c h i e f c o u n s e l department of the treasury i n t e r n a l r e v e n u e s e r v i c e w a s h i n g t o n d c date cc ita conex-116299-17 number release date uil the honorable nanette diaz barragán member u s house of representative sec_302 west 5th street suite san pedro ca dear representative barragán i apologize for the delay in responding to your letter dated date on behalf of your constituent ---------------------------- --------------asked whether he must pay federal_income_tax on per_diem and inconvenience payments he received from ---------------------- -------------- related to the remediation of toxic contamination of his home in the ------------ -------------------- of ------------------------- we’re reviewing the facts and circumstances of the per_diem and inconvenience payments -------------made to residents of the ---------------------------------to determine their appropriate tax treatment once we have a resolution we will make our views known to residents of the --------------------------------- thank you for your interest in this issue if you have questions please contact me or ---- ---------------------at ---------------------- sincerely michael j montemurro branch chief office of associate chief_counsel income_tax and accounting


tcmemo_2015_212 united_states tax_court jefferson cartwright and judith cartwright petitioners v commissioner of internal revenue respondent docket no filed date diane e tebelius for petitioners patsy a clarke for respondent memorandum findings_of_fact and opinion cohen judge respondent determined deficiencies and penalties with respect to petitioners’ federal_income_tax as follows year - - deficiency dollar_figure big_number big_number penalty sec_6662 dollar_figure dollar_figure dollar_figure petitioners have conceded numerous issues relating to respondent’s determinations disallowing substantial amounts of their claimed business_expense deductions and some personal itemized_deductions for the tax years involved herein thus the issues remaining for decision are whether the burden_of_proof shifted from petitioners to respondent pursuant to sec_7491 whether petitioners are entitled to depreciation and sec_179 expense deductions greater than respondent allowed for the business use by jefferson cartwright petitioner of a navigator rambler motor home navigator for the tax years and and whether petitioners are liable for sec_6662 accuracy-related_penalties for the tax years and unless otherwise indicated all section references are to the internal_revenue_code in effect for the years in issue and all rule references are to the tax_court rules_of_practice and procedure findings_of_fact most of the facts have been stipulated and the stipulated facts are incorporated in our findings by this reference petitioners resided in washington state when they filed their petition petitioner is an orthopedic surgeon while serving as an officer in the u s army he received his medical degree in from southwestern medical school in dallas texas he completed his internship in date at william beaumont army medical center in el paso texas in date he became a flight surgeon with the u s air force 101st airborne division and served in saudi arabia he returned to the united_states in and completed his residency in orthopedic surgery in at the william beaumont army medical center after practicing medicine in texas for several years petitioner moved in to arlington washington during the years in issue petitioner operated his medical practice in arlington washington he also worked as an on-call physician and staff surgeon at skagit valley hospital hospital in mount vernon washington his arlington home wa sec_25 miles from the hospital as an on-call physician and surgeon at the hospital petitioner was required to work a 24-hour period three days a month from friday through sunday if petitioner was notified in emergency situations to report to the hospital he was required to arrive within one hour in certain instances he was instructed to respond to pages within minutes and stat pages within minutes on date petitioners purchased their navigator petitioner drove it from his arlington home to the hospital when he reported for on-call duty he parked it in the hospital parking lot near its emergency room so that he could rest and sleep in the navigator when he was not needed inside the hospital because petitioner himself suffers from very serious and chronic medical conditions he thought the use of the navigator would help him better serve his patients it was there that he reviewed patient charts on his computer and referred to his medical books he did not treat patients in the navigator petitioners maintained mileage logs for their business and personal_use of the navigator in and petitioners timely filed their joint federal_income_tax returns for the years in issue on schedules c profit or loss from business attached to their and federal_income_tax returns petitioners reported business_expense deductions for depreciation and sec_179 expenses relating to petitioner’s business use percentages for the navigator for and in the respective amounts of and they have not explained at any time how they determined those percentages in the notice_of_deficiency respondent determined petitioner’s business use percentages as or miles of the total big_number miles driven during and or dollar_figure miles of the total big_number miles driven during in doing so respondent reviewed petitioners’ mileage logs odometer readings service invoices and statements in determining the business use mileage of the navigator for and petitioners’ mileage logs and other records show that for most of and all of they used the navigator primarily for personal rather than business reasons petitioners used it to provide volunteer services for the rotary club for judith cartwright to practice driving it in for petitioner to travel from his home to the hospital when he was on call and to return and for petitioners to travel to the koa campground in polson montana on date to camping world on date to freightliner on date to haller park on date and to great wolf lodge with the anesthesia group and their families on date most use of the navigator for both years was for petitioners’ personal activities and convenience and not for business purposes opinion i burden_of_proof generally taxpayers have the burden of proving that the determinations in the notice_of_deficiency are incorrect rule a 290_us_111 taxpayers particularly bear the burden of proving that they are entitled to claimed deductions 503_us_79 292_us_435 taxpayers must also maintain adequate_records to substantiate the amounts of any deductions sec_6001 sec_1_6001-1 e income_tax regs in their opening brief petitioners argue for the first time that the burden_of_proof should shift to respondent pursuant to sec_7491 with regard to the allocation of business use of the navigator sec_7491 provides an exception that shifts the burden_of_proof to the commissioner as to any factual issue relevant to a taxpayer’s liability if the taxpayer provides credible_evidence with respect to that issue and also satisfies other conditions including substantiation maintaining required records and cooperation with the government’s requests for information sec_7491 and taxpayers bear the burden of proving that they have met the sec_7491 requirements 135_tc_471 aff’d 668_f2d_888 7th cir on the basis of the record in this case we hold that the burden_of_proof has not shifted to respondent because petitioners did not comply with all substantiation requirements regarding their business and personal_use of the navigator ii allocation of business depreciation and sec_179 expense deductions for the navigator sec_162 allows a deduction for all ordinary and necessary expenses paid in carrying_on_a_trade_or_business see 403_us_345 ordinary means that which is normal usual or customary in the type of business in which the taxpayer is engaged 308_us_488 a necessary expense is one that is appropriate and helpful to the taxpayer’s business welch v helvering u s pincite however personal expenses are not deductible sec_262 in general the cost of daily commuting to and from work is a personal_expense and therefore not deductible see 326_us_465 sec_1_162-2 income_tax regs sec_167 allows as a depreciation deduction a reasonable allowance for the exhaustion wear_and_tear of property used in a trade_or_business where property is used for business and personal purposes the allowable deduction is measured by the percentage of business use 97_tc_670 see 77_tc_1096 60_tc_728 respondent agreed that petitioner used the navigator for business purposes when he was on call performing medical services at the hospital but contends that the allowable_depreciation deductions and sec_179 expenses for the navigator should be allocated between business use and personal_use to the contrary petitioner contends that the navigator was used as a mobile office for of the time he was performing on-call duties at the hospital for three days each month from may through date and for such periods each month for all of he argues that respondent’s method of calculating a business_use_percentage based entirely on petitioners’ own mileage logs does not accurately reflect the navigator’s correct business use petitioner testified that because of his serious health problems he used the navigator in performing some of his on-call duties at the hospital and that in doing so he was better able to serve his patients and saved the cost of renting an office near the hospital nevertheless we are not persuaded that he was entitled to allocate of the navigator’s use for business for and for the documentary_evidence shows only that petitioner’s business use of the navigator wa sec_27 days in and days in and that both petitioners used the navigator for personal purposes for the remainders of those years after examining petitioners’ statements mileage logs odometer readings and service invoices respondent determined allowable_depreciation and sec_179 expense deductions according to the business use of the navigator of and of the total mileage for and respectively on this record respondent’s determinations were fair reasonable and correct therefore we sustain respondent’s business use percentages for the navigator accordingly we hold that petitioners are not entitled to business depreciation and sec_179 expense deductions for the navigator greater than respondent has allowed iii sec_6662 penalties sec_6662 and b and imposes a accuracy-related_penalty on any underpayment of federal_income_tax attributable to a taxpayer’s negligence or disregard of rules or regulations or substantial_understatement_of_income_tax a substantial_understatement is an understatement that exceeds the greater of of the tax required to be shown on the return or dollar_figure sec_6662 because we determine that there is a substantial_understatement_of_income_tax we need not address negligence under sec_7491 the commissioner bears the burden of production with regard to penalties and must come forward with sufficient evidence indicating that it is appropriate to impose penalties 116_tc_438 respondent has satisfied the burden of production by showing that there were substantial understatements because the amounts of the understatements exceeded of the tax required to be shown on the returns and are greater than dollar_figure once the commissioner has met the burden of production the taxpayer must come forward with persuasive evidence that the penalty is inappropriate--for example by showing that he or she acted with reasonable_cause and in good_faith sec_6664 higbee v commissioner t c pincite the decision as to whether a taxpayer acted with reasonable_cause and in good_faith is made on a case-by-case basis taking into account all pertinent facts and circumstances see sec_1_6664-4 income_tax regs generally the most important factor is the extent of the taxpayer’s effort to assess her or his proper tax_liability id while reliance on the advice of a professional tax adviser does not necessarily demonstrate reasonable_cause and good_faith such reliance can establish reasonable_cause and good_faith if under all the circumstances such reliance was reasonable and the taxpayer acted in good_faith id although on brief petitioners argue that they relied on the advice of their accountant who was also the return preparer neither the return preparer nor judith cartwright who was present at the trial testified we therefore assume their testimony would not have aided petitioners see 6_tc_1158 aff’d 162_f2d_513 10th cir furthermore petitioner did not testify that he relied on the return preparer there is no evidence in the record as to the competence and expertise of the return preparer and it appears that he relied solely on petitioners’ representations under the circumstances petitioners are not entitled to rely on their return preparer to avoid the sec_6662 penalties determined see djb holding corp v commissioner __ f 3d __ __ wl at 9th cir date aff’g tcmemo_2011_36 115_tc_43 aff’d 299_f3d_221 3d cir petitioners conceded that respondent properly disallowed for lack of substantiation rather large amounts of their claimed schedule c business deductions for insurance interest meals and entertainment travel office expenses and other expenses deductions on schedule a itemized_deductions greater than respondent allowed and a capital_loss on schedule d capital_gains and losses greater than respondent allowed they have offered neither explanation nor justification of these erroneous claims therefore we conclude that petitioners have failed to prove that they acted with reasonable_cause and in good_faith accordingly we hold that petitioners are liable for the sec_6662 penalties for and relating to all conceded issues as well as those for the navigator for and we have considered all arguments made and to the extent not mentioned we conclude that they are moot irrelevant or without merit to reflect the foregoing decision will be entered for respondent


department of the treasury internal_revenue_service washington d g a - se tep ea tl sovernment entities jul uil no vend taxpayer a date date date amount b amount c account g credit_union p plan x dear this is in response to your letter dated date supplemented by correspondence dated date date and date in which you request a waiver of the 60-day rollover requirement contained in sec_402 3xa of the internal_revenue_code the code the following facts and representations have been submitted under penalty of perjury in support of the ruling requested taxpayer a age represents that he received a distribution totaling amount b from plan x taxpayer a asserts that his failure to accomplish a rollover within the 60-day period prescribed by sec_402 c of the code was due to his mental condition which impaired his ability to make financial decisions during the 60-day period taxpayer a represents further that no part of amount b has been used for any purpose other than the payment of taxes related to the failed rollover page of taxpayer a represents that he previously was a participant in plan x taxpayer a asserts that on date he requested a distribution of amount b from plan x because he believed that he had been told by the plan_administrator of plan x that as a result of his being age and as a result to of the plan_administrator no longer managing hi sec_401 account he was required to remove all of his money from plan x on date taxpayer a deposited amount c amount b less amounts deducted for federal and state tax withholding into account g at credit_union p taxpayer a asserts that he did not understand that the transaction on date did not constitute a valid rollover and he was unaware of the error until date whan his cpa discovered the error during the preparation of his income taxes taxpayer a represents further that during the relevant period he was receiving treatment for a medical_condition and taking doctor-prescribed medication that caused cognitive impairment and mental confusion taxpayer a also asserts that during the relevant period his wife was suffering from a severe medical_condition and he had to transport her to various medical facilities for multiple procedures and a surgery documentation submitted in support of this ruling_request including a letter from taxpayer a’s doctor supports taxpayer a's representations based on the facts and representations taxpayer a requests that the internal_revenue_service the service waive the day rollover requirement contained in sec_402 of the code with respect to the distribution of amount b from plan x sec_402 of the code provides that except as otherwise provided in this section any amount distributed to any distributee by an employees’ trust described in sec_401 which is exempt from tax under sec_501 shall be taxable to the distributee in the taxable_year of the distribute in which distributed under sec_72 of the code sec_402 of the code provides that if any portion of the balance_to_the_credit of an employee in a qualified_trust is paid to the employee in an eligible_rollover_distribution and the distribute transfers any portion of the property received in such distribution to an eligible_retirement_plan and in the case of a distribution_of_property other than money the amount so transferred consists of the property distributed then such distribution to the extent transferred shall not be includible in gross_income for the taxable_year in which paid sec_402 a of the code states that such rollover must be accomplished within days following the day on which the distribute received the property an individual_retirement_arrangement ira constitutes one form of eligible_retirement_plan page of sec_402 of the code provides that an eligible_rollover_distribution shall not include any distribution to the extent such distribution is required under sec_401 sec_402 c b of the code provides in relevant part that the secretary may waive the 60-day rollover requirement under sec_402 where the failure to waive such requirement would be against equity or good conscience including casualty disaster or other events beyond the reasonable control of the individual subject_to such requirement only distributions that occurred after date are eligible for the waiver under sec_402 b of the code sec_401 ax31 a of the code provides the rules for governing direct transfers of eligible rollover distributions sec_1_401_a_31_-1 of the income_tax regulations question and answer-15 provides in relevant part that an eligible rollover described in code sec_401 is a distribution and rollover of the eligible_rollover_distribution and not a transfer of assets and liabilities revproc_2003_16 ilr b date provides that in determining whether to grant a waiver of the 60-day rollover requirement pursuant to sec_402 the service will consider all relevant facts and circumstances including errors committed by a financial_institution inability to complete a rollover due to death disability hospitalization incarceration restrictions imposed by a foreign_country or postal error the use of the amount distributed fer example in the case of payment by check whether the check was cashed and the time elapsed since the distribution occurred the information presented and documentation submitted by taxpayer a is consistent with his assertion that his failure to accomplish a timely rollover was caused by his mental condition which impaired his ability to make financial decisions during the 60-day period therefore pursuant to sec_402 b of the code the service is granted a period of days from the hereby waives the 60-day rollover requirement with respect to the distribution of amount b from plan x taxpayer a issuance of this ruling letter to contribute amount b into an eligible rollover ira provided all other requirements of sec_402 c of the code except the day rollover requirement are met with respect to such contribution the contribution will be considered a valid rollover_contribution within the meaning of sec_402 of the code this ruling does not authorize the rollover of amounts that are required to be distributed by sec_401 of the code page of no opinion is expressed as to the tax treatment of the transaction described herein under the provisions of any other section of either the code or regulations which may be applicable thereto this letter is directed only to the taxpayer who requested it sec_6110 k of the code provides that it may not be used or cited as precedent if you wish to inquire about this ruling please contact i d no at please address all correspondence to se t ep ra t4 op ve sincerely yours phen employee_plans technical group oy donzell h littlejohn manager enclosures deleted copy of ruling letter notice of intention to disclose


number release date id office uilc cca-326170-09 ---------- from -------------------- sent thursday date pm to ------------------ cc ------------------------------------------------ subject re theft_loss follow-up --------- -------- we would interpret that as amounts that were paid and deducted such as fees and to the extent there's ambiguity say that the revenue_procedure cannot be interpreted as violating settled law and service position that without specific statutory authorization you can't take a double deduction or the practical equivalent of a double deduction for the same item see 292_us_62 revrul_81_207 1981_2_cb_57 ailing v commissioner 102_tc_323 ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- -----------------


internal_revenue_service number release date index number ------------------------------------ ---------------------------- ------------------------ ------------------------------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------- id no ---------------- telephone number ---------------------- refer reply to cc corp b1 plr-124177-17 date date parent sub sub sub state year date legend ------------------------------------ ------------------------ ------------------------------- ------------------------ ----------------------------------- ------------------------ -------------------- ------------------------ -------------- ------- --------------------------- company official --------------------- -------------------------------------------------- -------------------- tax professional ------------------- --------------------------------------------- plr-124177-17 dear -------------------- this letter responds to a letter from your authorized representative dated date requesting an extension of time under sec_301_9100-1 and sec_301_9100-3 of the procedure and administration regulations to file an election in particular parent is requesting an extension of time for parent and the members of its affiliated_group the parent group to file a consolidated federal_income_tax return with parent as the common parent under sec_1_1502-75 of the income_tax regulations the election for the taxable_year ending date the material information submitted for consideration is summarized below parent was a domestic_corporation incorporated under the laws of state that directly and indirectly owned sub sub and sub at the end of the year taxable_year sec_1_1502-75 of the income_tax regulations provides in part that an affiliated_group_of_corporations which did not file a consolidated_return for the immediately preceding_taxable_year may file a consolidated_return in lieu of separate returns for the taxable_year provided that each corporation which has been a member of the group during any part of the taxable_year for which the consolidated_return is to be filed consents in accordance with sec_1_1502-75 of the regulations to the regulations under sec_1502 if a group wishes to exercise its privilege of filing a consolidated_return such consolidated_return must be filed not later than the last day prescribed by law including extensions of time for the filing of the common parent’s return an election for the parent group to file a consolidated_income_tax_return with parent as the common parent for the year taxable_year was due on the last day prescribed by law including extensions of time for the filing of parent’s return parent intended to file the election but for various reasons a valid election ie the filing of the consolidated_return was not filed by the due_date of parent’s return subsequently this request was submitted under sec_301_9100-3 for an extension of time to file the election the period of limitations on assessment under sec_6501 has not expired for year or any subsequent taxable_year none of parent sub sub or sub has filed a federal_income_tax return for the year tax_year or any subsequent year under sec_301_9100-1 the commissioner has discretion to grant a reasonable extension of time to make a regulatory election or a statutory election but no more than six months except in the case of a taxpayer who is abroad under all subtitles of the internal_revenue_code except subtitles e g h and i sec_301_9100-1 through provide the standards the commissioner will use to determine whether to grant an extension of time to make a regulatory election sec_301_9100-1 sec_301_9100-2 provides automatic extensions of time for plr-124177-17 making certain elections requests for relief under sec_301_9100-3 will be granted when the taxpayer provides evidence to establish to the satisfaction of the commissioner that the taxpayer acted reasonably and in good_faith and that granting relief will not prejudice the interests of the government sec_301_9100-3 in this case the time for filing the election is fixed by the regulations ie sec_1 a therefore the commissioner has discretionary authority under sec_301_9100-3 to grant an extension of time for parent to file the election provided parent shows it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government information affidavits and representations submitted by parent company official and tax professional explain the circumstances that resulted in the failure to timely file the election the information establishes that the request for relief was filed before the failure to make the election was discovered by the internal_revenue_service see sec_301_9100-3 based on the facts and information submitted including the representations made we conclude that parent has shown it acted reasonably and in good_faith the requirements of sec_301_9100-1 and sec_301_9100-3 are satisfied and granting relief will not prejudice the interests of the government accordingly provided that parent group qualifies substantively to file a consolidated_return for the applicable tax_year we grant an extension of time under sec_301_9100-3 for sixty days from the date on this letter for parent to file the election by filing a consolidated_return with parent as the common parent and attaching a form_1122 for each of sub - sub for its year taxable_year parent group must attach a copy of this ruling letter to such return or if parent group files the return electronically a statement must be attached to the return that provides the date on and the control number of this ruling letter the above extension of time is conditioned on parent group’s tax_liability if any being not lower in the aggregate for all years to which the election applies than it would have been if the election had been timely made taking into account the time_value_of_money no opinion is expressed as to the parent group’s tax_liability for the years involved a determination thereof will be made by the applicable director’s office upon audit of the federal_income_tax returns involved we express no opinion with respect to whether in fact the parent group qualifies substantively to file a consolidated_return in addition we express no opinion as to the tax effects or consequences of filing the return or the election late under the provisions of any other section of the code or regulations or as to the tax treatment of any conditions existing at the time of or effects resulting from filing the return or the election late that are not specifically set forth in the above ruling plr-124177-17 for the purposes of granting relief under sec_301_9100-3 we relied on certain statements and representations made by parent company official and tax professional however the director should verify all essential facts in addition notwithstanding that an extension is granted under sec_301_9100-3 to file the election penalties and interest that would otherwise be applicable if any continue to apply this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office copies of this letter are being sent to your authorized representatives sincerely _______________________ ken cohen chief branch office of associate chief_counsel corporate


third party communication none date of communication not applicable office_of_chief_counsel internal_revenue_service memorandum number release date cc intl b05 rstahl ------------------------------ postu-127646-09 uilc date september to ----------------------- senior counsel large business international from steven a musher associate chief_counsel international subject trade_or_business_within_the_united_states for purposes of sec_864 and sec_882 this chief_counsel_advice responds to your request for assistance this memorandum discusses whether certain lending and stock_distribution activities constituted a trade_or_business_within_the_united_states for purposes of sec_864 and sec_882 of the internal_revenue_code_of_1986 as amended the code this advice may not be used or cited as precedent legend foreign feeder ------------------------------------------------ fund ------------------------------------- fund_manager ------------------------------ year ------ year ------ date a --------------------- state a ------------ country x --------------------- amount --- amount ----- amount ----- amount dollar_figure---------------- postu-127646-09 amount dollar_figure---------------- amount --- amount --- distribution agreement --------------------------------------------------- issue sec_1 during year and year did fund engage in a trade_or_business_within_the_united_states before considering the possible application of the safe harbors described in sec_864 the trading safe harbors were fund’s lending and stock_distribution activities during year and year trading in stocks or securities within the meaning of the trading safe harbors if fund’s lending and stock_distribution activities were treated as trading in stocks or securities for purposes of the trading safe harbors would fund be eligible for the trading safe harbors during year and year conclusion sec_1 during year and year fund engaged_in_a_trade_or_business_within_the_united_states fund’s lending and stock_distribution activities during year and year did not constitute trading in stocks or securities within the meaning of the trading safe harbors even if fund’s lending and stock_distribution activities were treated as trading in stocks or securities for purposes of the trading safe harbors fund would have been ineligible for the trading safe harbors during year and year facts i organization fund a state a limited_partnership was formed on date a in year fund converted from a state a limited_partnership to a country x exempted limited_partnership during year and year fund was treated as a partnership for federal tax purposes during year and year foreign feeder a country x entity taxable as a corporation for federal tax purposes was a limited_partner in fund country x does not have a bilateral postu-127646-09 income_tax treaty with the united_states during the years at issue fund’s taxable_year was the calendar_year ii management of fund during year and year fund had no employees the management of fund was vested exclusively in fund_manager fund and fund_manager entered into a management agreement pursuant to which fund appointed fund_manager as fund’s agent and irrevocable attorney-in-fact with full power to buy sell and otherwise deal in securities and related contracts for fund’s account fund further granted fund_manager the full power and authority to do and perform every act necessary and proper to be done as fully as fund might or could do personally pursuant to that grant of authority fund_manager conducted an extensive lending and stock_distribution business on behalf of fund fund_manager conducted these business activities and otherwise managed fund primarily through an office in the united_states fund_manager provided similar services for other investment entities and no employees of fund_manager worked exclusively for fund fund_manager held fund out to the markets as a lender and underwriter generating business for fund in a variety of ways fund_manager had over amount investment professionals who used their extensive business and personal relationships to generate lending and stock_distribution deals for fund as a result of the efforts of these investment professionals accounting firms securities attorneys and third-party investment bankers referred potential borrowers and stock issuers to fund in marketing materials fund touted its ------------------------------------------------------------------- ----------------------------- fund_manager also sponsored and attended industry conferences relating to deal origination to generate lending and stock_distribution opportunities for fund iii fund’s lending fund_manager acting on fund’s behalf pursuant to the management agreement committed extensive time and resources to fund’s lending activities over the course of year and year fund held at least amount convertible debt instruments and amount promissory notes fund made many of the loans associated with those convertible debt instruments and promissory notes during year and year in year fund determined that the value of its loan portfolio was over amount in year the value of fund’s loan portfolio exceeded amount on behalf of fund fund_manager negotiated directly with borrowers concerning all key terms of the loans before agreeing to make a loan fund conducted extensive due diligence on a potential borrower often fund lent borrowers money in return for debt instruments that were convertible into the borrowers’ stock at a future date typically the conversion prices were discounted from the trading prices of the borrowers’ stock determined at the time of conversion after converting a debt_instrument into stock at a postu-127646-09 discount fund sought to earn a spread by quickly disposing of the stock fund often received other_property in connection with its lending agreements including warrants to purchase additional shares of borrowers’ stock borrowers also paid fund various fees aside from fund_manager no other entity participated in fund’s lending activities iv fund’s stock_distribution activity fund_manager acting on fund’s behalf pursuant to the management agreement also committed extensive time and resources to conducting fund’s stock_distribution or underwriting activities fund entered into amount distribution agreements with unrelated issuers in year and amount distribution agreements with unrelated issuers in year on behalf of fund fund_manager negotiated the terms of each distribution agreement directly with the issuers a typical distribution agreement entitled an issuer to periodically issue and sell to fund shares of stock in an amount equal to a total specified purchase_price often referred to as fund’s commitment amount however an issuer could typically only request a portion of the commitment amount referred to as an advance at any given time the issuer was prohibited from requesting an advance until the issuer had filed with the securities_and_exchange_commission a registration_statement registering the issuer’s stock for resale by the fund and the registration_statement had become effective an issuer requested an advance by providing fund with a written notice after the issuer provided notice fund was irrevocably bound to purchase stock from the issuer after a specified number of business days the --------- period during the --------- period fund endeavored to pre-sell an amount of the issuer’s stock that would generate enough cash to fund the advance requested by the issuer typically fund succeeded fund’s sales of stock included sales to u s purchasers at the end of the --------- period the issuer sold stock to fund at a discounted price generally --------------percent below the stock’s lowest daily trading price during the ------ --------- period because fund sold the stock at the current market price but received stock from the issuer at a discount fund earned a spread on each share sold usually an issuer also paid fees to fund including commitment structuring and due diligence fees sec_2 of the securities act of defines an underwriter as any person who has purchased from an issuer with a view to or offers or sells for an issuer in connection with the distribution of any security or participates or has a direct or indirect participation in any such undertaking or participates or has a participation in the direct or indirect underwriting of any such undertaking in its distribution agreements fund agreed to act as a statutory underwriter for its counterparty in some cases fund’s counterparties were required to disclose in securities filings that ------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------ although fund’s distribution agreements included terms that differed from conventional underwriting arrangements fund still possessed the defining characteristics of an underwriter specifically fund purchased stock from issuers with a view to distributing that stock postu-127646-09 law i taxation of foreign_corporations engaged_in_a_trade_or_business_within_the_united_states a foreign_corporation that engages in a trade_or_business_within_the_united_states is taxable on a net_basis on its taxable_income that is effectively connected with the conduct_of_a_trade_or_business within the united_states sec_882 a foreign_corporation is considered to be engaged_in_a_trade_or_business_within_the_united_states if that foreign_corporation is a member of a partnership that is engaged_in_a_trade_or_business_within_the_united_states sec_875 ii determining whether activities constitute a trade_or_business_within_the_united_states a statutory definition the code does not include a comprehensive definition of the term trade_or_business_within_the_united_states instead the code provides only that the term ‘trade or business within the united states’ includes the performance of personal services within the united_states at any time within the taxable_year but does not include certain de_minimis personal_service_activity and also does not include under certain circumstances trading in stocks or securities or trading in commodities sec_864 there is no other statutory definition of the term except as noted all section references are to the code sec_864 b trade_or_business_within_the_united_states --for purposes of this part part ii and chapter_3 the term trade_or_business_within_the_united_states includes the performance of personal services within the united_states at any time within the taxable_year but does not include- performance of personal services for foreign_employer -the performance of personal services-- a for a nonresident_alien_individual foreign_partnership or foreign_corporation not engaged in trade_or_business_within_the_united_states or b for an office or place of business maintained in a foreign_country or in a possession_of_the_united_states by an individual who is a citizen or resident_of_the_united_states or by a domestic_partnership or a domestic_corporation by a nonresident_alien_individual temporarily present in the united_states for a period or periods not exceeding a total of days during the taxable_year and whose compensation_for such services does not exceed in the aggregate dollar_figure postu-127646-09 b judicial and administrative interpretation facts_and_circumstances_test the courts and the internal_revenue_service have adopted a facts_and_circumstances_test to evaluate whether the activities of a foreign_person cause that person to be engaged_in_a_trade_or_business_within_the_united_states see eg 20_tc_151 aff’d 221_f2d_227 9th cir sec_1_864-2 for a foreign_corporation to be engaged_in_a_trade_or_business_within_the_united_states the foreign corporation’s profit-oriented activities in the united_states must be considerable continuous and regular see 34_tc_894 aff’d 299_f2d_623 3rd cir lewenhaupt t c pincite 113_f2d_718 2d cir the conduct of activities in the united_states that are ministerial and ancillary to a business conducted outside the united_states are not sufficient to give rise to a trade_or_business in the united_states 12_tc_49 mere managerial attention to investments is also insufficient to cause a foreign_person to be engaged_in_a_trade_or_business_within_the_united_states 312_us_212 376_f2d_280 ct_cl managing one’s own investments in securities is not the carrying on of a trade_or_business an investor is primarily interested in the long term growth potential of the investor’s stocks 889_f2d_29 2d cir by contrast a foreign bank was engaged in business when the bank engaged in multiple financial transactions through u s brokers including the purchase and sale of securities taking deposits participating in underwriting syndicates and other monetary transactions trading in securities or commodities - a stocks and securities - i in general --trading in stocks or securities through a resident broker commission agent custodian or other independent agent ii trading for taxpayer's own account --trading in stocks or securities for the taxpayer's own account whether by the taxpayer or his employees or through a resident broker commission agent custodian or other agent and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions this clause shall not apply in the case of a dealer in stocks or securities b commodities -- c limitation --subparagraphs a i and b i shall apply only if at no time during the taxable_year the taxpayer has an office or other fixed place of business in the united_states through which or by the direction of which the transactions in stocks or securities or in commodities as the case may be are effected postu-127646-09 30_fsupp_490 ct_cl cert_denied 309_us_670 whether an income-producing activity rises to the level of a trade_or_business_within_the_united_states is based on the nature and the extent of the activity required to conduct that activity for example in pinchot the second circuit held that a nonresident alien’s management of real_estate constituted a trade_or_business_within_the_united_states rather than investment and re-investment of funds in real_estate based on the nature and degree of activity necessary to manage real_estate pinchot f 2d pincite the second circuit noted that the taxpayer’s management activity required regular and continuous activity of the kind which is commonly concerned with the employment of labor the purchase of materials the making of contracts and many other things which come within the definition of business and within the commonly accepted meaning of that word id pincite citations omitted cf 97_f2d_891 5th cir t he word business notwithstanding disguise in spelling and pronunciation means busyness it implies that one is kept more or less busy that the activity is an occupation isolated or occasional activities on the other hand generally do not give rise to a trade_or_business pasquel v comm’r 12_tcm_1431 holding that a nonresident_alien was not engaged_in_a_trade_or_business_within_the_united_states on account of the nonresident alien’s limited involvement in a single isolated loan transaction 14_tc_725 holding that two small isolated transactions did not give rise to a trade_or_business_within_the_united_states cases addressing when lending activity gives rise to a trade_or_business for purposes of other code provisions are also informative for example courts have frequently addressed whether lending constitutes a business for purposes of the bad_debt deduction permitted by sec_166 in those cases courts have considered a number of factors including the total number of loans made the amount of time and effort expended whether the taxpayer made loans to unrelated borrowers and whether the taxpayer actively sought out lending business and solicited borrowers e g 21_tc_407 mccrackin v comm’r 48_tcm_248 ruppel v comm’r tcmemo_1987_248 activities of agents on behalf of the taxpayer in determining whether a foreign_person is engaged_in_a_trade_or_business_within_the_united_states activities undertaken on behalf of the foreign_person by an agent are considered to be performed by the foreign_person regardless of the degree of control the foreign_person exercises over the agent see 10_tc_273 aff'd 171_f2d_457 4th cir concluding that a nonresident_alien engaged_in_a_trade_or_business_within_the_united_states when the nonresident_alien granted a u s -resident agent authority to use his discretion in trading commodity futures for the nonresident alien’s account lewenhaupt t c pincite concluding that a nonresident_alien engaged in trade_or_business in the united_states when the postu-127646-09 nonresident_alien managed real_property through an agent with a broad power_of_attorney which included the power to buy sell lease and mortgage real_estate on the nonresident alien’s behalf revrul_55_617 1955_2_cb_774 holding that a foreign_corporation was engaged in trade_or_business_within_the_united_states when it marketed goods in the united_states through an independent commission agent for example in de amodio the tax_court held that a nonresident_alien was engaged in a trade_or_business in the united_states when the nonresident_alien acquired real_property through a real_estate agent and managed the properties through other local real_estate agents t c pincite the tax_court concluded that the nonresident alien’s conduct of considerable continuous and regular activities through his agents in the united_states caused the nonresident_alien to be engaged in trade_or_business in the united_states de amodio t c pincite the court did not consider any specifics of the nonresident alien’s relationship with his agents such as whether the nonresident had entered into written agreements with the agents nor did the tax_court describe as relevant for purposes of determining whether the nonresident_alien had a trade_or_business_within_the_united_states the degree of control that the nonresident_alien exercised over his agents whether the agents had the power to bind the nonresident_alien or whether the agents were independent iii statutory safe harbors for certain trading activities a the trading safe harbors the trading safe harbors are two statutory safe harbors pursuant to which certain trading activities conducted by or for a foreign_person that might otherwise constitute a trade_or_business_within_the_united_states are treated as not being a trade_or_business_within_the_united_states one requires that the foreign_person not conduct those activities through an agent who has been granted discretionary authority or through a u s office of the foreign_person the other permits trading through an agent with discretionary authority or through the foreign person’s u s office but requires that the foreign_person not be a dealer the first trading safe_harbor the first trading safe_harbor the a i safe_harbor provides that the term trade_or_business_within_the_united_states does not include t rading in stocks or securities through a resident broker commission agent custodian or other independent agent sec_864 any foreign_person including a foreign dealer in stocks or securities may use the a i safe_harbor see sec_1_864-2 the a i safe_harbor does not apply if the foreign_person has an office or other fixed place of business in the united_states at any time during the taxable_year through which the transactions in stocks or securities are effected sec_864 the tax_court held that the nonresident alien’s agents were independent agents for purposes of the u s -switzerland income_tax treaty such that the nonresident_alien was not treated as having a u s permanent_establishment in the united_states de amodio t c pincite postu-127646-09 the second trading safe_harbor the second trading safe_harbor the a ii safe_harbor provides that the term trade_or_business_within_the_united_states does not include t rading in stocks or securities for the taxpayer’s own account whether by the taxpayer or his employees or through a resident broker commission agent custodian or other agent and whether or not any such employee or agent has discretionary authority to make decisions in effecting the transactions sec_864 a dealer in stocks or securities may not use the a ii safe_harbor id on the other hand the a ii safe_harbor may apply to a foreign_person who has an office or other fixed place of business in the united_states see taxpayer_relief_act_of_1997 p l a eliminating a statutory restriction on the applicability of the a ii safe_harbor to certain corporations if their principal offices were in the united_states b the meaning of trading in stocks or securities for purposes of the trading safe harbors both trading safe harbors apply to trading in stocks or securities the regulations under sec_864 interpret that term to mean the effecting of transactions in stocks or securities which includes buying selling whether or not by entering into short_sales or trading in stocks securities or contracts or options to buy or sell stocks or securities on margin or otherwise see sec_1_864-2 and ii the volume of stock or security transactions effected during a taxable_year is not taken into account in determining whether a taxpayer’s activities qualify for the trading safe harbors see sec_1_864-2 for these purposes the term securities means any note bond debenture or other evidence_of_indebtedness or any evidence of an sec_1_864-2 c trading in stocks or securities for purposes of paragraph a of this section-- in general the term engaged in trade_or_business_within_the_united_states does not include the effecting of transactions in the united_states in stocks or securities through a resident broker commission agent custodian or other independent agent trading for taxpayer's own account-- i in general the term engaged in trade_or_business_within_the_united_states does not include the effecting of transactions in the united_states in stocks or securities for the taxpayer's own account for purposes of this paragraph the effecting of transactions in stocks or securities includes buying selling whether or not by entering into short_sales or trading in stocks securities or contracts or options to buy or sell stocks or securities on margin or otherwise for the account and risk of the taxpayer and any other activity closely related thereto such as obtaining credit for the purpose of effectuating such buying selling or trading the volume of stock or security transactions effected during the taxable_year shall not be taken into account in determining under this subparagraph whether the taxpayer is engaged in trade_or_business_within_the_united_states postu-127646-09 interest in or right to subscribe to or purchase any of the foregoing sec_1_864-2 c the meaning of dealer in stocks or securities for purposes of the a ii safe_harbor the regulations under sec_864 define a dealer in stocks or securities as a merchant of stocks or securities with an established place of business regularly engaged as a merchant in purchasing stocks or securities and selling them to customers with a view to the gains and profits that may be derived therefrom sec_1_864-2 a person that buys and sells or holds stocks or securities solely for investment or speculation is not a dealer id a person’s transactions in stocks or securities effected both in and outside the united_states are taken into account to determine whether the person is a dealer in stocks or securities id the regulations provide two exceptions to the definition of the term dealer in stocks or securities a foreign_person that otherwise may be considered a dealer in stocks or securities is not considered a dealer solely because he acts as an underwriter or as a selling group member for the purpose of making a distribution of stocks or securities of a domestic issuer to foreign purchasers of such stocks or securities irrespective of whether other members of the selling group distribute the stocks or securities of the domestic issuer to domestic purchasers or solely because of transactions effected in the united_states in stocks or securities pursuant to his grant of discretionary authority to make decisions in effecting those transactions if he can demonstrate to the satisfaction of the commissioner that the broker commission agent custodian or other agent through whom the transactions were effected acted pursuant to his written representation that the funds in respect of sec_1_864-2 iv definition of dealer in stocks or securities-- a in general for purposes of this subparagraph a dealer in stocks or securities is a merchant of stocks or securities with an established place of business regularly engaged as a merchant in purchasing stocks or securities and selling them to customers with a view to the gains and profits that may be derived therefrom persons who buy and sell or hold stocks or securities for investment or speculation irrespective of whether such buying or selling constitutes the carrying on of a trade_or_business and officers of corporations members of partnerships or fiduciaries who in their individual capacities buy and sell or hold stocks or securities for investment or speculation are not dealers in stocks or securities within the meaning of this subparagraph solely by reason of that activity in determining under this subdivision whether a person is a dealer in stocks or securities such person's transactions in stocks or securities effected both in and outside the united_states shall be taken into account postu-127646-09 which such discretion was granted were the funds of a customer who is neither a dealer in stocks or securities a partnership described in subdivision ii b of this subparagraph or a foreign_corporation described in subdivision iii b of this subparagraph sec_1_864-2 the regulations include two examples illustrating the foregoing exceptions example foreign_corporation x is a member of an underwriting syndicate organized to distribute stock issued by domestic_corporation y foreign_corporation x distributes the stock of domestic_corporation y to foreign purchasers only domestic_corporation m is syndicate manager of the underwriting syndicate and pursuant to the terms of the underwriting agreement reserves the right to sell certain quantities of the underwritten stock on behalf of all the members of the syndicate so as to engage in stabilizing transactions and to take certain other actions which may result in the realization of profit by all members of the underwriting syndicate foreign_corporation x is not engaged in trade_or_business_within_the_united_states solely by reason of its participation as a member of such underwriting syndicate for the purpose of distributing the stock of domestic_corporation y to foreign purchasers or by reason of the exercise by m corporation of its discretionary authority as manager of such syndicate example foreign_corporation y a calendar_year taxpayer is a bank which trades in stocks or securities both for its own account and for the account of others during foreign_corporation y authorizes domestic_corporation m a broker to exercise its discretion in effecting transactions in the united_states in stocks or securities for the account of b a nonresident_alien_individual who has a trading account with foreign_corporation y foreign_corporation y furnishes a written representation to domestic_corporation m to the effect that the funds in respect of which foreign_corporation y has authorized domestic_corporation m to use its discretion in trading in the united_states in stocks or securities are not funds in respect of which foreign_corporation y is trading for its own account but are the funds of one of its customers who is neither a dealer in stocks or securities a partnership described in subdivision ii b of this subparagraph or a foreign_corporation described in subdivision iii b of this subparagraph pursuant to the discretionary authority so granted domestic_corporation m effects transactions in the united_states during in stocks or securities for the account of the customer of foreign_corporation y at no time during does foreign_corporation y have an office or other fixed place of business in the united_states through which or by the direction of which such transactions in stocks or securities are effected by domestic_corporation m during foreign_corporation y is not engaged in trade_or_business_within_the_united_states solely by reason postu-127646-09 of such trading in stocks or securities during such year by domestic_corporation m for the account of the customer of foreign_corporation y copies of the written representations furnished to domestic_corporation m should be retained by foreign_corporation y for inspection by the commissioner if inspection is requested analysis fund’s position is that fund’s lending and stock_distribution activities in year and year constituted mere investment activity and thus do not constitute a trade_or_business_within_the_united_states alternatively fund argues that its lending and stock_distribution activities constituted trading in stocks or securities and that fund qualifies for the trading safe harbors we conclude that during year and year the nature and extent of fund’s lending and underwriting which were conducted by fund_manager acting as fund’s agent caused fund to be engaged_in_a_trade_or_business_within_the_united_states fund’s lending and underwriting did not constitute trading in stocks or securities for purposes of the trading safe harbors and even if fund’s lending and underwriting had constituted trading in stocks or securities for purposes of the trading safe harbors fund would not have qualified for the trading safe harbors i during year and year fund’s lending and stock_distribution activities caused fund to be engaged_in_a_trade_or_business_within_the_united_states fund’s lending and underwriting activities were profit-oriented activities that fund conducted on a considerable continuous and regular basis in the united_states during year and year based on the facts and circumstances fund’s lending and underwriting activities rose to the level of a trade_or_business_within_the_united_states fund_manager acting as fund’s agent conducted all aspects of fund’s business those activities were performed by fund_manager on behalf of fund and were attributable to fund for purposes of sec_864 and sec_882 see eg 34_tc_894 unlike a passive investor fund conducted an active business in the united_states contrast 312_us_212 estate of yaeger v comm’r the taxpayer_relief_act_of_1997 p l a which eliminated a statutory restriction on the applicability of the a ii safe_harbor to certain corporations if their principal offices were in the united_states obsoleted certain regulations under sec_1_864-2 however the quoted exceptions and examples continue to be effective because fund conducted a lending and underwriting business on a considerable continuous and regular basis it is unnecessary to address and this memorandum does not address whether certain of the fund’s activities may constitute engaging in a u s trade_or_business without regard to the extent of those activities see sec_864 postu-127646-09 f 2d 2d cir nor were fund’s activities sporadic and occasional contrast pasquel v comm’r 12_tcm_1431 14_tc_725 during the years at issue fund made numerous loans to borrowers and entered into dozens of distribution agreements with issuers fund dedicated significant time resources and effort to these activities fund negotiated with its counterparties and conducted extensive due diligence on potential borrowers and issuers fund actively solicited potential borrowers and issuers acting as an agent of fund fund_manager dedicated over amount of its investment banking personnel and other professionals to the process of sourcing and originating potential deals the nature and extent of fund’s lending and underwriting activities demonstrate that fund engaged in a lending and underwriting business on a considerable continuous and regular basis as a result fund was engaged_in_a_trade_or_business_within_the_united_states during the years at issue ii fund’s lending and stock_distribution activities during year and year did not constitute trading in stocks or securities within the meaning of the trading safe harbors fund’s lending and underwriting activities also did not constitute trading in stocks or securities for purposes of the trading safe harbors the regulations under sec_864 as well as relevant authorities in other contexts establish that lending and underwriting are distinctive activities that go beyond the effecting of transactions in stocks and securities and are therefore not treated as trading for purposes of the trading safe harbors a active_conduct_of_a_banking_financing_or_similar_business with respect to lending sec_1_864-4 stipulates that a foreign_person is considered engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states when the person m ak es personal mortgage industrial or other loans to the public in the united_states although this regulation provides rules for determining whether income is effectively connected to a banking_financing_or_similar_business these regulations demonstrate that the conduct of that type of business in the united_states does not qualify as trading in stocks or securities for purposes of the trading safe harbors the tax_court has also looked to these regulations as a useful framework for analyzing whether a person is engaged in trade_or_business_within_the_united_states inverworld inc v comm’r 71_tcm_3231 pincite in year and year fund actively solicited unrelated borrowers in the united_states and made multiple loans to those borrowers because fund made personal mortgage industrial or other loans to the public in the united_states fund was engaged in the active_conduct_of_a_banking_financing_or_similar_business within the united_states fund’s lending activities therefore did not constitute trading in stocks or securities sec_1_864-4 postu-127646-09 b limited underwriting exception similarly the sec_864 regulations establish that underwriting generally does not constitute trading for purposes of the trading safe harbors those regulations describe a narrow set of circumstances under which a foreign underwriter may qualify for the trading safe harbors specifically a foreign underwriter will not be treated as a dealer and will not be engaged_in_a_trade_or_business_within_the_united_states if the foreign_person acts as an underwriter or as a selling group member for the purpose of making a distribution of stocks or securities of a domestic issuer only to foreign purchasers of such stocks or securities sec_1_864-2 sec_1_864-2 example the limited nature of the exception demonstrates that distributing stocks or securities to u s customers exceeds the level of underwriting activity permitted to qualify as trading in stocks or securities through distribution agreements fund purchased shares from u s issuers and sold those shares to purchasers in the united_states and abroad fund’s underwriting activities in the united_states were more extensive than the limited underwriting activities permitted under the trading safe harbors see sec_1_864-2 c trading for sec_1221 purposes this interpretation of what constitutes trading for purposes of the trading safe harbors is consistent with judicial determinations of the scope of trading activity in other contexts for example for purposes of sec_1221 courts have described trading as purchasing and selling in secondary markets in order to generate profit based on changes in value of the traded assets see eg 943_f2d_1048 9th cir t raders are sellers of securities or commodities who ‘depend upon such circumstances as a rise in value or an advantageous purchase to enable them to sell at a price in excess of cost a trader performs no merchandising functions nor any other service which warrants compensation by a price mark-up of the securities he or she sells quoting 16_tc_1026 231_f3d_1035 7th cir the trader’s income is based not on any service he provides but rather on precisely fluctuations in the market_value of the securities or other assets that he transacts in fund profited from its lending and underwriting activities by earning fees a spread and interest payments fund did not seek to profit from a change in value of the securities it received from issuers and borrowers as a result fund’s lending and underwriting did not constitute trading sec_1221 excludes from capital_asset status stock_in_trade of the taxpayer or other_property of a kind which would properly be included in the inventory of the taxpayer or property held by the taxpayer primarily_for_sale_to_customers and property_held_for_sale to customers in the ordinary_course_of_his_trade_or_business courts have held that sec_1221 describes securities held by dealers but not traders see eg 147_f3d_147 2d cir postu-127646-09 d conclusion based on the regulations under sec_864 and case law defining the term trader for purposes of sec_1221 fund’s lending and underwriting activities did not constitute trading in stocks or securities these regulations and judicial decisions establish that certain activities may entail the effecting of transactions in stocks and securities but nonetheless exceed the scope of the trading activities protected by the trading safe harbors these characteristics may include the conduct of one or more activities typical of a banking_financing_or_similar_business interaction with customers the attempt to generate profit from merchandising rather than market appreciation or the extent of an underwriter’s involvement in the u s markets fund’s lending and underwriting activities demonstrate these characteristics when fund engaged in lending and underwriting it did not profit from taking on risk or identifying advantageous purchases rather in exchange for performing lending and underwriting activities fund received compensation in the form of fees discounted property and spreads both the activities performed and the compensation received by the fund demonstrate that fund’s activities are not properly characterized as trading in stocks or securities iii even if fund’s lending and stock_distribution activities were treated as trading in stocks or securities for purposes of the trading safe harbors fund would have been ineligible for the trading safe harbors during year and year the conclusion that fund’s lending and underwriting activities were not trading in stocks or securities is sufficient to exclude these activities from the trading safe harbors however even if fund’s lending and underwriting activities had constituted trading in stocks or securities fund was ineligible for the a i safe_harbor because fund granted discretionary authority to fund_manager further fund did not qualify for the a ii safe_harbor because fund acted as a dealer during year and year a the a i safe_harbor fund was ineligible for the a i safe_harbor because fund delegated discretionary authority to a u s -resident agent to conduct fund’s lending and underwriting neither sec_864 nor the regulations interpreting that section specifically define the term independent agent for purposes of the a i safe_harbor however the statutory language of sec_864 the legislative_history and the regulations under sec_864 demonstrate that a taxpayer may not qualify for the a i safe_harbor if the taxpayer delegates discretionary authority to a u s -resident agent the trading safe harbors after fita congress enacted sec_864 in partly in response to judicial and administrative interpretations of the trading safe_harbor provided in the internal_revenue_code_of_1939 the code the term independent agent in section postu-127646-09 b a i must be construed in light of that context which demonstrates that congress intended that transactions conducted through an agent vested with discretionary authority could not qualify for the a i safe_harbor the code provided that a nonresident_alien_individual engaged in trade_or_business in the united_states or having an office or place of business therein was subject_to u s tax on a net_basis see sec_211 of the code the code also included a safe_harbor that was similar to the current a i safe_harbor specifically sec_211 of the code provided that the phrase engaged in trade_or_business_within_the_united_states did not include the effecting of transactions in the united_states in stocks securities or commodities through a resident broker commission agent or custodian id in congress amended that safe_harbor by adding or other independent agent so that it permitted trading through a resident broker commission agent custodian or other independent agent the amendment was prompted by a tax_court decision interpreting the code’s trading safe_harbor in adda the tax_court concluded that the sec_211 safe_harbor in the code was inapplicable to a nonresident_alien who granted discretionary authority to a u s -resident agent the taxpayer’s brother to deal in commodity futures for the nonresident alien’s account t c pincite the tax_court reasoned had the petitioner come to the united_states and effected these transactions while here for a sufficient period he would be taxed upon the profits of these transactions for he would lose the status of nonresident_alien and sec_211 would not be applicable he seeks to accomplish in this case through his brother as his agent what he could not accomplish directly by himself that is to effect transactions by decisions made in the united_states by one who is not a resident broker commission agent or custodian and not be taxed upon the gains in effect he is engaging by his agent in trade_or_business in the united_states id pincite soon afterwards the internal_revenue_service reached a similar conclusion ruling that a canadian investment_company was engaged in trade_or_business in the united_states when the company had an agent in the united_states with discretionary power to purchase and sell securities see revrul_55_282 1955_1_cb_634 congress enacted sec_864 as part of the foreign investors tax act of p l fita fita amended the code’s statutory trading safe_harbor in two relevant ways first whereas the code permitted trading in the united_states through a resident broker commission agent or custodian congress amended that safe_harbor to permit trading through a resident broker commission agent custodian or other independent agent second in the newly-enacted a ii safe_harbor postu-127646-09 congress expressly permitted foreign persons that are not dealers in stocks or securities to trade in stocks securities and commodities in the united_states through resident agents vested with discretionary authority the term independent agent is not explicitly defined for purposes of sec_864 however the term should be understood in the context of fita’s overhaul of the pre- statutory trading safe_harbor congress expressly permitted taxpayers invoking the a ii safe_harbor to grant discretionary authority to u s -resident agents but did not extend the same right to taxpayers invoking the a i safe_harbor concurrently congress limited the scope of trading permitted under the a i safe_harbor to trading through a resident broker commission agent custodian or other independent agent by specifically permitting trading through resident agents granted discretionary authority solely in the a ii safe_harbor while simultaneously limiting the scope of the a i safe_harbor to trading through a resident broker commission agent custodian or other independent agent congress implicitly defined an independent agent as an agent lacking discretionary authority permitting dealers to trade in the united_states through resident agents vested with discretionary authority would have undermined congress’s decision to exclude dealers from the a ii safe_harbor unlike the a i safe_harbor the a ii safe_harbor permits trading through employees or an office located in the united statesdollar_figure by preventing dealers from qualifying for the trading safe harbors when trading through an employee or office in the united_states congress sought to block foreign dealers from actively competing with u s dealers while also qualifying for the trading safe harbors see cc lr-1185 wl at p a second question arose with respect to the exclusion of dealers from sec_864 trading for taxpayer's own account the reason for this is that dealers are in the business of trading in stocks or securities for their own account if they were artificially to be considered not engaged in trade_or_business in the united_states by virtue of their united_states trading they would have a distinct competitive advantage vis-à-vis their united_states counterparts if the a i safe_harbor permitted trading through resident agents vested with discretionary authority then dealers could use that safe_harbor to do exactly what congress was trying to prevent that is those dealers could trade through u s - resident agents granted discretionary authority and exempt their trading gains from u s taxation while their domestic competitors were subject_to full u s taxation on their trading gains this would eviscerate congress’s purpose in banning dealers from the a ii safe_harbor furthermore the legislative_history to fita demonstrates that congress sought to overturn the result in adda for non-dealers by enacting the a ii safe_harbor while prior to the taxpayer_relief_act_of_1997 p l a a foreign_corporation generally could qualify for the a ii safe_harbor unless the foreign corporation’s principal business was trading in stocks or securities and the corporation’s principal office was in the united_states the taxpayer relief act eliminated that restriction postu-127646-09 preserving the adda result for dealers by clarifying that if an agent were granted discretionary authority then the a i safe_harbor would not apply under present law the granting of this discretionary authority may prevent a nonresident_alien or foreign_corporation from qualifying for the pre-1966 statutory trading safe_harbor y our committee has amended present law to specifically provide that except in the case of a dealer the trading in stocks securities or commodities in the united_states for one’s own account whether by a foreign_person physically present in the united_states through an employee located here or through a resident broker commission agent custodian or other agent - whether or not that agent has discretionary authority - does not constitute a trade_or_business in the united_states although under sec_864 a dealer is specifically excluded from those who may grant discretionary authority and not be deemed to be conducting a business in the united_states he may trade in securities or commodities for his own account through a u s agent without being considered to be conducting a business in the united_states h_r rep no 89th cong 2d sess 1966_2_cb_965 numerous commentators have concurred with the conclusion that the a i safe_harbor is inapplicable when a foreign_person grants discretionary authority to a u s -resident agent see eg sidney i roberts u s taxation of foreign taxpayers’ stock or security transactions an analysis tax’n of int’l trade date a dealer can qualify for exclusion only under the general_rule of sec_864 t hus a foreign dealer in stocks or securities who regularly effects transactions in the united_states is within the statutory exclusion only if he effects such transactions through an independent nondiscretionary agent leslie b samuels patricia a brown observations on the taxation of global securities trading tax l rev arguing that the a i safe_harbor does not apply to a foreign_person who grants discretionary authority to a u s -resident agent yaron z reich taxing foreign investors' portfolio investments developments and discontinuities tax notes int'l ta ndollar_figure date noting that the a i safe_harbor which is available to dealers is intended to facilitate the execution of transactions through u s brokers that do not exercise discretionary authority on behalf of the taxpayer david r sicular emma o sobol selected current effectively_connected_income issues for investment funds tax law summer noting that pre-fita case law suggests that an independent agent cannot for sec_864 purposes be granted discretionary investment authority new york city bar report offering proposed guidance regarding u s federal_income_tax treatment of certain lending activities conducted within the u s pincite date noting that legislative_history to fita suggests that an agent with discretionary authority may not be considered independent for purposes of the a i safe_harbor postu-127646-09 this conclusion is unaffected by the fact that in other contexts an independent agent may exercise discretionary authority on behalf of its principal see eg 104_tc_535 date reasoning that i t is freedom in the manner by which the agent performs specified duties that distinguishes him as independent in determining whether a japanese resident would be deemed to have a u s permanent_establishment under article of the convention between the united_states of america and japan for the avoidance of double_taxation and the prevention of fiscal evasion with respect to taxes on income date u s t part dollar_figure regulatory definition of dealer the regulatory definition of the term dealer under the a ii safe_harbor also confirms that a foreign_person who grants discretionary authority to u s -resident agents is ineligible for the a i safe_harbor and is limited to trading through the a ii safe_harbor the treasury regulations provide that a foreign_person who otherwise may be considered a dealer in stocks or securities shall not be considered a dealer for purposes of the a ii safe_harbor s olely because of transactions effected in the united_states in stocks or securities pursuant to his grant of discretionary authority to make decisions in effecting those transactions if he can demonstrate that the transactions were effected on behalf of a customer who is not a dealer in stocks or securities sec_1_864-2 see also sec_1_864-2 example providing that a foreign bank is not engaged in trade_or_business in the united_states when the foreign bank authorizes a u s broker to exercise discretion in trading stocks for the foreign bank’s customer david s miller the u s federal_income_tax consequences of origination activity by foreign investment vehicles abatax- cle n date this narrow exception to the dealer definition allows a foreign dealer to qualify for the a ii safe_harbor when the foreign dealer effects transactions of a customer through an agent with discretionary authority if a dealer could grant discretionary authority to a u s -resident agent to transact on the dealer’s behalf and still qualify for the a i safe_harbor then there would be no need to provide or illustrate this exception to the dealer definition hence the regulations demonstrate that foreign persons that grant discretionary authority to u s -resident agents to transact on the foreign person’s behalf can only use the a ii safe_harbor see also cc lr-1185 wl at p commentators have noted evolving uses of the term independent agent in the treaty context see generally john f avery jones david a ward agents as permanent establishments under the oecd model tax_convention eur tax’n sidney i roberts the agency element of permanent_establishment the oecd commentaries from the civil law view part sec_1 intertax richard crawford pugh policy issues relating to the u s taxation of foreign persons engaged in business in the united_states through agents some proposals for reform san diego int’l law l j postu-127646-09 indicating in the transmittal letter for the final sec_1_864-2 regulations that an example in sec_1_864-2 was intended to demonstrate that adda had been reversed for non-dealers by the addition of sec_864 the a ii safe_harbor to the code conclusion during the years at issue fund had no employees of its own instead fund conducted its business entirely through fund_manager which had been granted ------------------------ --------------------------------------------------------------------------------------------------------------------- ------------------------------------------------ fund granted discretionary authority to fund_manager to conduct a lending and underwriting business in the united_states on behalf of fund therefore fund_manager was not a resident broker commission agent custodian or other independent agent for purposes of the a i safe_harbor during the years at issue b the a ii safe_harbor fund was ineligible for the a ii safe_harbor because its underwriting activities made it a dealer in stocks or securities a dealer in stocks or securities is a merchant of stocks or securities with an established place of business regularly engaged as a merchant in purchasing stocks or securities and selling them to customers with a view to the gains and profits that may be derived therefrom sec_1 c iv a by contrast investing or speculating in stocks or securities does not cause a person to be treated as a dealer id through its underwriting activity fund was regularly engaged in purchasing stocks and selling them to customers with an intention of earning gains and profits from those purchases and sales and it had an established place of business in addition regulatory exceptions available to certain dealers are inapplicable to fund postu-127646-09 fund acted as a merchant of stocks by purchasing stocks from issuers with a view to distributing or selling that stock to the public see 77_f2d_323 2d cir a merchant ordinarily at least does not resell to the same class of persons from whom he buys he is a middleman in distributing the goods fund held itself out to the public as providing issuers with access to public markets through distribution agreements pursuant to the distribution agreements fund was irrevocably bound to purchase stock from the issuers during the --------- period fund typically sold an issuer’s stock in an amount that would generate enough cash to fund the advance requested by the issuer the terms of the distribution agreements and the fund’s conduct show that it purchased and sold issuers’ stock in the course of its underwriting business moreover the number of transactions that occurred over the course of several years shows that fund regularly engaged in this underwriting activity fund entered into amount distribution agreements with unrelated issuers in year and amount distribution agreements with unrelated issuers in year sec_1_864-2 establishes that dealers seek to derive gains and profits specifically from the activity of acting as merchants and buying stocks and securities and selling them to customers meaning that dealers are distinguished from investors or traders by charging a mark-up as middlemen rather than seeking to derive profits solely from market appreciation whereas a dealer is one who acquires securities to hold for resale to customers charging a mark-up on such securities for providing a service a trader buys and sells securities with a view to profiting from changes in value in the securities see 231_f3d_1035 7th cir explaining that the dealer’s income is based on the service he provides in the chain of distribution of the goods he buys and resells rather than on fluctuations in the market_value of those goods while the trader’s income is based not on any service he provides but rather on precisely fluctuations in the market_value of the securities or other assets that he transacts in in light of this distinction between the profits earned by a dealer and a trader_fund earned profits as a dealer fund did not profit by speculating in an issuer’s stock instead fund acquired the issuer’s stock at a discount and sold the stock at market price fund as an underwriter distributed stock_or_securities in exchange for fees discounted securities and other_property that compensation constitutes income based on the service an underwriter provides in the chain of distribution of the goods he buys and resells rather than profits derived from market fluctuations id these gains and profits are consistent with the gains and profits earned by a dealer in stocks and securities for purposes of sec_1_864-2 and for other purposes of the code as a result of its underwriting activity fund purchased stocks and sold them to customers within the meaning of sec_1_864-2 the reference to purchasing stocks or securities and selling them to customers does not establish a conjunctive test pursuant to which a dealer must both x purchase stocks or securities postu-127646-09 from a specified class of persons identifiable as customers and y sell those stocks or securities to a class of persons also identifiable as customers rather the regulation articulates a standard pursuant to which a dealer is a person that acts as a middleman or market-maker with respect to stocks or securities further the regulations do not require that the middleman establish any particular prescribed or pre-existing relationship with a given purchaser in order for that purchaser to qualify as a customer for purposes of the dealer definition rather a middleman’s vendees are customers per se whenever the middleman is seeking to earn a profit by reselling to such vendees cf 16_tc_1026 t hose who sell ‘to customers’ are comparable to a merchant in that they purchase their stock_in_trade in this case securities with the expectation of reselling at a profit not because of a rise in value during the interval of time between purchase and resale but merely because they have or hope to find a market of buyers who will purchase from them at a price in excess of their cost this excess or mark-up represents remuneration for their labors as a middleman bringing together buyer and seller and performing the usual services of retailer or wholesaler of goods such sellers are known as ‘dealers ’ this is true even when a middleman's vendees are for example other dealers provided that the middleman is seeking to earn a mark-up through the transaction therefore when fund sold the stock acquired pursuant to the distribution agreements fund’s vendees were customers simply by virtue of the fact that fund was providing market access to issuers in addition fund performed its underwriting activities through the fund manager’s office which served as an established place of business within the meaning of sec_1_864-2 fund and fund_manager entered into a management agreement pursuant to which fund appointed fund_manager as fund’s agent and irrevocable attorney-in-fact with full power to buy sell and otherwise deal in securities and related contracts for fund’s account pursuant to that grant of authority fund_manager conducted a stock_distribution business on behalf of fund through fund manager’s office although treasury regulations permit a foreign_person to engage in limited underwriting activities without being treated as a dealer these exceptions are not available to fund specifically a foreign_person is not considered a dealer solely because the foreign_person acts as an underwriter or as a selling group member for the purpose of making a distribution of stocks or securities of a domestic issuer to foreign purchasers of such stocks or securities sec_1_864-2 c iv c example however fund’s activities were not within the scope of the exception because fund’s distribution of stock was not limited to foreign purchasers further the narrow scope of this exception establishes that a foreign_person purchasing stocks or securities from u s issuers with a view to distributing those stocks or securities to u s purchasers will typically be treated as a dealer for purposes of the a ii safe_harbor postu-127646-09 accordingly fund was a dealer in stocks or securities within the meaning of sec_1_864-2 as a dealer in stocks or securities within the meaning of sec_1_864-2 fund was ineligible for the a ii safe harbordollar_figure summary based on all the facts and circumstances described above fund through fund_manager engaged in lending and stock_distribution activities within the united_states on a considerable continuous and regular basis those activities were neither investment activities nor trading in stock and securities as that term is used in the trading safe harbors rather fund’s extensive lending and underwriting activities caused fund to be engaged_in_a_trade_or_business_within_the_united_states during year and year as a partner in fund foreign feeder was engaged_in_a_trade_or_business_within_the_united_states other cases determinations regarding whether nonresident individuals or foreign_corporations are engaged_in_a_trade_or_business_within_the_united_states for purposes of sec_864 sec_871 and sec_882 are highly factual depending on the facts and circumstances we will support adjustments asserting that offshore investment vehicles that engage in a lending or underwriting business or in other activities that are not protected by the trading safe harbors are engaged_in_a_trade_or_business_within_the_united_states other fact patterns may also cause foreign investment entities to be engaged in the active_conduct_of_a_trade_or_business within the united_states we encourage you to contact this office to discuss the factual development and legal analysis in these cases this memorandum is limited to an analysis of whether fund and foreign feeder were engaged_in_a_trade_or_business_within_the_united_states fund purchased convertible debt instruments that were typically converted to discounted stock within a year fund sought to distribute that stock to the public market immediately following conversion notwithstanding the fact that fund i sold stock rather than the notes that it acquired from borrowers and ii held its borrowers’ notes for a brief period before converting the notes to stock and selling the stock to the public the distribution activity associated with fund’s convertible loans constituted dealing in stocks or securities for the same reasons that fund’s activities related to its distribution agreements constituted dealing in stocks or securities moreover in other contexts making loans to the public may be sufficient to cause a person to be treated as a dealer even when the lender holds the loans instead of selling them see eg sec_1_475_c_-1 providing an exception from dealer status for a taxpayer that regularly purchases securities from customers in the ordinary course of a trade_or_business including regularly making loans to customers in the ordinary course of a trade_or_business of making loans that engages in no more than negligible sales of the securities is not a dealer unless the taxpayer elects otherwise emphasis added this memorandum expresses no opinion as to whether other types of lending activity for example lending but not selling the loans would be sufficient to cause a foreign_person to be treated as a dealer for purposes of the a ii safe_harbor postu-127646-09 case development hazards and other considerations this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views please call mark erwin peter merkel or raymond stahl at if you have any further questions