KPMG report: YA Global v. Commissioner Tax Court decision released
First case to consider the application of the U.S. trade or business standard to a partnership fund arrangement in the modern era of asset management
Application of the U.S. trade or business standard to a partnership fund arrangement
The U.S. Tax Court released a precedential opinion on November 15, 2023, upholding the IRS’s determination that a fund was engaged in a U.S. trade or business and sustaining additions to tax. This is the first case to consider the application of the U.S. trade or business standard to a partnership fund arrangement in the modern era of asset management, and as such this case has been followed closely.
The case is: YA Global Investments, LP v. Commissioner, 161 T.C. No. 11 (November 15, 2023). Read text of the Tax Court’s opinion [PDF 703 KB] (133 pages)
In summary, the court found that the YA Global (the “Fund”), a limited partnership registered in The Cayman Islands was engaged in a U.S. trade or business through the activities of its U.S. based fund manager, earned income that was effectively connected with that U.S. trade or business and failed to withhold tax under section 1446 of the Internal Revenue Code in respect of that income allocable to non-U.S. partners.
The court focused on fees the Fund earned for entering into a type of convertible debt agreement under which the Fund was required to purchase the issuer’s stock over a fixed term.
Institutional investors should review the facts of this case and the court’s analysis in connection with current and proposed fund investments and related activities.
The implications of this case for institutional investors to consider include:
- Which fund investments, if any, involve facts similar to those of the Fund
- Potential imposition of U.S. withholding tax on their allocable share of a fund’s income effectively connected with a U.S. trade or business, or in connection with the disposition of their limited partnership interest
- Imposition of U.S. tax on effectively connected income and related tax compliance requirements
- For section 892 investors, managing the risk of conducting commercial activity including the potential to rely on the exception from attribution of commercial activity to a limited partner provided certain requirements are met
- If necessary, whether the exception for inadvertent commercial activity could be practically applied
- A review of which fund investments are held through controlled commercial entities or integral parts of the government given the different treatment under section 892 of commercial activity under each alternative
- A possible shift to relying on tax treaty relief rather than a section 892 exemption in some cases
- Whether fund due diligence procedures adequately take the implications of the case into account
- Commercial steps that may be taken to mitigate the earning of fees similar to those earned by the Fund
- The impact the case may have on the IRS’ enforcement campaign relating to financial services entities engaged in a U.S. trade or business
Read a KPMG report to learn more or contact a member of the KPMG Sovereign Wealth and Pension Funds tax team:
Sam Riesenberg | sriesenberg@kpmg.com
Dan Winnick | danielwinnick@kpmg.com
Josh Kaplan | jskaplan@kpmg.com
Janice Russell | janicerussell@kpmg.com
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.