                                151 T.C. No. 2



                      UNITED STATES TAX COURT



 YA GLOBAL INVESTMENTS, LP f.k.a. CORNELL CAPITAL PARTNERS,
LP, YORKVILLE ADVISORS, GP LLC, TAX MATTERS PARTNER, AND YA
 GLOBAL INVESTMENTS, LP f.k.a. CORNELL CAPITAL PARTNERS, LP,
  YORKVILLE ADVISORS, LLC, TAX MATTERS PARTNER, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 14546-15.                          Filed August 8, 2018.



            R issued FPAAs with respect to Y, a partnership. R determined
    that Y was liable for withholding taxes under I.R.C. sec. 1446 and
    made adjustments in the FPAAs to reflect the withholding tax
    liabilities as well as related additions to tax and penalties.

            Y’s tax matters partner (TMP) filed a petition for readjustment
    of partnership items under I.R.C. sec. 6226(a). Y’s TMP also filed a
    motion to dismiss for lack of jurisdiction as to nonpartnership items.
    In that motion the TMP argues that the issue of liability under I.R.C.
    sec. 1446 should be dismissed for lack of jurisdiction because that
    liability is not a partnership item and thus is beyond our jurisdiction
    under I.R.C. sec. 6226(f).
                                         -2-

            Held: Under I.R.C. sec. 1461 any party required to withhold
      tax under ch. 3 of the Internal Revenue Code is liable for the tax
      required to be withheld.

            Held, further, I.R.C. sec. 1446 imposes a tax withholding
      requirement on partnerships with respect to effectively connected
      taxable income allocated to foreign partners, giving rise to a
      partnership liability.

              Held, further, under I.R.C. sec. 6226(f) the Tax Court has
      jurisdiction to determine partnership items including partnership
      liabilities.

             Held, further, a partnership’s liability for withholding tax under
      I.R.C. sec. 1446 is a partnership item and properly before the Court in
      a partnership-level proceeding.

            Held, further, the motion to dismiss for lack of jurisdiction as
      to nonpartnership items will be denied.



      Henry C. Cheng, Ellis L. Reemer, and Tamara L. Shepard, for petitioners.

      Gretchen A. Kindel, Robert T. Bennett, Mary Helen Weber, and Charles E.

Buxbaum, for respondent.


                                     OPINION


      BUCH, Judge: This case comes before the Court on a motion to dismiss for

lack of jurisdiction filed by the tax matters partner (TMP) for YA Global

Investments, LP (YA Global). In its motion, the TMP argues that withholding tax
                                          -3-

under section 14461 is not a partnership item and as a result the adjustments in the

notices of final partnership administrative adjustment (FPAA) relating to

withholding tax liability under section 1446 must be dismissed for lack of subject

matter jurisdiction. The Commissioner argues that withholding tax liability under

section 1446 is a partnership item and that YA Global is a party to the proceeding.

We find that withholding tax liability under section 1446 is a partnership item and

as such is properly before the Court in this partnership-level proceeding.

                                     Background

      YA Global is a partnership for U.S. Federal income tax purposes. YA

Global reports that it is an investor and is not engaged in an active U.S. trade or

business. It is based in the Cayman Islands, and its general partner and TMP,

Yorkville, is based in New Jersey.2 YA Global has both foreign and domestic

partners and was subject to the unified partnership audit and litigation procedures

of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-

248, sec. 402(a), 96 Stat. at 648, during the years in issue.



      1
        All section references are to the Internal Revenue Code (Code) in effect at
all relevant times.
      2
       In 2006 its general partner and TMP was Yorkville Advisors, LLC. In
2007 through 2010 its general partner and TMP was Yorkville Advisors GP, LLC.
For purposes of this Opinion, we refer to these entities singularly as Yorkville.
                                        -4-

      YA Global filed a Form 1065, U.S. Return of Partnership Income, for each

of the years in issue, 2006 through 2010. For each year YA Global reported its

income as portfolio income from interest, qualified dividends, ordinary dividends,

short-term capital gain, long-term capital gain, and other income.

      In March of 2015 the Commissioner issued a separate FPAA for each year,

2006 through 2010, to YA Global’s TMP. The Commissioner contends that YA

Global was a dealer in securities under section 475. In the FPAAs the

Commissioner determined that YA Global was engaged in a U.S. trade or business

and that all of its income was ordinary income that was effectively connected with

the U.S. trade or business. As a result, YA Global was required to “withhold on

effectively connected taxable income allocable to its foreign partners under I.R.C.

§ 1446.” For 2006 through 2009 the Commissioner determined that YA Global

was liable for taxes that were required to be withheld under section 1446 and

related additions to tax and penalties. The Commissioner issued an FPAA with no

adjustments for 2010.

      In addition to the FPAAs for 2006 through 2010, the Commissioner issued a

notice of deficiency for 2006 through 2009, determining that YA Global was

required to withhold taxes under section 1446. On the basis of that determination,

the Commissioner further determined that YA Global was liable for the tax under
                                          -5-

section 1446, failure to file and failure to pay additions to tax under section

6651(a), and failure to make estimated tax payments additions to tax under

sections 6655 and 1446(f)(2).

      YA Global’s TMP filed a petition for readjustment of the partnership items

for 2006 through 2010, and YA Global filed a petition for redetermination of the

deficiencies. YA Global and its TMP each filed motions to dismiss for lack of

jurisdiction.

      In the motion to dismiss for lack of jurisdiction in this partnership-level

proceeding, Yorkville argues that withholding tax liability under section 1446 is

not a partnership item. From this the TMP further argues that the liabilities under

section 1446 and all of the related additions to tax and penalties are not properly

before the Court in this partnership-level proceeding. The TMP also argues that,

because it is the partners who are the parties to a TEFRA proceeding rather than

the partnership, the partnership’s liabilities cannot be determined in the

proceeding.

      In the motion to dismiss for lack of jurisdiction as to the deficiency

redetermination, YA Global argues that the liability under section 1446 is

dependent on partner-level determinations and cannot be addressed until after a

partnership-level proceeding is completed. Specifically it argues that the Court
                                           -6-

must determine in a partnership-level proceeding whether YA Global had taxable

income that was effectively connected with a U.S. trade or business that could

give rise to liability under section 1446. YA Global further argues that any notice

of deficiency determining liability under section 1446 must await the outcome of

the partnership-level proceeding.

        The Commissioner argues that liability under section 1446 is a partnership

item. His principal argument is that liability under section 1446 fits within the

statutory definition of a partnership item under section 6231(a)(3). He also argues

that liability under section 1446 is more appropriately determined at the

partnership level than at the partner level, further suggesting that it is a partnership

item.

        These two proceedings have moved forward in tandem, and both

proceedings with their respective motions to dismiss are before the Court. The

question in this proceeding is whether the liability under section 1446 and the

related penalties are properly before the Court in this partnership-level proceeding.

                                       Discussion

        Ordinarily, it is the partners and not the partnership that are subject to tax.

Sec. 701. Certain tax issues can be resolved at the partnership level and remain

the same regardless of particular partners’ circumstances, while other issues can be
                                         -7-

addressed only at the partner level. To ensure that all partners receive the same

treatment with respect to the common issues and to reduce duplication of

administrative and judicial efforts, Congress created the partnership-level audit

and litigation procedures under TEFRA. Domulewicz v. Commissioner, 129 T.C.

11, 17 (2007), aff’d in part, remanded in part sub nom. Desmet v. Commissioner,

581 F.3d 297 (6th Cir. 2009).

      While partnerships are not generally subject to income tax, they are required

to file annual information returns with the Commissioner. Sec. 6031. When the

Commissioner disagrees with what is reported on those returns, he can issue an

FPAA which makes adjustments to those items. Sec. 6223(a), (d)(2). If certain

partners disagree with those adjustments, they can petition the Tax Court for

readjustment of partnership items for the taxable year identified in the FPAA. Sec.

6226(a) and (b).

      The Tax Court is a court of limited jurisdiction. Sec. 7442. The Tax Court

is granted jurisdiction to determine partnership items and make partnership-level

determinations as to penalties. Sec. 6226(a)(1), (f). Section 6226(f) limits the

scope of review in a partnership-level proceeding to “all partnership items of the

partnership for the partnership taxable year to which the notice of final partnership

administrative adjustment relates, the proper allocation of such items among the
                                         -8-

partners, and the applicability of any penalty, addition to tax, or additional amount

which relates to an adjustment to a partnership item.”

      A partnership item is defined in section 6231(a)(3) as “any item required to

be taken into account for the partnership’s taxable year under any provision of

subtitle A to the extent regulations prescribed by the Secretary provide that, for

purposes of this subtitle, such item is more appropriately determined at the

partnership level than at the partner level.” The question before the Court is

whether liability under section 1446 is a partnership item.

      Under section 1446 a partnership must withhold tax on any foreign partner’s

share of effectively connected taxable income. Section 1446 is one of a handful of

provisions that explicitly place a withholding burden on a partnership. See, e.g.,

sec. 1445(e). Section 1461 provides that “[e]very person required to deduct and

withhold any tax under * * * [chapter 3] is hereby made liable for such tax”.

Section 1446 is in chapter 3 of the Code. Together these two sections make a

partnership liable for the tax required to be withheld on foreign partners’ shares of

effectively connected taxable income.

      Section 1446 is also in subtitle A. Because the tax imposed by section 1446

is found in subtitle A, it is among the items that may be partnership items if the

Secretary determines by regulation that the tax is more appropriately determined at
                                          -9-

the partnership level. Sec. 6231(a)(3). But the Secretary has not promulgated any

such regulation. Thus, at first blush, it might appear that the tax imposed by

section 1446 is not treated as a partnership item. But our inquiry does not end

there.

         The tax imposed by section 1446 is brought within the scope of partnership

items because that tax is a partnership liability. “Partnership liabilities” are

included within the scope of the definition of partnership items. Sec.

301.6231(a)(3)-1(a)(1)(v), Proced. & Admin. Regs. Because section 1461 makes

the partnership liable for any tax required to be withheld under section 1446, any

tax required to be withheld under section 1446 is a partnership liability. And the

regulations are clear that partnership liabilities are partnership items.

         Most penalties cannot be partnership items. Penalties are generally found in

subtitle F, and to be a partnership item, an item must be in subtitle A. But

Congress expanded the scope of partnership-level proceedings to include “any

penalty, addition to tax, or additional amount which relates to an adjustment to a

partnership item”. Sec. 6221. And insofar as this Court’s jurisdiction is

concerned, section 6226(f) explicitly includes determining any penalty, addition to

tax, or additional amount that relates to an adjustment to a partnership item within
                                         -10-

the scope of our judicial review. Consequently, the penalties included in the

FPAAs are properly before the Court in this partnership-level proceeding.

      YA Global’s TMP argues that YA Global is not a party to the proceeding

for readjustment. As a result, it argues that we cannot determine liability under

section 1446 and the related penalties of an entity that is not a party to the

proceeding. We conclude that we need not address this issue. We are explicitly

granted jurisdiction to make findings with respect to partnership liabilities and do

so in partnership-level proceedings routinely. Sec. 6231(a)(3); sec.

301.6231(a)(3)-1(a)(1)(v), Proced. & Admin. Regs.; see, e.g., Hambrose Leasing

1984-5 Ltd. P’ship v. Commissioner, 99 T.C. 298 (1992); Great Plains

Gasification Assocs. v. Commissioner, T.C. Memo. 2006-276.

                                     Conclusion

      A liability stemming from duty to withhold under section 1446 is a

partnership liability and therefore properly before the Court in a partnership-level

proceeding, as are penalties relating to the partnership-item adjustment. The

motion to dismiss for lack of jurisdiction as to nonpartnership items will be

denied.


                                                An appropriate order will be issued.
