Cayman Islands Partnership, With No Staff, Not Recognized and Attributed US Income From US Agent/Advisor

According to Law360, a securities partnership based in the Cayman Islands owes federal income taxes on earnings connected with the management of its assets by a New Jersey advisory firm, the U.S. Tax Court ruled in YA Global Investments LP et al. v. Commissioner of Internal Revenue, docket numbers 14546-15 and 28751-15, saying the relationship constitutes engagement in a U.S. business.

The advisory firm's regular participation qualified the offshore partnership, YA Global Investments LP, as being engaged in a U.S. business, making it liable for withholding taxes, the Tax Court said in an opinion. Under Internal Revenue Code Section 1446, the partnership is required to pay tax on the portion of its income effectively connected with its U.S. business that was allocated to foreign partners, according to the opinion, which upheld partnership adjustments by the Internal Revenue Service for 2006 through 2008.

The IRS Had Argued That The Activities Of The Advisory Firm, Yorkville Advisors GP LLC, Were Attributable To YA Global Because The Partnership Had No Employees And Couldn't Perform Any Activities Itself, According To The Opinion.

YA Global had argued that Yorkville was its service provider rather than an agent whose activities could be attributed to the partnership for determining whether it was engaged in a U.S. business.

The court reasoned that YA Global, which provided funding to portfolio companies in exchange for stock and other securities, maintained control over Yorkville and expressly appointed the advisory firm as the partnership's agent in its investment management agreements. 

Furthermore, the activities that Yorkville performed on behalf of the partnership were "continuous, regular, and engaged in for the primary purpose of income or profit," meeting the requirements for engagement in a U.S. business as defined by case law and under IRC Section 864(b), the court said.

Planning Point - Need to staff foreign entities for them to be recognized as separate from US affiliates.

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DC Circ.Told Foreign Partner Liable For $6.5M In Gains Attributable To Inventory

According to Law360,  a foreign citizen living abroad who sold her share in a U.S. partnership that sold 5-Hour Energy drinks owed federal income tax on $6.5 million in gains stemming from the partnership's sale of inventory, the U.S. government told the D.C. Circuit in he case is Rawat v. Commissioner of Internal Revenue, case number 23-1142, in the U.S. Court of Appeals for the District of Columbia Circuit.

While Indu Rawat claimed that the inventory gains, like her partnership interest, should have been taxed as her personal property in the country where she lives, the government argued in a brief Tuesday that the gains were subject to an exception for inventory property.

Income from personal property sales, including partnership interests, by nonresidents is generally sourced to the country where the taxpayer lives and is therefore not taxable under Internal Revenue Code Section 865(a)(2), according to the brief. However, Rawat's gains are governed by an exception under IRC Section 865(b)(1) , which says income from the sale of inventory is subject to taxation according to the location where the inventory was produced, purchased or sold — in Rawat's case, in the U.S., the government said.

Furthermore, IRC Sections 751 and 741, which govern inventory items and gains and losses, require that in a partnership sale, the income from inventory sales should be severed from the gain of the sale and treated separately and as an inventory sale, the government said.

"That Meant That The Portion Of Rawat's Profits From
The Sale Of Her Partnership Interest Attributable To

The Partnership's Inventory Was Sourced In And
Taxable By The United States," The Government Said.

Rawat, a Canadian citizen who lived in India, sold her 29% interest in Innovation Ventures LLC, a U.S. partnership that sold consumer products including the energy drinks, in 2008 for a $438 million promissory note, according to the brief. The partnership later sold inventory for $22.3 million, of which $6.5 million was Rawat's share.

After an IRS audit of the partnership's returns, the agency determined Rawat owed $2.3 million in taxes on the inventory gain. Rawat paid the tax, plus penalties and interest, and challenged the agency's determination in U.S. Tax Court, which in May sided with the IRS and denied Rawat a $2.9 million refund.

Rawat's appeal of the decision to the D.C. Circuit incorrectly argues that IRC Section 741 allows her partnership interest to be classified as a single interest in a capital asset, the government said. Rawat's argument ignores the law's explicit exemption for inventory items, according to the government.

Furthermore, Rawat wrongly claims that her sale of the partnership stake wasn't connected to the U.S.-based business of selling energy drinks, relieving her of the requirement to pay tax to the U.S., the government said. She argued that while she is considered to be in the energy drink business, her gain was derived from the sale of the partnership interest.

But That Is Only True With Respect To Her Noninventory
Gain Under The Inventory Exception Laid Out In
IRC Section 865, The Government Said.

Rawat also incorrectly invoked "the entity theory" of partnership law to conclude that the income from her property shouldn't be separated from the rest of her profits for tax purposes, the government said. However, the Tax Court correctly held that the exception for inventory property applies, according to the government.

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Democratic-Led Senate Opposes Any Further Cuts To IRS Funding

According to Law360, House Republicans passed legislation to rescind $14.3 billion in IRS funding to pay for an aid package for Israel, but resistance in the Democratic-led Senate and public support for the agency's recent changes will likely insulate the agency from the latest attempt to cut its funding.

The Israel Security Supplemental Appropriations Act, which the House passed 226-196 on Thursday, would rescind unobligated funding that the Inflation Reduction Act provided to the Internal Revenue Service for enforcement and operations support. It would also claw back funding for the agency's task force that is designing an IRS-run free electronic tax return filing system, which the agency has said will launch in the 2024 filing season.

• The IRS already has seen $21.4 billion of the Inflation Reduction Act's original $80 billion funding boost clawed back under the Fiscal Responsibility Act. 
• While $1.4 billion was immediately rescinded, President Joe Biden and then-House Speaker Kevin McCarthy, R-Calif., also agreed to cut $10 billion of the agency's funding in each of the 2024 and 2025 fiscal years.

While newly elected House Speaker Mike Johnson, R-La., has said he's hopeful the bill will get Democrats' votes, Senate Majority Leader Chuck Schumer, D-N.Y., has said lawmakers in his chamber will work on their own emergency aid bill for Israel that will also include aid for Ukraine and humanitarian aid for Gaza. 

The White House has said the House proposal departs from the bipartisan approach Congress consistently takes to provide emergency national security assistance and Biden will veto the bill if it is sent to him. Even some Senate Republicans have said they'd be open to an alternative way to pay for aid to Israel.

Congressional Observers Say It Is Unlikely Biden And
The Senate Will Agree To Such A Large Additional Cut
To The IRS' Funding After Making This Summer's
Deal To Claw Back Funding In The Future.

"I am strongly against what the House is doing," Cardin said.

Finance Committee Chairman Ron Wyden, D-Ore., told Law360 there's no way he'll support the proposed funding cuts."It's a terrible idea," Wyden said, adding that the plan would make the government lose out on revenue. He pointed to the Congressional Budget Office's outlook that the House Israel aid proposal would decrease federal revenue by $26.8 billion and increase the deficit by $12.5 billion over the next decade because it would impede the IRS' ability to undertake enforcement actions.

For their part, some Senate Republicans said they were open to alternatives for funding an aid bill that wouldn't pull money out of the IRS' accounts.

Public support for the agency's progress, especially its improved customer service since the Inflation Reduction Act's passage, could also bolster the IRS' argument that further funding cuts would be counterproductive.

The agency also said recently that it collected $122 million in back taxes from 100 high-income, high-wealth individuals in its effort to ramp up enforcement against people with more than $1 million in income who haven't filed taxes and those who have failed to pay more than $250,000 in tax debt. According to polling conducted by Hart Research Associates on behalf of Groundwork Action, 75% of voters want Congress to crack down on wealthy individuals and corporations who don't pay the taxes they owe.

Biden Is Likely To Feel Some Political Pressure When It Comes To Whether To Claw Back More Of The Agency's Funding, Especially From Congressional Observers Who Were Disappointed By The President's Agreement To Claw Back
A Portion Of It Earlier This Year.

"It's critically important [that] this president who, in the depths of the negotiation, agreed to rescind $20 billion from the IRS funding ... doesn't give a penny more in IRS funds," Volsky said, adding that Biden has been vocal about the importance of closing the country's wealth gap. Americans expect Biden and progressive members of Congress to "fight Republican efforts to empower wealthy tax cheats to dodge their tax obligations," he said.

The previous clawback makes it essential for Democrats to protect the agency's remaining funding, Hughes said, adding that Congress shouldn't be using the funding boost as a piggy bank. If Democrats acquiesce to House Republicans' demands, they'll set a precedent that could eventually wipe out the agency's entire funding boost, he said.

"Democrats sort of regrettably accepted that $20 billion in cuts to avoid a debt default earlier in the year, and then Republicans immediately backtracked on their agreement," Hughes said. "Now, they want more and more cuts, and it's just pretty clear how this is going to go. If they keep accepting more and more cuts, eventually there's going to be nothing left."

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TC Find That The Petition Filing Deadline Is Jurisdictional

On August 9, 2023 we posted Deadline To File TC Petition is Midnight EST on the Last Day To File & TC Dismisses 11 Second Late e-Filed Petition, where we discussed that in Sanders, (6/20/2023) 160 TC 16, the Tax Court dismissed a pro se taxpayer's petition because it was e-filed 11seconds late. 

Now The Tax Court Has Held That The 90-Day
Deadline For Filing Petitions With The Court
In Deficiency Cases Is Jurisdictional.

The Court pointed out that any appeal of its decision would presumptively lie in the Court of Appeals for the Fourth Circuit, which has not yet issued a precedential, published opinion as to whether the 90-day deadline is jurisdictional. (Sanders, 161 TC 8 (2023))

The IRS had issued a notice of deficiency to a taxpayer. The taxpayer filed her petition with the Tax Court three days after the expiration of the 90-day period, as extended by Code Sec. 7503, to file a petition disputing the notice of deficiency under Code Sec. 6213(a).

The IRS moved to dismiss the case for lack of jurisdiction.

The Tax Court held that the 90-day deadline for filing petitions with this Court in deficiency cases is jurisdictional. Hence, the petition in this case was untimely filed, and the Court dismissed the case for lack of jurisdiction.

The Tax Court noted that it was reaffirming its prior holding in Hallmark Research Collective v. Commissioner, 159 TC 126 (2022).

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IRS J5 Joint Op Creates 50 Crypto Tax Crime Leads

According to Law360, the Internal Revenue Service and several international partners created well over 50 leads on potential tax crimes and money laundering involving cryptocurrency during a joint action this week, the agency's Criminal Investigation chief said Thursday.

The Joint Chiefs of Global Tax Enforcement, or J5, gathered criminal investigators and financial intelligence units from Canada, Australia, the Netherlands, the United Kingdom and the U.S. for a "cyber challenge," Jim Lee, chief of IRS Criminal Investigation, said during a virtual news briefing. The group's fifth challenge to drive leads on tax crimes focused on data mining and financial reports with the help of data scientists and industry experts from cryptocurrency companies Chainalysis, BlockTrace, and AnChain, according to Lee.

"These Are What I Consider, After A Briefing,
High-Dollar, High-Impact Leads That Have
Cross-Jurisdiction Representation," Lee Said."

We're not fighting for a split decision; we're fighting for the knockout punch."

The Canada Revenue Agency is hosting the challenge in Ottawa. Sharing the same room significantly expedites how quickly information is shared, which creates more leads, Oleg Pobereyko, J5 project lead for the U.S. and the J5's cyber group lead, said during the briefing.

"The main priorities are tax crime," Pobereyko said, but the team also looked into individuals who made significant amounts of crypto potentially from drug trafficking, human trafficking and child exploitation.

A paper summarizing the results of the current challenge is expected to be published next week by the group's financial intelligence units, or FIU. It was the first time that the FIUs participated in a J5 challenge, according to the release.

Cryptocurrency allows investigators to follow suspects' transactions over a longer time frame compared to traditional financial crime investigations, even with old data, according to Ron Willemse, strategic advisor to the Dutch Fiscal Intelligence and Investigation Service.

The J5 helped to track diverted funds and make arrests following an indictment, charging three founders of a cryptocurrency called SafeMoon with a conspiracy to misappropriate millions of dollars,  that the U.S. Attorney's Office for the Eastern District of New York unsealed Wednesday,November 1, 2023.

Over 83% of IRS-CI's investigations that are recommended for prosecution have a primary suspect with a BSA filing, the report said.

Since the J5's inception in 2018 its challenges have helped track down people who make a living out of facilitating "international tax crime," Eric Ferron, director general of the CRA's Criminal Investigations Directorate, said during the briefing. 

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Republicans Look To Rescind Another $14.3 Billion In Inflation Reduction Act Funding For The IRS

According to Law360, House Republican legislation that would rescind $14.3 billion in Inflation Reduction Act funding for the Internal Revenue Service to offset an aid package for Israel.

This Would Decrease Federal Revenue By $26.8 Billion Over The Next Decade, The Congressional Budget Office Said Wednesday, November 1, 2023.

The Israel Security Supplemental Appropriations Act, which would pay for aid to Israel by rescinding $14.3 billion in unobligated funding that the Inflation Reduction Act provided to the IRS, would impede the agency's ability to undertake enforcement actions, the CBO said in a report. 

The House of Representatives is expected to vote this week on the proposal. Senate Democrats have already said the legislation would be a nonstarter in that chamber.

"Republicans Never Miss A Chance To Protect 
Their Billionaire Donors," Whitehouse Said.

"As if conditioning aid to Israel on this gift to wealthy tax cheats wasn't bad enough, what they claim will 'pay for' the aid will actually add $12.5 billion to the deficit, nearly doubling the bill's total cost."

The House is also planning to vote on an IRS appropriations bill that aims to cut the agency's annual funding.

The IRS funding bill passed by the Republican-led House Appropriations Committee in July would give the agency $11.2 billion for fiscal 2024, a $1.1 billion drop compared with the agency's fiscal 2023 budget. 

It would also provide 

• $4.2 billion in enforcement funding — a $1.2 billion cut compared with the current fiscal year funding and 
• proposes clawing back $6.1 billion in unobligated funds for enforcement and $4.1 billion for operations support that the IRS received under the Inflation Reduction Act. 
• The 2022 law originally provided the IRS with $25.3 billion for operations support.

Lawmakers have submitted several amendments to the bill ahead of a House Rules Committee vote that could bring the proposal to the House floor next week.

Proposed Republican amendments would block funding for implementation of the Organization for Economic Cooperation and Development's global tax deal and funding for the IRS to enforce the American Rescue Plan Act's provision that requires peer-to-peer payment platforms such as Venmo and PayPal to report aggregate payments of $600 or more. The threshold was $20,000 under previous law.

Republicans also submitted amendments that would prohibit the IRS from hiring new agents and prevent the agency from purchasing and storing firearms and ammunition.

Democrats have introduced amendments to block the IRS from using funds to issue regulatory guidance or rulings that restrict state and local tax deduction workarounds and increase funding for the Taxpayer Advocate Service by $10 million.

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Why More -Not Less - IRS Enforcement Is Necessary

According to the DoJ, a federal grand jury in Alexandria, Virginia, returned an indictment, unsealed today, charging a Virginia man with income tax evasion and failure to pay employment taxes.

According to the indictment, Rick Tariq Rahim of Great Falls owned and operated two businesses, BV Management LLC, an Amazon reseller, and BusinessVentures.com LLC, an umbrella company over other businesses including laser tag facilities. 

Starting In At Least 2012, Rahim Allegedly Took Steps To
Evade IRS Efforts To Collect More Than $1 Million In Federal Income Taxes He Allegedly Owed For Tax Years 2004 And 2011.

The indictment charges that in November 2016, Rahim submitted a false form to the IRS that omitted valuable assets he owned, including:

• a helicopter, 
  
• a 2006 Bentley, 
• a 2008 Lamborghini and 
• real property, the ownership of which he allegedly transferred to his wife two weeks after submitting the form. 

The indictment further alleges that Rahim also withdrew a total of more than $1.1 million in cash in amounts less than $10,000 to avoid triggering currency transaction reports from the bank and paid personal expenses from his businesses’ bank accounts, including more than $889,000 toward his mortgages and more than $669,000 to purchase or lease cars, including three different Lamborghinis. 

In addition, the indictment charges that from 2015 to 2021, Rahim also did not pay to the IRS the taxes that his businesses withheld from employee paychecks or file quarterly tax returns reporting those withholdings.

If convicted, Rahim faces a maximum penalty of five (5) years in prison for the tax evasion count and five (5) years in prison for each count of failing to pay over employment tax withholdings. 

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