The United States Tax Court has held that the owner of a capital interest in a partnership be recognized as a partner regardless of that person’s subjective intent to participate in the partnership’s business.
The court noted that the appellant-assessee was engaged in a U.S. trade or business during 2009. The assessee was required by I.R.C. § 475(a)(2) to recognize gain or loss as if each security it held on December 31, 2009, had been “sold for its fair market value” on that date.
The court held that the assessee has not established that any portion of the $148,269,798 value that PS assigned to its C convertible debentures was attributable to one or more assets that were not “securities” within the meaning of I.R.C. § 475(c)(2).
If the participation interests held by the foreign special purpose vehicles (Foreign SPVs) were contract rights to shares of the proceeds from the sale of specified securities owned by PS, those interests were capital interests in PS. See Treas. Reg. § 1.704-1(e)(1)(v).
I.R.C. § 704(e)(1), as in effect for 2009, required that the owner of a capital interest in a partnership be recognized as a partner regardless of that person’s subjective intent to participate in the partnership’s business.
Because the record does not establish whether the participation interests held by the Foreign SPVs gave them undivided ownership interests in specified securities or instead were contractual rights to receive proceeds upon assessee’s sale of those securities, assessee has not met its burden of establishing that the Foreign SPVs were not partners during 2009. Therefore, assessee withholding tax liability under I.R.C. § 1446 for 2009 must take into account the items of partnership income, gain, loss, and deduction allocable to the Foreign SPVs.
The assessee has not established that, when it accrued the $17,137,938 of interest it later wrote off for 2009, there was no reasonable expectation that the interest would ultimately be paid. The assessee’s accrual of the interest indicates that, at the time of accrual, its general partner had not determined that reasonable doubt existed as to the collectibility of the interest. The assessee has not identified any evidence unavailable to the assessee general partner during 2009 that establishes that assessee should have had no reasonable expectation of ultimately receiving the interest.
Facts
The appellant-assessee, PS, a partnership, provided funding to portfolio companies in exchange for stock, convertible debentures, promissory notes, and warrants. Under its established accounting policies, PS stopped accruing interest on debentures and promissory notes when, in the opinion of its general partner, reasonable doubt existed as to the collectibility of the interest. PS wrote off previously accrued interest when it determined that payment by the debtor was unlikely. During 2009, PS accrued $17,137,938 of interest that it ended up writing off as an expense for the year. Also during that year, PS’s general partner established foreign special purpose vehicles (Foreign SPVs) to facilitate the redemption of indirect interests in PS. Each Foreign SPV held participation interests entitling it to receive cash distributions as PS sold specified securities. On December 31, 2009, PS held stock, warrants, and convertible debentures issued by C, an Australian corporation in voluntary administration. On its financial statements, PS reported that its C convertible debentures were worth $148,269,798 on December 31, 2009. In an amended petition, Ps made the affirmative claim that PS was not required to have accrued for 2009 the $17,137,938 of interest that it later wrote off.
Case Details
Case Title: YA Global Investments V/S Commissioner Of Internal Revenue
Citation: T.C. Memo. 2024-78
Judges: Halpern Judge
Date of Order / Judgment: 08/08/2024
