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David S. Miller critiques the Tax Court’s decision in YA Global, arguing that the judge’s conclusions regarding agency, services, force of attraction, and penalties were fatally flawed.
Investment fund partnership YA Global Investments (YA Global) was formed as a Delaware limited partnership in 2001. In 2007, YA Global registered under the law of the Cayman Islands. YA Global had no employees. Yorkville Advisers, which had its headquarters in New Jersey, was YA Global’s ...
Investment fund partnership YA Global Investments (YA Global) was formed as a Delaware limited partnership in 2001. In 2007, YA Global registered under the law of the Cayman Islands. YA Global had no employees. Yorkville Advisers, which had its headquarters in New Jersey, was YA Global’s sole general partner from its formation until early 2007.A 2005 investment and management agreement stated that YA Global retained Yorkville Advisors to render management services and manage its securities investment account. The agreement further appointed Yorkville Advisors as YA Global’s agent with full authority to buy and sell on the partnership’s account.The parties entered into a new agreement in 2007 that substantively retained these provisions. Under the terms of each management agreement, YA Global had the right to give interim instructions to Yorkville Advisors regarding the management of YA Global’s investment account.Both YA Global and Yorkville Advisors received certain fees from portfolio companies in connection with the acquisition of securities. For example, Yorkville Advisors received structuring fees and YA Global received commitment fees.
Funds risk being considered engaged in a trade or business in the US if they engage in lending & create “effectively connected income” for non-US investors
On November 15, the U.S. Tax Court issued its decision in YA Global Investments, LP v. Commissioner. The facts state that YA Global provided direct capital to portfolio companies by purchasing convertible bonds and entering into standby equity distribution agreements.The court's view was that YA Global was receiving additional income and acting as an agent and therefore not merely an investor in securities (receiving capital gains from sales) but engaged in a trade or business.The IRS’s issue was that they believed YA Global was not an investor but in the lending business, causing it to be in a trade or business.In making this determination, the court employed a three-part analysis to determine that YA Global was engaged in a trade or business.
In a long-awaited decision, the United States Tax Court recently ruled in favor of the IRS, holding that YA Global, a non-U.S. partnership, was engaged in a U.S. trade or business and was therefore liable for federal tax withholding for its non-U.S. partners.
Learn how the United States Tax Court recently ruled in favor of the IRS, holding that YA Global was engaged in a U.S. trade or business and was liable for federal tax withholding for its non-U.S. partners.In a long-awaited opinion released November 15, 2023, the United States Tax Court ruled in favor of the IRS, holding that YA Global, a non-U.S. partnership, was engaged in a U.S. trade or business and was therefore liable for federal tax withholding for its non-U.S.In 2015, the IRS released Chief Counsel Advice (CCA) 201501013, which discussed when loan origination activities are deemed to occur such that they create ECI, in the context of a foreign fund that engaged a U.S.-based investment manager. YA Global was not mentioned by name, but the ruling confirmed that YA Global was the subject of the above CCA.The salient issues before the Tax Court included determining whether YA Global:
Mayer Brown is an international law firm positioned to represent the world’s major corporations, funds and financial institutions in their most important and complex transactions and disputes.
The Tax Court refused to reconsider its prior decision regarding a partnership’s withholding tax liability under section 1446, finding that the partnership failed to
On July 11, 2024, petitioners in these cases moved for leave to file a Motion for Reconsideration under Rule 1611 asking that we reconsider one of the conclusions reached in YA Global Investments, LP v. Commissioner, Nos. 14546-15 and 28751-15, 161 T.C. (Nov. 15, 2023).In our November 15, 2023, Opinion, we held that YA Global Investments, LP, (YA Global, or the partnership) was engaged in a U.S. trade or business and, consequently, owed withholding tax under section 1446 on the income effectively connected with that trade or business that was allocable to the partnership's foreign partners.The parties stipulated to expenses incurred by one of YA Global's foreign partners, YA Offshore Global Investments, Ltd. (YA Offshore), for 2007, 2008, and 2009. The stipulated expenses were sufficient to offset YA Offshore's share of YA Global's effectively connected taxable income for 2009 but not for the two earlier years.Section 1464 provides: “Where there has been an overpayment of tax under this chapter, any refund or credit made under chapter 65 [sections 6401 through 6432] shall be made to the withholding agent unless the amount of such tax was actually withheld by the withholding agent.” Petitioners posited that, “if YA Global were to pay the full amount of withholding tax that Respondent asserts is due [for 2007 or 2008], YA Global would be immediately entitled [under section 1464] to a refund of the amount that exceeded YA Offshore's liability for that year.” YA Glob.
The YA Global case has drawn widespread attention due to the U.S. tax implications for foreign investment entities investing in U.S. securities or making use of a U.S. investment manager.
From a base in New York City, Ruchelman P.L.L.C. provides bespoke cross-border tax planning and related legal services to a global client base that is sophisticated and savvy. Engagements include overseas expansions, strategic acquisitions, transfer pricing, and international mobility. ... The YA Global case has drawn widespread attention due to the U.S.The Tax Court has now released a memorandum opinion1 (the “Follow-up Opinion”) that addresses the following question: what standard should be applied when determining whether a purported partner should be recognized as a partner for income tax purposes? In the context of the YA Global, the answer controls whether a distribution to a non-U.S.YA Global could impose restrictions from time to time on the management of its assets with appropriate notice to Yorkville.2 As part of the transactions in which YA Global acquired securities from portfolio companies, those companies paid fees to both YA Global and Yorkville.The F.P.A.A.'s also determined that YA Global was a dealer in securities, meaning it was subject to the mark-to-market accounting rules of Code §475. In a previous opinion,3 the Tax Court held that the activities of Yorkville were attributable to YA Global in the sense that Yorkville was acting as YA Global's agent.
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
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.KPMG report: YA Global v.The case is: YA Global Investments, LP v. Commissioner, 161 T.C. No. 11 (November 15, 2023).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.
Analysis Group affiliated expert Roberts W. Brokaw III testified on behalf of the Internal Revenue Service (IRS), the respondent and prevailing party in a tax liability dispute brought before the US Tax Court.
Analysis Group affiliated expert Roberts W. Brokaw III testified on behalf of the Internal Revenue Service (IRS), the respondent and prevailing party in a tax liability dispute brought before the US Tax Court. During the tax years 2006–2008, petitioner YA Global Investments’ assets were managed by its US-based agent and fellow petitioner, Yorkville Advisors.An Analysis Group team led by Managing Principal Gaurav Jetley and Manager Hailey Nguyen supported Mr. Brokaw, who filed a report and testified at deposition and trial on the financial aspects of the case and agreements for investment services between YA Global and Yorkville.The US Tax Court held that YA Global could not have performed any investment activities independent of Yorkville and found that the relationship between the petitioners constituted trade or business engagement in the US.At the time, YA Global did not withhold US taxes, taking the position that it had no employees and was not directly engaged in a US trade or business.
For years, the YA Global litigation has attracted the attention of many tax practitioners and private fund industry stakeholders. The proliferation
The public became aware of IRS’s challenge to YA Global’s position that its activities qualified for securities trading safe harbor of Section 864(b) of the Internal Revenue Code (the “Code”) when the taxpayer petitioned the Tax Court in 2015. Shortly before the court petition was filed by the taxpayer, the IRS released a Chief Counsel Advice memorandum, CCA 201501013 (Jan.The facts of YA Global are unique, and so as expected, the opinion does not easily lend itself to clear and concise conclusions that could be applied generally. What’s more, the Tax Court’s analysis focuses on the YA Global’s failure to meet its burden of proof, rather than on merits of the IRS’s arguments.For the years at issue, 2006-2009, YA Global was a Cayman Islands partnership and was taxable as a partnership for U.S. federal income tax purposes.9 YA Global had an offshore feeder fund named “YA Offshore” and several other direct non-US. limited partners.YA Global filed IRS Forms 1065 for each of the years at issue, which is the US income tax return for partnerships. YA Global did not, however, file IRS Forms 8804 for any of the years at issue. The Form 8804 reports the amount of US federal income tax withheld by the partnership in respect of ECI.
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The Tax Court’s decision in YA Global Investments LP v. Commissioner in November sends a warning to the offshore banking, finance and equity investment industries: an offshore entity is engaged...
William McRae of Cleary Gottlieb discusses the U.S. Tax Court’s decision in YA Global Investments v. Commissioner and what it means for the private equity sector.
In November 2023 the U.S. Tax Court released its decision in YA Global Investments v. Commissioner. The decision has sparked a lot of discussion in the tax community over the court's view of a private equity company's U.S. operations. The company was found liable for over $57 million, plus penalties and interest, for failing to withhold taxes on income that was effectively connected with a U.S.So the company was called YA Global, and it was an investment fund, and it had a legal structure that's very common for a lot of private equity funds and hedge funds and similar things, which was that they had a partnership that was the entity that held their investments or held their positions.Instead, what they did was they had these things called SEDAs, standby equity distribution agreements I think is what it stood for. And the idea was when the company wanted to distribute equity, they could sell their equity to YA Global, not for a fixed price but for a discount to the current trading price based on some kind of weighted average over some period of time.So let's say YA Global would buy it at 95 percent of the current market price. Then the way that they were trying to make their money, at least the way the IRS described it, was they would then flip it as quickly as they could.
On April 28, YA Global Investments, LP ("YA Global") filed an appeal in the 3rd Circuit, contesting the Tax Court's decision in YA Global Investments, LP v. Commissioner, which we discussed here and here.
In YA Global Investments, the court found that YA Global's activities – conducted through its agent, Yorkville Advisors, LLC ("Yorkville") – produced taxable income that was effectively connected with a U.S. trade or business, which obligated YA Global to withhold under Code Section 1446.The court concluded that because YA Global's activities went beyond the scope of a typical investor who invests capital or manages investments, YA Global did not qualify for the securities trading safe harbor under Code Section 864(b)(2)(A).Whether Yorkville's activities were attributable to YA Global under relevant legal principles. Whether YA Global was engaged in a U.S.Whether the Tax Court properly applied the mark-to-market rules of Code Section 475 to YA Global. Whether the statute of limitations barred the Commissioner from making adjustments to YA Global's income and liability for its 2006 and 2007 years.
Last month, YA Global Investments, LP (the "Fund") filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit, seeking review of the U.S. Tax Court holding in YA Global Investments, LP v. Commissioner.
Last month, YA Global Investments, LP (the "Fund") filed a notice of appeal to the U.S. Court of Appeals for the Third Circuit, seeking review of the U.S. Tax Court holding in YA Global Investments, LP v. Commissioner.1 In November 2023, the Tax Court held that this Cayman Islands fund was engaged in a U.S.This appeal reopens the discussion on agency principles, the characterization of a U.S. trade or business, and the Section 475 dealer definition. The Tax Court found YA to be the Fund's agent primarily because the investment management agreements designated YA as such.In determining that the Fund was engaged in a U.S. trade or business through YA's activities, the Tax Court emphasized that YA's fees tied to convertible debt and standby equity distribution agreement transactions from portfolio companies were compensation for services and exceeded returns on invested capital.(1st Session) 2025 Global In-House Counsel Survey Report: Unique Insights into the Global In-House Counsel Profession
Notably, YA Global Investments, LP, a recent Tax Court decision, relevantly involved a fund (YA Global) that primarily provided funding to various companies in the form of purchasing convertible debt, standby equity distribution agreements (SEDAs),48 and other securities through its U.S.
Agency: The court held that Yorkville, a U.S. entity, was YA Global’s agent during the applicable period. The primary reason behind the court’s finding was that YA Global, the principal, had the ability to give interim instructions to Yorkville.That is, YA Global was able to instruct Yorkville on investments and certain restrictions throughout the applicable period, as opposed to setting guidelines at the start of the relationship and sticking with them, the latter of which is indicative of a traditional service provider.Engaged in a USToB: The court found that YA Global was engaged in a USToB through Yorkville. Yorkville’s activities were continuous, regular, and made to earn a profit.52 Additionally, the court found that the fees paid to Yorkville were more than simply payment for the use of capital.Yorkville did not fund the purchases of convertible notes or SEDAs; that was YA Global. Yet Yorkville received fees from the companies entering these transactions with YA Global, sometimes before the companies sought any draws on the SEDAs. Fees were also received in connection with the convertible debt transactions, such as transactional and structuring fees.
The episode entitled, “What’s a U.S. Trade or Business? Analyzing YA Global,” discusses the U.S. Tax Court’s decision in YA Global Investments v.
Tax Notes Talk: What’s a U.S. Trade or Business? Analyzing YA Global
In a widely anticipated opinion, on November 15, 2023 the U.S. Tax Court ruled that a fund was engaged in a U.S. trade or business through the activities of its investment manager, and that the fund was also a “dealer in securities” subject to the mark-to-market accounting rules of Section 475.
YA Global Investments, LP (the “Fund”) was a Cayman Islands exempted limited partnership, treated as a partnership for U.S. federal income tax purposes, that provided funding to small-cap and micro-cap portfolio companies in the form of convertible debentures, standby equity distribution agreements, and other securities.[1] YA Global Investments, LP v. Commissioner, 161 T.C.The Fund’s investments were managed by New Jersey-based Yorkville Advisors, LLC, a Delaware limited liability company (“YA”), which received substantial fees from portfolio companies in connection with the Fund’s investments. YA largely performed investment management services solely for the Fund.On the threshold question, the Tax Court held that YA was properly classified as an agent of the Fund, and not as a service provider that furnished services to the Fund, largely because (i) the relevant investment management agreements allowed the Fund to give interim instructions to YA regarding the management of the Fund’s investments, rather than specifying from the outset all the restrictions that would apply to YA’s investment management activities during the term of the investment management agreements, and (ii) the powers given to YA under the investment management agreements were n
On November 15, 2023, the Tax Court released its opinion in YA Global v. Commissioner and, among other conclusions, held that YA Global Investments LP, a Cayman Islands limited partnership (YA Global), was engaged in a U.S. trade or business for purposes of Code Section 864.
On November 15, 2023, the Tax Court released its opinion[1]in YA Global v. Commissioner and, among other conclusions, held that YA Global Investments LP, a Cayman Islands limited partnership (YA…On November 15, 2023, the Tax Court released its opinion[1]in YA Global v. Commissioner and, among other conclusions, held that YA Global Investments LP, a Cayman Islands limited partnership (YA Global), was engaged in a U.S.YA Global was a hedge fund that focused on equity-related lending transactions with convertible instruments and standby equity distribution arrangements (SEDAs). In 2001, YA Global was initially formed as a Delaware limited partnership. In early 2007, YA Global registered as a Cayman Islands limited partnership.From YA Global’s formation until early 2007, Yorkville Advisors, LLC, a Delaware limited liability company (Yorkville), was YA Global’s sole general partner. Yorkville Advisors GP, LLC was then YA Global’s sole general partner from 2007 until 2011. YA Global had two feeder funds: YA Offshore, a Cayman Islands corporation (for YA Global’s non-U.S.
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 ...
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.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.
