C. s ec. 1 4 4 6 i s a p artn ers h i p i t em an d p ro p erl y b efo re t h e Co u rti n a p art n ers h ip -l ev el p ro ceed in g . Hel d , fu rt h er, t h e m o t io n t o d i s m i s s fo r l acko f ju ri s d i ct i o n as t o n o np artn ers h i p i t em s wi l l b e d en i ed
.

Hen ry C. Ch en g , El l i s L. Reem er, an dTam ara L. Sh ep ard , fo r p et it i on ers . Gret ch en A. Ki n d el , Ro b ertT. Ben n et t , M ary Hel enW eb er, an dCh arl es E. Bu x b au m , fo r res p o n d en t
. OPINION BUCH, J u d g e: Th i s cas e co m es b efo re t h e Co u rto n a m o t i o n t o d i s m i s s fo r l acko f ju ri s d i ct i o n fi ledb y th e t ax m at t ers p art n er (TM P) fo r YA Gl o b al In v es t m en t s , LP (YA Gl o b al ). Ini t s m ot i o n, the TM P arg u es thatwi th h o l d i n g t ax-3
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u n d er s ect i o n 1 4 4 6 1 i s n o ta p art n ers h i p i t em an das a res ul tthe ad

ju s t m en t s i n th e
n o t i ces o f fi n al p art n ers hi p ad m i n i s trat i v e ad j u s t m en t(FPAA) rel at in g t o wi th h o l d i n g t ax l i ab i l it y

u n d er s ect i o n 1 4 4 6 m

us tb e d i sm i s s edfo r l acko f s ub ject
m at t er ju ri sd i ct i on . Th e Co m m i s s i o n er arg u es thatwi th h o l d i n g t ax l i ab i l i ty u n d er
s ect i on 1 4 4 6 i s a p art n ers hi p i tem an dth atYA Gl ob al i s a p art y t o th e p ro ceed i n g . W e fi n dth atwi th h o l d in g t ax l i ab i l i ty u n d er s ect i o n 1 4 4 6 i s a p artn ers h i p i t em an d
as s u ch i s p ro p erl y b efo re t h e Co u rti n th is p art n ers hi p -l ev el p ro ceed i n g . Back gro u n d YA Gl o b al i s a p art n ers hi p fo r U.S. Fed eral i n co m e t ax p u rp o s es . YA Gl o bal rep o rt s th at i ti s an i n ves t o r an di s n o t en g ag ed i n an act i ve U.S. t rad e o r b u s i n es s . It i s b as ed i n th e Caym an Is l an d s , an di ts g en eral p art n er an dTM P, Yo rkv i l le, i s b as edi n New J ers ey . 2 YA Gl o b al h as b o th fo rei g n an dd o m es t i c p art n ers an d was s ub

jectt o the u n ifi edp art n ers h i p au d itan dl it i gat i o n p ro cedu res
o f t h e Tax Equ i ty

an dFi s cal Res p o ns i bi l it y Acto f 1 9 8 2 (TEFRA), Pub . L. No . 9 7
- 2 4 8 , s ec. 4 02 (a), 9 6 St at . at6 4 8, duri n g th e y ears i n i s s u e.

1 Al l s ect i o n referen ces are t o th e In tern al Rev en u e Co d e (Co de) i n effect at al l rel ev an tt i m es .

2 In 2 0 0 6 i t s g en eral p art ner an dTM P was Yo rkv i ll e Ad v i s o rs , LLC. In 2 0 0 7 thro u g h 2 0 1 0 i ts g en eral p art n er an dTM P was Yo rkv i l l e Ad v i s o rs GP, LLC. Fo r p urp o s es o f t h i s Op i n i o n , we refer t o thes e en t i t i es s i n g u l arl y as Yo rkvi l l e.-4
-

YA Gl o b al fi l eda Fo rm

1 0 6 5 , U.S. Retu rn o f Part n ers h ip In co m e, fo r each
o f t h e y ears i n i s s ue, 2 0 0 6 th ro u g h 2 0 1 0 . Fo r each y ear YA Gl o b al rep o rt edi t s i n co m e as p ort fo l io i n co m e fro m i n t eres t , qu al i fi edd i v i d en ds , o rd i n ary d i v i d en d s , s h o rt -t erm

cap i t al g ai n , l o n g -t erm

cap i t al g ai n , an d o th er i n co m e. In M arch o f 2 0 1 5 th e Co m m i s s i o n er i s s ueda s ep arat e FPAA fo r each y ear, 2 0 0 6 thro u g h 2 0 1 0 , t o YA Gl ob al ’ s TM P. Th e Co m m i s s i o n er co n t en d s th atYA Gl o bal was a d eal er i n s ecu ri t i es u n d er s ect i o n 4 7 5. In th e FPAAs th e Co m m i s s i o n er d et erm i n edth atYA Gl o b al was en gag edi n a U.S. trad e o r b u s i n es s
an d th atal l o f i t s i n co m e was o rd i n ary i nco m e t h atwas effect i v el y co n n ect edwi t h th e U.S. trad e o r b u s in es s . As a res u l t, YA Gl o b al was req u i redt o “ wi th ho l do n effect i v el y

co n n ect edt ax ab l e i n co m e al lo cab l e t o i t s fo rei gn p art n ers u nd er I.R.C. § 1 44 6 .” Fo r 2 0 0 6 th ro u g h 2 0 0 9 th e Co m m i ss i o n er d et erm i n ed th atYA Gl o b al
was l i ab l e fo r t ax es th atwere req u i red t o b e wi th h el du n d er s ect i o n 1 4 46 an d rel at ed ad d i t i o n s t o t ax an dp en al t ies . Th e Co m m i s s i o n er i s s u edan FPAA wi th n o ad ju s t m en t s fo r 2 01 0
. In ad d i t i o n t o th e FPAAs fo r 2 0 0 6 t h ro u g h 2 0 1 0, the Co m m i ss i o n er i s s u eda
n o t i ce o f d efi ci en cy

fo r 2 0 0 6 th ro u g h 2 0 0 9 , d et erm in i n g th at YA Gl o b al was req u i redt o wi th ho l dt ax es u n d er s ect i o n 1 44 6 . Onth e b as i s o f th atd et erm i n at i o n , th e Co m m i s s i o n er fu rt h er d et erm i n edth at YA Gl o bal was l i ab l e fo r t h e t ax u n d er-5
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s ect i on 1 4 4 6 , fai l ure t o fi l e an dfai l u re t o p ay ad d i t i o ns t o t ax u nd er s ect i o n 6 6 5 1 (a), an dfai l u re t o m ak e es t i m at edt ax p aym en t s ad d i t i o n s t o t ax u n d er
s ect i on s 6 6 5 5 an d1 4 4 6 (f)(2 ). YA Gl o b al ’ s TM P fi leda p et i t i on fo r read ju s t m en to f t h e p art n ers h i p i t em s fo r 2 0 0 6 th ro u g h 2 0 1 0 , an dYA Gl o bal fi leda p et i t io n fo r red et erm i n at i o n o f t h e d efi ci en ci es . YA Gl o b al an d i t s TM P each fi l edm o t i o ns t o d is m i ss fo r l acko f juri s d i ct i o n . In th e m o t i on t o d i s m i s s fo r l acko f ju ri s d i ct i o n i n t h i s p artn ers h ip -l ev el p ro ceed in g , Yo rkv i l l e arg u es th atwi th h o l d i ng t ax l i ab il i ty u n d er s ect i o n 1 44 6 i s
n o ta p artn ers hi p i t em . Fro m thi s th e TM P fu rt h er arg u es th atth e l i ab il i ti es u n d er
s ect i on 1 4 4 6 an d al l o f t h e rel at edad d it i o n s t o t ax an dp en al t ies are n o t p ro p erl y b efo re t h e Co u rti n th i s p art n ers h i p -l ev el p ro ceed i n g . Th e TM P al s o arg u es th at , b ecau s e i ti s th e p art n ers wh o are t h e p art i es t o a TEFRA p ro ceed i n g rat her t h an th e p art n ers h i p , th e p art n ers h i p ’ s l i ab il i ti es can n o t b e d et erm i n edi n t h e p ro ceed in g . In th e m o t i on t o d i s m i s s fo r l acko f ju ri s d i ct i o n as t o the d efi ci en cy red et erm i n at i o n , YA Gl o b al arg u es th atth e l i ab i l i ty u n d er s ect i o n 1 4 4 6 i s d ep en d en t o n p art n er-l ev el d et erm i n at i o n s an dcan n o tb e ad dres sedu n t il aft er a p art n ers hi p -l ev el p ro ceed i n g i s co m p l et ed . Sp eci fi cal l y

i targ u es th atth e Co u rt-6
-

m u std et erm i n e i n a p art n ers hi p-l ev el p ro ceed i n g wh eth er YA Gl o bal h adt ax ab l e i n co m e th atwas effect i vel y co n n ect edwi th a U.S. trad e o r b u s i n es s th atco u l d g i v e ri se t o l i ab i l i ty

u n der s ect i o n 1 4 4 6
. YA Gl o bal fu rt h er arg u es th atan y n o t i ce
o f d efi ci en cy d et erm i n i n g l i ab i l i t y u n d er s ect i o n 1 44 6 m u s tawai tth e o u t co m e o f th e p art n ers h i p -l ev el p ro ceed i n g . Th e Co m m is s i o n er arg u es th atl i ab i l i ty u nd er s ect i o n 1 4 4 6 i s a p art ners h i p i t em . Hi s p ri n ci p al arg u m en ti s th atl i ab i l i ty u n d er s ect i on 1 4 4 6 fi t s wi th in th e
s t atu to ry d efi n i ti o n o f a p art n ers h i p i t em u n d er s ect i o n 6 2 3 1 (a)(3 ). He al s o arg u es th atl i ab i l i ty

u n d er s ect i on 1 4 4 6 i s m o re ap pro p ri at el y d et erm i n edatth e p art n ers hi p l ev el th an atthe p art n er l ev el , fu rt h er s u gg es ti n g t h ati ti s a p art n ers hi p i t em . Th es e t wo p ro ceed i n gs h av e m o v edfo rwardi n t an d em , an db o th p ro ceed in g s wi th th ei r res p ect iv e m o t io n s t o d i s m i s s are b efo re t he Co u rt
. Th e qu es ti o n i n th i s p ro ceed i n g i s wh et h er t h e l i ab il i ty u n d er s ect i o n 1 44 6 an d th e rel at ed p en al t i es are p ro perl y b efo re th e Co u rti n th i s p art n ers h i p -l ev el p ro ceed i n g . Di s cu ss i o n Ord i n ari l y , i ti s th e p art n ers an dn o t th e p art n ers h i p th atare s ub ject t o t ax . Sec. 7 0 1. Cert ai n t ax i s s u es can b e res o l v edatth e p art ners h i p l ev el an drem ai n th e s am e reg ard l es s o f p art icu l ar p art n ers ’ ci rcu m s t an ces , wh i l e o ther i ss u es can b e-7
-

ad dres s edo n l y

atthe p art n er l ev el . To en s u re t h atal l p art n ers recei ve t h e s am e treat m en twi th res p ectt o th e co m m o n i s su es an dt o redu ce dup l i cat i o n o f ad m i n is trat i v e an dju d i ci al effo rt s, Co n gres s creat ed th e p art ners h i p -l ev el au d i t
an d l i t ig at i o n p ro cedu res u nd er TEFRA. Do m u l ewi cz v . Co m

m i s s i o n er, 1 2 9 T.C. 1 1 , 1 7 (2 0 0 7 ), aff’ di n p art , rem an dedi n p arts ub n om . Des m etv . Co m m i s s i o n er, 5 8 1 F.3 d2 9 7 (6 th Ci r. 2 0 0 9). Wh i l e p art n ers h ip s are n o t g en eral ly s ub jectt o i n co m e t ax , they

are req u i red t o fi l e an n u al i nfo rm at io n retu rn s wi th th e Co m m i s s i o n er. Sec. 6 0 31 . When th e Co m m i s s i o n er d i s ag rees wi th wh ati s rep o rt edo n th o s e ret u rn s , h e can i ss u e an FPAA wh i ch m ak es ad

ju s t m en t s t o t h o s e i t em s . Sec. 6 2 2 3(a), (d )(2 ). If cert ai n p art n ers d i s ag ree wi th th o s e ad ju s t m en t s , th ey

can p et i t i o n th e Tax Co u rtfo r read ju s tm en to f p art n ers hi p i tem s fo r t h e t ax ab l e y ear i d en t i fi edi n t h e FPAA. Sec. 6 2 2 6 (a) an d (b ). Th e Tax Co u rt i s a co u rto f l i m i t ed juri sd i ct i o n . Sec. 7 4 4 2 . Th e Tax Co u rt i s g ran t edjuri s d ict i o n t o d et erm i n e p art n ers h i p i tem s an dm ak e p art n ers h i p-l ev el d et erm i n at i o n s as t o p en al t i es . Sec. 6 2 2 6 (a)(1 ), (f). Sect i o n 6 2 2 6 (f) l i m i t s th e
s co p e o f rev i ew i n a p art n ers hi p -l ev el p ro ceed i n g t o “ al l p artn ers h i p i t em s o f t h e p art n ers hi p fo r the p artn ers h i p t ax ab l e y ear t o wh i ch th e n o t i ce o f fi n al p art n ers hi p ad m i n is trat i v e ad

ju st m en t rel at es , th e p ro p er al l o cat i o n o f s u ch i t em s am o ng th e-8
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p art n ers , an dthe ap p l i cab il i ty o f an y p en al ty , ad d i t i o n t o t ax , o r ad d it io n al am o u n t wh i ch rel at es t o an ad

ju s t m en tt o a p art n ers h i p i t em .” A p art n ers h i p i t em

i s d efi n edi n s ect i o n 6 2 3 1 (a)(3 ) as “ an y i t em req u i redt o b e t ak en i n t o acco u n tfo r t h e p art n ers h i p ’ s t ax ab l e y ear u n der an y p ro v i s i o n o f
s ub t i t le A t o th e ex t en t reg u l at io n s p res cri b edb y th e Secret ary p ro vi d e t h at , fo r p u rp os es o f t hi s s ub t i t l e, s u ch i t em i s m o re ap p ro p ri at el y d et erm i n edatth e p art n ers hi p l ev el th an atthe p art n er l ev el .” Th e qu es t i o n b efo re t h e Co u rti s wh et h er l i ab il i ty

u n d er s ect i on 1 4 46 i s a p art n ers h ip i t em . Un d er s ect i o n 1 44 6 a p artn ers h i p m us twi th ho l dt ax o n an y

fo rei g n p art n er’ s
s h are o f effect iv el y

co n n ect edt ax ab l e i n co m e. Sect i o n 1 4 4 6 i s o n e o f a h an d fu l o f p ro v is i o n s th atex p l i ci t l y p lace a wi th h o l di n g b u rd en o n a p art n ers h ip . See, e.g ., s ec. 1 4 45 (e). Sect i on 1 46 1 p ro v i d es th at“ [e] v ery p ers o n req u i redt o d edu ctan d wi th h o l dan y

t ax u nd er * * * [ch ap t er 3 ] i s h ereb y m ad e l iab l e fo r s u ch t ax ”. Sect i o n 1 4 4 6 i s i n ch ap t er 3 o f t h e Co d e. To g eth er t h es e two s ect i o n s m ak e a p art n ers hi p l i ab l e fo r t h e t ax req u i red t o b e wi th h el do n fo rei g n p art n ers ’ s hares o f effect i v el y

co n n ect edt ax ab l e i n co m e. Sect io n 1 4 4 6 i s al so i n s ub t it l e A. Becau s e t h e t ax i m p o s edb y s ect i o n 1 4 46 i s fo u n di n s ub t i t l e A, i ti s am o n g th e i t em s th atm ay b e p art n ers h i p i t em s i f t h e Secret ary d et erm i n es b y

reg u l at i o n th atthe t ax i s m o re ap p ro p ri at el y d et erm i n edat-9
-

th e p art n ers h i p l ev el . Sec. 6 23 1 (a)(3 ). Bu tth e Secret ary h as n o tp ro m u l g at edan y
s u ch reg ul at i o n. Th us , atfi rs t b l u s h , i t m i g h tap p ear t h atth e t ax i m p o s ed b y
s ect i on 1 4 4 6 i s n o ttreat edas a p art n ers h i p i t em . Bu t o u r i n qu i ry d oes n o t en d th ere. Th e t ax i m

p os edb y s ect i o n 1 4 4 6 i s b ro u g htwi th i n th e s co p e o f p art n ers h i p i t em s b ecau s e t h att ax i s a p art n ers h i p l iab i l i ty . “ Part n ers h i p l i ab i l i t i es ” are i n cl u d edwi th i n th e s co p e o f t h e d efi ni t io n o f p art n ers h i p i t em s . Sec. 3 0 1 .6 2 3 1 (a)(3 )-1 (a)(1 )(v ), Pro ced . & Ad m i n . Reg s . Becau s e s ect io n 1 4 6 1 m ak es th e p art n ers h i p l iab l e fo r an y t ax req u iredt o b e wi th h el du n d er s ect i o n 1 4 4 6 , an y t ax req u i red t o b e wi th h el d u n der s ect i o n 1 4 4 6 i s a p art ners h i p l iab i li ty . An dthe reg u l at i o n s are cl ear t hatp art n ers h i p l i ab i l i t i es are p art n ers hi p i t em s . M o s t p en al ti es can no tb e p art n ers hi p i t em s . Pen al t i es are g en eral l y fo u n di n
s ub t i t le F, an dt o b e a p art n ers h i p i t em , an i t em m us tb e i n s ub t it l e A. Bu t Co n g res s ex pan d edth e s co p e o f p art n ers h i p -l ev el p ro ceed in g s t o i n cl u d e “ an y p en al ty , ad d i t i o n to t ax , o r ad d i t i o n al am o u n t wh ich rel at es t o an ad ju s t m en tt o a p art n ers hi p i t em ”. Sec. 6 2 2 1 . An di n s o far as th i s Co u rt ’ s juri sd i ct i o n i s
co n cern ed , s ect i o n 6 2 2 6 (f) ex p l i ci t l y i n cl u d es d et erm in i ng an y p en al ty , ad d i t i o n t o t ax , o r ad d i t io nal am ou n tth atrel at es t o an ad ju s t m en tt o a p art ners h i p i t em wi t h i n-1 0
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th e s co p e o f o u r ju d i ci al rev iew. Co n s equ en t l y , th e p en al t i es i n cl u d ed i n th e FPAAs are p ro p erl y

b efo re t h e Co u rti n th i s p art n ers h i p -l ev el p ro ceed i n g . YA Gl o b al ’ s TM P arg u es thatYA Gl ob al i s n o ta p art y t o th e p ro ceed i n g fo r read ju s t m en t . As a res u l t, i targ u es th atwe can n o td et erm i n e l i ab i l i ty u n d er
s ect i on 1 4 4 6 an d t h e rel at edp en al ti es o f an en t i ty th ati s n o ta p art y t o th e p ro ceed in g . W e co n cl u de t h atwe n eedn o t ad dres s th i s i s s ue. W e are ex p li ci t l y g ran t edjuri s d i ct i o n t o m ak e fi n d i n g s wi th res p ectt o p art n ers hi p l i ab i l i t i es an d d o
s o i n p art n ers h i p -l ev el p ro ceed i n g s ro u t i n el y . Sec. 6 23 1 (a)(3 ); s ec. 3 0 1 .6 2 3 1 (a)(3 )-1 (a)(1 )(v ), Pro ced . & Ad m i n . Reg s .; s ee, e.g ., Ham b ro s e Leas i n g 1 9 8 4 -5 Lt d . P’ s h i p v . Co m m i s s i o n er, 9 9 T.C. 2 9 8 (1 9 9 2 ); GreatPl ai n s Gas ifi cat i o n As so cs . v . Co m m i s s i o n er, T.C. M em o . 2 0 0 6-2 7 6
. Co n cl u s io n A l i ab i l i ty

s t emm i n g fro m

du ty t o wi th h o l du n d er s ect io n 1 44 6 i s a p art n ers hi p l i ab i l it y

an d t h erefo re p ro p erl y b efo re t h e Co u rti n a p art n ers h i p -l ev el p ro ceed in g , as are p en al t i es rel at i n g t o th e p art n ers h i p -i tem ad j u s t m en t
. Th e
m o ti o n t o d i s m i s s fo r l acko f ju ri s d i ct i o n as t o n o np art ners h i p i tem s wi ll b e d en ied
. Anap p ro p ri at e o rd er wi ll b e i s s u ed
.