On November 15, 2023, the U.S. Tax Court held in YA Global Investments v. Commissioner[1] that a non-U.S. private equity fund (YA Global) with a U.S. asset manager that bought equity and convertible debt of U.S. portfolio companies was engaged in the conduct of a trade or business within the United States for U.S. federal income tax purposes, all of its income was “effectively connected” to that trade or business, and the fund (which was treated as a partnership for U.S. federal income tax purposes) was liable for penalties and interest for failing to withhold with respect to its non-U.S. corporate feeder fund partner. 

  • YA Global made loans and convertible loans and entered into standby equity distribution agreements (“SEDAs”) to purchase equity.  It entered into hundreds of these transactions over the years in question.  YA Global described itself as providing underwriting services, its manager received structuring fees and banker’s fees, and YA Global itself received commitment fees.  The Tax Court held that YA Global provided services, and therefore was engaged in a trade or business in the United States for tax purposes.
  • The case provides a reminder that labels matter and taxpayers should not assume that they will be able to assert a substance argument which conflicts with their own form.  For example, the outcome of the case may have been different had YA Global received all of the fee income that was paid to its manager and if the upfront payments had not been labeled as “fees”.  It certainly would have been easier to argue such income was earned for the provision of capital rather than for services if the income actually had been earned by the entity providing the capital and if the income was not called “fees”.  Where it is not possible to adopt a corporate form that is consistent with the intended tax treatment, it also can be helpful for the parties to agree on the tax treatment of the payment and explicitly state that agreed intention in the transaction documents.
  • The IRS argued that YA Global’s manager should be treated as YA Global’s agent merely because it was acting on behalf of YA Global.  However, the court declined to adopt such a broad standard, instead holding that it is the power to provide interim instructions that made the manager YA Global’s agent.  The court found that YA Global had that power based on a provision in its governing documents requiring it to promptly advise its manager of any relevant investment restrictions.  It is doubtful that future courts will follow this very narrow view of agency, and, therefore, funds should not rely on it.  However, funds whose managers have full discretion to invest on their behalf will have a second defense against an assertion that they are engaged in a U.S. trade or business.
  • YA Global held many of its securities for 12-24 months, told its investors that it sought “capital appreciation”, and had returns similar to venture capital funds (some investments doubled in value and a large number experienced losses).  Despite this, the court held that YA Global was a “dealer in securities” for purposes of section 475, and that its portfolio companies were “customers”.  Again, YA Global’s characterization of its own business to these portfolio companies as being a low-risk spread business likely worked against it.

On May 2, 2023, the Department of the Treasury and Internal Revenue Service (“IRS”) issued proposed Treasury Regulations (REG-124064-19) that would, in certain cases, terminate the application of Section 367(d)[1] when intangible property is repatriated back to the United States.  The proposed Regulations represent a taxpayer-favorable position for taxpayers that have considered repatriating intangible property to the United States but are concerned about the possibility of excessive taxation under current tax law.

On March 9, 2023, the Biden Administration released the Fiscal Year 2024 Budget, and the “General Explanations of the Administration’s Fiscal Year 2024 Revenue Proposals,” which is commonly referred to as the “Green Book.” The Green Book summarizes the Administration’s tax proposals contained in the Budget. The Green Book is not proposed legislation, and each of the proposals will have to be introduced and passed by Congress. Most of this year’s proposals were previously proposed by the Biden Administration. However, there are a number of notable new proposals, including proposals to increase the stock buyback tax to 4%, increase the net investment income tax (“NIIT”) rate and additional Medicare tax rate from 3.8% to 5% for certain high income taxpayers, apply the wash sale rules to digital assets, and implement several changes to the international tax laws. This blog post summarizes some of the Green Book’s key proposals.

On August 16, 2022 President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) into law.

The IRA  includes a 15% corporate alternative minimum tax, a 1% excise tax on stock buybacks and a two-year extension of the excess business loss limitation rules. The IRA also contains a number

On August 7, the Senate passed the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a significant number of climate and energy tax proposals, many of which were previously proposed in substantially similar form by the House of Representatives in November 2021 (in the “Build Back Better Act”).