# 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

> United States Tax Court · August 8, 2024

URL: https://www.frixlaw.com/law-library/cases/10501483

## Case

- **Court:** United States Tax Court
- **Decided:** August 8, 2024
- **Precedential status:** Unpublished
- **Opinion:** Opinion
- **Judges:** Halpern
- **Cited by:** 0 later opinions in the Frix Law Library

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## Opinion text

United States Tax Court

T.C. Memo. 2024-78

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,
Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent

YA GLOBAL INVESTMENTS, LP, YORKVILLE ADVISORS GP, LLC,
TAX MATTERS PARTNER,
Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,
Respondent

—————

Docket Nos. 14546-15, 28751-15. Filed August 8, 2024.

—————

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)

Served 08/08/24
2

[*2] 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.

Held: PS was engaged in a U.S. trade or business
during 2009.

Held, further, PS is 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.

Held, further, Ps have 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).

Held, further, if the participation interests held by
the 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).

Held, further, 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.

Held, further, 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 PS’s sale of those securities, Ps have not met
their burden of establishing that the Foreign SPVs were
3

[*3] not partners in PS during 2009. Therefore, PS’s
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.

Held, further, Ps have not established that, when PS
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. PS’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. Ps have not identified any
evidence unavailable to PS’s general partner during 2009
that establishes that PS should have had no reasonable
expectation of ultimately receiving the interest.

__________

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

Gretchen A. Kindel, Robert T. Bennett, Rebecca J. Kalmus, Charles E.
Buxbaum, Shawna A. Early, Kelly M. Davidson, and Travis Vance III,
for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

HALPERN, Judge: In these cases, we review notices of final
partnership administrative adjustment (FPAAs) in which respondent
adjusted various partnership items reported by YA Global Investments,
LP, a limited partnership (YA Global or the partnership) for the taxable
years ended December 31, 2006, 2007, 2008, and 2009.1 The FPAAs
reflect respondent’s determination that the partnership was engaged in
a U.S. trade or business during those years and that, consequently, it
was liable for withholding tax under section 14462 on the portion of its

1 Respondent also issued FPAAs for the partnership’s 2010 and 2011 taxable

years but made no adjustment to its partnership items for those years.
2 Unless otherwise indicated, statutory references are to the Internal Revenue

Code, Title 26 U.S.C., in effect for the years in issue, regulation references are to the
Code of Federal Regulations, Title 26 (Treas. Reg.), in effect for those years, and Rule
4

[*4] taxable income effectively connected with that trade or business
that was allocated to foreign partners. The FPAAs also determined that
the partnership was liable for additions to tax under sections 6651(a)(1)
and (2) and 6655 for its failure to file Forms 8804, Annual Return for
Partnership Withholding Tax, and its failure to pay estimated taxes and
section 1446 withholding tax.

In addition to assigning error to respondent’s determination that
YA Global was engaged in a U.S. trade or business during the years in
issue, petitioners raised various issues regarding the manner in which
respondent computed the partnership’s section 1446 withholding tax
liability. And petitioners challenged respondent’s determinations of the
additions to tax. Petitioners also alleged that the applicable statute of
limitations barred respondent from assessing the tax and additions to
tax in issue for 2006 and 2007.

In YA Global Investments, LP v. Commissioner, Nos. 14546-15
and 28751-15, 161 T.C. (Nov. 15, 2023), we addressed the issues that
affected YA Global’s taxable years ended December 31, 2006, 2007, and
2008. For the reasons explained in that opinion, we concluded that
(1) the activities of Yorkville Advisors, the manager of YA Global’s
assets, were attributable to the partnership, (2) YA Global was engaged,
through Yorkville Advisors, in the conduct of a U.S. trade or business
during 2006, 2007, and 2008, (3) YA Global was required to recognize
gain under the “mark-to-market” rule of section 475(a)(2) for each of
2006, 2007, and 2008, (4) all of YA Global’s taxable income for 2006,
2007, and 2008 was effectively connected with its U.S. trade or business,
(5) YA Global’s liability for section 1446 withholding tax for 2007 and
2008 could not be “adjusted” under section 1464 to reflect stipulated
expenses of YA Offshore Global Investments, Ltd. (YA Offshore), beyond
its distributive share of partnership deductions, (6) YA Global’s filing of
Form 1065, U.S. Return of Partnership Income, for each of 2006, 2007,
and 2008 did not commence the period of limitation on the assessment
of section 1446 withholding tax for the year, and (7) YA Global is liable
for additions to tax under section 6651(a)(1) and (2) for its failure to file
Forms 8804 and pay section 1446 withholding tax.

references are to the Tax Court Rules of Practice and Procedure in effect for the
relevant times.
5

[*5] Conference calls held with the parties’ counsel on November 29,
2023, and February 22, 2024, identified the following issues that remain
to be decided for YA Global’s taxable year ended December 31, 2009:

1. Whether the increase in the value of YA Global’s interest
in Compass Resources, Ltd. (Compass), during 2009 was
attributable to securities subject to section 475’s mark-to-
market rules;

2. Whether any of the items effectively connected with YA
Global’s U.S. trade or business for 2009 are properly
allocated to foreign special purpose vehicles to which the
partnership issued Schedules K‒1, Partner’s Share of
Income, Deductions, Credits, etc., for that year;

3. The value of accrued interest on convertible debentures
held by YA Global on December 31, 2009, for the purpose
of determining the partnership’s mark-to-market gain or
loss for the year under section 475(a)(2); and

4. Whether YA Global was required to accrue for 2009
$17,137,938 of interest that it wrote off on its books.3

FINDINGS OF FACT

YA Global’s Activities

YA Global provided funding to portfolio companies in the form of
convertible debentures, standby equity distribution agreements
(SEDAs), and other securities. In a SEDA, YA Global committed to
purchasing up to a specified dollar value of a portfolio company’s stock
over a fixed period, typically two years. The portfolio companies to

3 In an Order issued December 1, 2023 (December 1 Order), we identified an

additional issue related to YA Global’s liability for additions to tax. The Supplemental
Briefs that the parties submitted in response to that Order indicated that the parties’
only disagreements regarding the additions to tax respondent determined were
derivative of other issues. In regard to YA Global’s 2010 and 2011 taxable years,
shortly after trial, the parties stipulated:
To the extent that YA Global is found to be engaged in a U.S. trade or
business in 2006 through 2009, YA Global was also engaged in such
U.S. trade or business in 2010 and 2011; in such case, YA Global’s
income and losses for 2010 and 2011 will be computed using the same
methodology used to make adjustments to YA Global’s Forms 1065 for
2006 through 2009 as shown in the FPAAs for those years.
6

[*6] which YA provided funds were generally small, microcap companies
that would have been unable to receive funds from conventional sources
such as commercial banks.

Compass

In November 2007, YA Global entered into a Series A Convertible
Loan Agreement with Compass, an Australian company. Compass
initially borrowed $25 million under that agreement and, in May 2008,
borrowed an additional $11 million. Between April and December of
2008, Compass repaid about $13 million. On January 29, 2009,
Compass entered into voluntary administration, and its stock was
suspended from trading. In 2009, YA Global held Compass stock and
warrants, in addition to convertible debt. On April 22, 2009, the
administrator appointed in connection with Compass’s voluntary
administration prepared a 94-page “Circular to Creditors.”

At a meeting of Compass shareholders held on June 17, 2010, YA
Global, as one of the corporation’s creditors, submitted a proposal to
recapitalize the corporation. Under the proposal, YA Global would have
received 2,263,267,330 new Compass shares in exchange for the debt
Compass owed to YA Global on January 29, 2009, which was stated at
approximately $35,538,068. The plan also called for YA Global to make
additional advances of up to about $50 million. Another creditor, Coffee
House, would have received 422,101,919 shares in exchange for the debt
Compass owed to it, which was stated at approximately $37,798,404.
The issuance of new stock to YA Global and Coffee House would have
diluted the interests of existing Compass shareholders to about 5%.

Compass’s administrators asked DMR Corporate Pty Ltd. (DMR)
to prepare an independent expert’s report evaluating YA Global’s
proposed recapitalization of Compass. DMR concluded that Compass
“ha[d] a nil value” before the proposed recapitalization because “a
substantial deficiency of net assets will result from both an orderly
realisation of assets and from a liquidation of the assets.”

According to the DMR report, “[u]nder the liquidation of assets
valuation methodology, the Administrators estimate that [Compass]
would have a deficiency of assets of $66,647,967.” Compass’s pro forma,
postrecapitalization, balance sheet showed total liabilities of
$42,421,199. As noted in the text, in the recapitalization, about
$35,538,068 of debt held by YA Global and about $37,798,404 of debt
held by Coffee House would be exchanged for newly issued Compass
7

[*7] stock. Therefore, Compass apparently had total liabilities before
the recapitalization of about $115,757,671 ($42,421,199 + $35,538,068 +
$37,798,404). The administrators thus determined that a sale of
Compass’s assets in liquidation would generate proceeds of about
$49,109,704 ($115,757,671 − $66,647,967).

Neither the “orderly realisation” scenario nor the liquidation
scenario valued Compass as a going concern. According to the DMR
report: “The orderly realisation of assets method estimates the fair
market value by determining the amount that would be distributed to
shareholders, after payment of all liabilities including realisation costs
and taxation charges that arise, assuming the company is wound up in
an orderly manner.” “The liquidation method,” the report explained, “is
similar to the orderly realisation of assets method except the liquidation
method assumes that the assets are sold in a short time frame.”

In evaluating the fairness of the proposed recapitalization,
however, DMR valued Compass as a going concern. It accepted that, if
Compass were valued as a going concern, its gross assets would be worth
$113,250,000, substantially more than the $49,109,704 of proceeds that
could be raised from a liquidating sale. Thus, Compass’s net assets, after
the proposed recapitalization, would be $70,828,801 ($113,250,000 total
assets less $42,421,199 remaining liabilities).4 DMR valued the existing
shareholders’ interests in Compass at $3,541,000 (roughly 5% of
$70,829,000). In other words, DMR determined that the same stock that
would have been worthless in an “orderly realisation” or liquidation
scenario would be worth about $3.5 million if Compass were maintained
as a going concern, recapitalized in accordance with YA Global’s
proposal. For that reason, DMR judged the proposed recapitalization to
be fair.

YA Global’s initial recapitalization proposal was approved by
Compass’s creditors but not by its shareholders. YA Global then
submitted a revised proposal that was approved by both Compass’s
creditors and shareholders.

Special Purpose Vehicles

Most investors in YA Global participated in the partnership
through one of two “feeder” funds: YA Offshore and YA Global

4 DMR viewed a net asset value of $70,829,000 as a “conservative estimate,”

and opined that, “in a best-case scenario,” Compass’s equity value “could be up to
$20,000,000 higher.”
8

[*8] Investments (U.S.), LP (YA Onshore). U.S. investors owned their
interests in YA Global through YA Onshore, and foreign investors held
their interests in YA Global through YA Offshore.

YA Global’s general partner established two special purpose
vehicles (SPVs) at the end of each quarter during 2009, one for the
benefit of investors in YA Onshore and another for the benefit of
investors in YA Offshore. The SPVs facilitated redemption requests
made by the investors. Each investor who sought redemption (of either
its partnership interest in YA Onshore or its stock in YA Offshore) was
given the option of receiving an in-kind distribution of securities or an
ownership interest in one of the SPVs, which held “pro rata participation
interests” in YA Global’s securities. The SPVs would receive cash
distributions as YA Global liquidated its securities in the ordinary
course of its business.

At trial, Oren Franks, YA Global’s controller, explained that the
SPVs gave withdrawing investors “a slice—their pro rata slice” of YA
Global’s existing securities. The withdrawing investors, he said, “would
no longer participate in new investments done by YA Global.”

Financial Reporting

YA Global issued its 2009 financial statements in August 2010.
(The auditor’s report on those financial statements is dated August 13,
2010.)

YA Global’s Consolidated Statement of Financial Condition as of
December 31, 2009, reported the partnership’s investments at fair
value. An explanatory note accompanying the partnership’s financial
statements includes an extensive discussion of how the partnership
determined the fair value of its investments. According to that note,
convertible debentures, promissory notes, and other assets “for which no
. . . market prices [were] available [were] valued at fair value as [YA
Global’s] General Partner . . . reasonably determine[d] in good faith.”

YA Global accounted separately for accrued interest on
debentures and promissory notes and the underlying instruments. Its
Consolidated Statement of Financial Condition as of December 31, 2009,
lists “Investments” (including Convertible Notes and Debentures and
9

[*9] Promissory Notes) and “Interest Receivable” as separate assets.5
The explanatory note describes the partnership’s accounting for accrued
interest: “The accrual of interest is discontinued when, in the opinion of
the General Partner, there is reasonable doubt as to collectability. The
Partnership also records a charge to operations for interest receivable
that is written-off when management determines that payment by the
debtor is unlikely.”

The Schedule of Investments included in YA Global’s financial
statements for 2009 lists convertible debentures of Compass at a value
of $148,269,798. That amount is the midpoint of a range of values for
YA Global’s interest in Compass as of September 30, 2009, determined
by the financial advisory firm Valuation Research Corp. (VRC). In
valuing YA Global’s interest in Compass, VRC estimated Compass’s
enterprise value at $250.9 million to $306.9 million.

YA Global’s Consolidated Statement of Financial Condition for
2009 reports a liability of $316,254,804 described as “Due to Special
Purpose Vehicles.” An explanatory note describes that amount as “[t]he
fair value of the participating interests in the Partnership held by the
SPVs . . . as of December 31, 2009.” The partnership’s 2009 Consolidated
Statement of Changes in Partners’ Capital reports withdrawals of
$329,120,453. A footnote explains that that figure “[i]ncludes
$277,044,686 of in-kind distributions . . . of participating interests in
Special Purpose Vehicles.”

YA Global’s Consolidated Statement of Operations for 2009
reports an investment loss of $10,839,690, the excess of expenses of
$56,716,169 over income of $45,876,479. The reported expenses include
a $46,506,023 “[w]rite-off of interest receivable deemed uncollectible.”

Tax Reporting

The Form 1065 that YA Global filed for 2009 reported a taxable
loss of $125,568,354, consisting of $42,617,464 of interest, a short-term
capital loss of $18,792,337, a long-term capital loss of $96,771,203, other
income of $4,042,912, and other deductions of $56,665,190. By contrast,
the partnership’s loss per income statement for the year, as reported on
line 26(a) of Schedule M‒3, Net Income (Loss) Reconciliation for Certain
Partnerships, Part II, was only $21,715,680. The partnership’s loss per

5 YA Global reported $34,581,418 of interest receivable as of December 31,

2009. By contrast, it reported $66,237,160 of interest receivable as of December 31,
2008.
10

[*10] income statement reflected other income of $103,852,672 not
taken into account for tax purposes. An explanatory statement
identifies the other income as “Change in Unrealized Appreciation.”

The “other deductions” of $56,665,190 that YA Global reported on
line 13d of Schedule K, Partners’ Distributive Share Items, of its 2009
Form 1065 include the same writeoff of interest receivable reported on
YA Global’s 2009 financial statements ($46,506,023), legal fees of
$7,521,049, other professional fees of $1,602,188, and other investment
expenses of $1,035,930.

YA Global issued Schedules K–1 for 2009 to, among others, YA
Offshore and the following four SPVs: YA Offshore Global Investments
SPV, Ltd., YA Offshore SPV 309, Ltd., YA Offshore SPV 609, Ltd., and
YA Offshore SPV 909, Ltd. (collectively, Foreign SPVs). The Schedule
K–1 issued to each Foreign SPV identified it as a foreign corporation.6

The Schedules K–1 issued to the Foreign SPVs reported
allocations to them of each item of income, loss, and deduction shown on
YA Global’s Schedule K. Those schedules also reported the Foreign
SPVs as having substantial capital accounts in YA Global at the end of
2009: YA Offshore Global Investments SPV, Ltd. had a capital account
of $47,615,923, YA Offshore SPV 309, Ltd.’s capital account was
$114,757,093, YA Offshore SPV 609 Ltd.’s capital account was
$35,106,274, and YA Offshore SPV 909’s capital account was $8,709,758.

Writeoff of Accrued Interest

Petitioners provided a schedule to respondent (included in the
record as Exhibit 1290-P) “to show information used to compute YA
Global’s interest write off for 2009.”7 Exhibit 1290-P shows interest
accrued and written off on 98 debentures and promissory notes issued
by 34 different issuers. Those issuers are Access Beverage, Inc. (Access
Beverage), BlueCreek Energy, Inc., Cobalis Corp. (Cobalis), Compass,
Corporate Strat, CSI Business, Earth Biofuels, Inc. (Earth Biofuels),
EYI Ind., Falcon Natural Gas Corp. (Falcon), Futuremedia PLC

6 YA Global also issued a Schedule K–1 to an entity named YA Offshore SPV

1209, Ltd., which the schedule identifies, perhaps erroneously, as a domestic
corporation. But the Schedule K–1 issued to YA Offshore SPV 1209, Ltd., lists that
entity’s share of each item of YA Global’s income, loss, and deduction as zero.
7 The amount shown on Exhibit 1290-P as interest written off is $99 less than

the $46,506,023 that YA Global reported on its financial statements and on its tax
return.
11

[*11] (Futuremedia), Handheld Entertainment, Inc. (Handheld), Ignis
Petroleum Group, Inc. (Ignis Petroleum), Innova Holdings, Inc., Isonics
Corp. (Isonics), iVoice Technology, Inc. (iVoice), KD Resources, Macmin
Silver Limited, MM2 Group, Inc. (MM2), Natural Nutrition, Inc.,
Newgen Tech., NS8 Corp., Pacific Gold Corp. (Pacific Gold), Poseidis,
Inc. (Poseidis), PNG Ventures, Inc., Renewable Fuels, Inc., Speech
Switch, Inc., Techlabs Inc., Teleplus World Corp. (Teleplus), Terminal 1,
Titan Global Holdings, Inc. (Titan), TXP Corp., United Fiber Systems,
U.S. Helicopter Corp. (US Helicopter), and Wherify Wireless, Inc.
(Wherify). The interest that YA Global both accrued and wrote off for
2009 did not include interest on any debenture or promissory note issued
by McKenzie Bay International, Ltd., Savi Media Group, Inc., or the
Certo Group Corp.

Respondent stipulated that petitioners provided him with Exhibit
1290-P but did not stipulate the amounts shown on the schedule. The
amounts in the “2009 Write Off” column of Exhibit 1290-P sum to
$46,505,924. Another column purports to identify the portion of the
amount written off that accrued in 2009. The amounts in that column
sum to $17,137,938.

Cobalis

YA Global accrued and wrote off interest for 2009 on two
debentures issued by Cobalis. It accrued interest on each debenture in
January and then wrote off all accrued interest in February.

An order issued by the Securities and Exchange Commission on
July 26, 2011, revoked the registration of Cobalis’s securities. The order
notes that the auditors’ report included with the registration statement
filed by Cobalis’s predecessor in 2002 expressed doubt about the
company’s ability to continue as a going concern. The auditors also
included going concern qualifications in the financial statements of
Cobalis and its predecessor for 2004 through 2007.

On August 1, 2007, YA Global filed an involuntary bankruptcy
proceeding against Cobalis. On August 31, 2009, Cobalis filed a
bankruptcy plan in which it proposed to repay its debt using revenue
from product sales and the sale of its common stock.

Compass

YA Global accrued and wrote off interest for 2009 on two
debentures issued by Compass. On one of those debentures, the
12

[*12] partnership accrued interest for each month from January
through May, accrued no interest for June or July, wrote off most of the
accrued interest in August, and wrote off the remainder of the accrued
interest in November. On the other debenture, the partnership again
accrued interest each month from January through May, accrued no
interest for June, July, or August, wrote off most of the accrued interest
in September, and wrote off the remainder of the accrued interest in
November.

Isonics

YA Global both accrued and wrote off interest for 2009 on three
debentures and three promissory notes issued by Isonics. YA Global
accrued interest on each instrument for each month from January
through November. On one of the debentures, it received a $600,000
payment of interest in March.

A Form 10–Q (the quarterly report under Section 13 or 15(a) of
the Securities and Exchange Act of 1934) filed by Isonics for the quarter
ended October 31, 2008, noted that Isonics had working capital and
stockholders’ deficits at the end of the quarter. It noted that the
company might not be in compliance with covenants made in connection
with its issuance of convertible debentures and term notes. Those
conditions, the company reported, “raise[d] substantial doubt about [its]
ability to continue operations as a going concern.” In fact, the auditors’
report on the company’s financial statements for the year ended April
30, 2008, included a going concern qualification. Isonics’s cashflow from
operating activities was −$815,000 for the six months ended October 31,
2007, and −$1,211,000 for the six months ended October 31, 2008.

iVoice

YA Global both accrued and wrote off for 2009 interest on a
debenture issued by iVoice.8 The partnership accrued interest on that
debenture for each month from January through May 2009. It accrued
no interest from June through October. It then wrote off the accrued
interest in November.

According to Form 10–K (the Annual Report Pursuant to Section
13 or 15(d) of the Securities and Exchange Act of 1934) for the year

8 The partnership also wrote off in November 2009 interest that had accrued

as of December 31, 2008, on another iVoice debenture. The partnership did not accrue
any interest on that other debenture for 2009.
13

[*13] ended December 31, 2008, filed by iVoice Technology, Inc. (iVoice
Technology), a subsidiary of iVoice, iVoice Technology’s auditors
included a going concern qualification in its reports on the company’s
financial statements for both 2007 and 2008. The going concern
qualification included in the company’s 2007 financial statements was
attributed to, among other things, its “historical negative cash flow.”
The going concern qualification for 2008 was based, among other things,
on the company’s negative cashflow from operations and negative
working capital.

A Form 10–Q filed by iVoice for the quarter ended September 30,
2009, also refers to “substantial doubt about the Company’s ability to
continue as a going concern.” That doubt was attributed to the
company’s “substantial accumulated deficits,” its “obligation to deliver
an indeterminable amount of common stock due on derivative
liabilities,” and its completion of “the process of spinning out . . . five
operating subsidiaries.” The company had spun off three of the five
operating subsidiaries in 2005 and, since then, had “transitioned itself
into a company focused on the development and licensing of proprietary
technologies.”

A Form 10–K for the year ended December 31, 2009, filed by
B Green Innovations, Inc. (B Green), the successor to iVoice Technology,
states that the company’s auditors had, again, included a going concern
qualification in their report on the company’s financial statements for
the year. The issues cited by the auditors for their 2009 going concern
qualification were the company’s “net loss,” its “negative cash flow from
operations,” and its “negative working capital.”

MM2

YA Global accrued and wrote off interest for 2009 on two
debentures issued by MM2. For each debenture, the partnership
accrued interest each month from January through November and then
wrote off all accrued interest in December.

The statements of cashflow included in the Form 10–Q filed by
MM2 for the quarter ended March 31, 2009, report that the company’s
cashflow from operations was −$298,826 for the nine months ended
March 31, 2008, and −$89,233 for the nine months ended March 31,
2009. The Form 10–Q also notes that the company was “in default of
the repayment terms” of a convertible debenture it issued to YA Global
in 2006. As of the date of the filing of the Form 10–Q, YA Global had
14

[*14] “not demanded payment” on the debenture and MM2’s
“management [was] in negotiations to restructure the debt.” The Form
10–Q also stated that the company’s “recurring losses” and “deficiencies
in cash flow from operations . . . raise[d] substantial doubt about [its]
ability to continue as a going concern.”

Titan

YA Global accrued and wrote off interest for 2009 on a debenture
issued by Titan. The partnership accrued interest on the debenture for
each month from January through November of 2009 and then wrote off
the accrued interest in December.

The Consolidated Statements of Cash Flows included in a Form
10–Q that Titan filed for the quarter ended November 30, 2008, report
that Titan’s cashflow from operations was −$8,758,000 for the three
months ended November 30, 2007, but was $5,744,000 for the
three months ended November 30, 2008.

November 24, 2009, Meeting of Yorkville Advisors’ Investment
Committee

At a meeting of Yorkville Advisors’ Investment Committee held
on November 24, 2009, the committee reviewed positions held by YA
Global and agreed to write down specified positions as of December 31,
2009. Among other things, the committee agreed to write down 50% of
YA Global’s position in Access Beverage, 20% of YA Global’s position in
Cobalis, 25% of its position in Isonics, 50% of its position in MM2, 25%
of its position in Poseidis (in addition to a 20% writedown previously
taken), 50% of its position in Speech Switch, 50% of its position in Titan,
and 30% of its position in US Helicopter.

FPAA

The 2009 FPAA determined that YA Global had ordinary
business income of $24,790,341. That amount is the partnership’s
overall loss for the year computed without regard to the interest writeoff
and increased by the change in unrealized appreciation reported on line
26(d) of Part II of the partnership’s Schedule M–3 (−$125,568,354 +
$46,506,023 + $103,852,672 = $24,790,341). The FPAA describes the
15

[*15] interest writeoff deduction as having been disallowed because it
had “not been substantiated or shown to be allowed under I.R.C. § 166.”9

The 2009 FPAA determined that YA Global owed section 1446
withholding tax for the year of $6,748,616. In computing that amount,
respondent determined that all of the partnership’s ordinary business
income was effectively connected taxable income (ECTI). In
determining YA Global’s section 1446 liability for 2009, respondent took
into account the portion of YA Global’s ECTI allocable to YA Offshore
and the Foreign SPVs.10

OPINION

I. Treatment Under Section 475 of YA Global’s Interest in Compass
Resources

Section 475(a) provides rules regarding the treatment of
“securities” held by a “dealer in securities.” Section 475(a)(1) requires
that securities included in the dealer’s inventory be valued at their fair
market value. Section 475(a)(2) provides:

In the case of any security which is not inventory in the
hands of the dealer and which is held at the close of any
taxable year—
(A) the dealer shall recognize gain or loss as
if such security were sold for its fair market value on
the last business day of such taxable year, and
(B) any gain or loss shall be taken into
account for such taxable year.

For purposes of section 475, the term “security” includes “any . . . share
of stock in a corporation,” § 475(c)(2)(A), any “note, bond, debenture, or
other evidence of indebtedness,” § 475(c)(2)(C), and any warrant to
acquire stock, § 475(c)(2)(E).

9 Section 166(a)(1) allows a deduction for “any debt which becomes worthless

within the taxable year.” Section 165(a) allows a deduction for “any loss sustained
during the taxable year and not compensated for by insurance or otherwise.”
Deductions in respect of debt instruments that are evidenced by securities are
governed by section 165 rather than section 166. See § 166(e). Petitioners contend
that YA Global’s convertible debentures were “securities” within the meaning of
section 165(g)(2).
10 Respondent concedes that “YA Global is not liable for any section 1446 tax

with respect to [YA Offshore] SPV 1209, Ltd.”
16

[*16] In our prior opinion, we concluded that YA Global was a “dealer
in securities,” as defined by section 475(c)(1), and thus was subject to
the mark-to-market rule provided in section 475(a)(2). We also
concluded that petitioners had not demonstrated that any of the
securities YA Global held at the end of 2006, 2007, or 2008 qualified for
an exception from the mark-to-market rules for securities identified as
being held for investment. See § 475(b)(1)(A), (2). Petitioners offer us
no reason why those conclusions do not apply equally to the
partnership’s 2009 taxable year. It follows that, under section 475(a)(2),
YA Global is required 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.

Petitioners contend that the $103,852,672 Change in Unrealized
Appreciation reported on Schedule M–3 of YA Global’s 2009 Form 1065
includes “an unrealized gain of over $116,308,517 that was associated
with YA Global’s investment of [sic] Compass Resources, Ltd.” “But for
the inclusion of [that] unrealized gain,” petitioners allege, “the total
unrealized amount for 2009 would have been a comparatively modest
loss . . . rather than a gain.” Petitioners argue:

Respondent’s inclusion of the $116.3 million unrealized
gain associated with Compass was in error because . . . that
unrealized gain was not attributable to any security that
YA Global held. Rather, it was an amount recorded on YA
Global’s books to account for the value associated with the
likelihood that YA Global would be entitled to enter into a
new funding arrangement with Compass that would render
the Fund [that is, YA Global] a controlling shareholder in
the company.

Petitioners’ argument rests on DMR’s determination that
Compass had a nil value before the proposed recapitalization. If the
Compass stock was worthless, petitioners reason, the warrants YA
Global held to acquire Compass stock “were also worthless.” And the
partnership’s right to convert its Compass debentures into stock “was
also worth zero.” If the conversion privilege were worthless, “[t]he debt
could not possibly be worth more than its face value.” Petitioners
conclude: “The value of the interest that the Fund held in Compass was
therefore not attributable to any security at all. Rather, the interest
that VRC valued was merely the potential that the Fund would be
entitled to acquire stock of Compass as part of the recapitalization of the
company if that transaction were approved.”
17

[*17] Respondent argues that “[n]othing in the record . . . establishes
how YA Global calculated the [$103,852,672] shown on the 2009
Schedule M–3 or whether the unrealized gain of $116,308,517
attributable to Compass Resources was included in this calculation.”
Moreover, even assuming arguendo that “petitioners could show that
the Section 475 Adjustment took into account an unrealized gain of
approximately $116 million with respect to Compass Resources,”
respondent disputes petitioners’ claim that the gain was not attributable
to a security. Respondent observes that petitioners’ position is
“inconsistent with YA Global’s own financial reporting.” He argues that
petitioners “have not provided evidence to establish that the unrealized
gain attributable to Compass Resources was for anything other than”
the convertible debentures that YA Global reported on its 2009 financial
statements.

Petitioners’ argument rests on an invalid premise. DMR
concluded that Compass’s equity would have “a nil value” if Compass
were valued on either an “orderly realisation” or liquidation method.
But the DMR report, in judging the proposed recapitalization as fair,
established that Compass was worth more as a going concern than as a
pool of assets to be liquidated either in a “short time frame” or “an
orderly manner.” The conclusion petitioners draw from the DMR report,
that the Compass stock was worthless, would be valid only if an orderly
realization of assets or prompt liquidation would produce more value for
stakeholders than continuing Compass as a going concern. The DMR
report itself establishes the invalidity of that premise.11

We understand that petitioners might be reluctant to accept the
possibility that YA Global overstated the value of its interest in
Compass on the partnership’s 2009 financial statements. With their
insistence that the partnership’s interest in Compass was worth no less
than the $148,269,798 that YA Global reported as the value of its
Compass convertible debentures, however, petitioners have backed
themselves into a corner. The simultaneous acceptance that (1) YA
Global held an interest in Compass as of December 31, 2009, worth
$148,269,798, and (2) only $31,961,281 of that value ($148,269,798 −

11 If Compass’s assets were worth $113,250,000, a value that the DMR report

accepted as a conservative estimate, Compass would have been insolvent before the
recapitalization even if the company were valued as a going concern. The value of
Compass’s assets would have been less than its $115,757,671 of liabilities. But DMR
determined that Compass’s assets could have been worth up to $20 million more than
$113,250,000. If so, Compass would not have been insolvent and its stock would have
had positive value before the recapitalization.
18

[*18] $116,308,517) was attributable to securities reflects a logical
contradiction. The proposed recapitalization would have entitled YA
Global to receive new Compass stock in exchange for its pre-
recapitalization interest in Compass. If that interest consisted of
securities worth $31,961,281 and some other asset worth $116,308,517,
what happened to that other asset? If it simply disappeared in the
recapitalization, it cannot have been a real asset. And viewing YA
Global as having received new Compass stock in exchange for the
expectation of receiving new Compass stock would be tautological: The
mere expectation of receiving something cannot be consideration for its
receipt.

In sum, the differences between the VRC and DMR reports do not
identify any nonsecurity interests in Compass that YA Global held at
the end of 2009. Instead, the differences reflect different judgments as
to Compass’s enterprise value.12 But petitioners have not asked us to
resolve that difference. Instead, consistent with YA Global’s financial
reporting, petitioners accept that the partnership’s interest in Compass
was worth $148,269,798 as of December 31, 2009. The question for us
to resolve is whether petitioners have met their burden of proving that
any portion of that value was attributable to one or more assets that
were not “securities” within the meaning of section 475(c)(2).13 For the
reasons explained above, petitioners have not met that burden.

12 The valuation assumptions underlying the DMR report indicate that the

value of YA Global’s interest in Compass at the end of 2009 could not have been more
than about $72.6 million. The issuance of new stock to YA Global under the proposed
recapitalization would have given it an 80% interest in Compass. If, as DMR
determined, Compass’s net assets in a “best-case scenario” were worth no more than
$90,829,000, then YA Global’s interest in Compass, post recapitalization, would have
been worth no more than about $72.6 million ($90,829,000 × .8). We assume that YA
Global would not have proposed a recapitalization of Compass that reduced the value
of its interest in the company. Petitioners, however, do not argue that YA Global’s
interest in Compass as of December 31, 2009, was worth less than the $148,269,798 it
reported on its financial statements as the value of its Compass convertible
debentures. Instead, petitioners argue that most of that value was attributable to one
or more assets that were not “securities” within the meaning of section 475(c)(2).
13 Rule 142(a)(1) provides: “The burden of proof shall be upon the petitioner,

except as otherwise provided by statute or determined by the Court; and except that,
in respect of any new matter, increases in deficiency, and affirmative defenses, pleaded
in the answer, it shall be upon the respondent.” None of the exceptions applies to the
issues addressed in this Opinion.
19

[*19] II. Allocation of ECTI to Foreign Special Purpose Vehicles

A. Background

Section 1446(a) requires a partnership to pay a withholding tax
on any ECTI allocable to a foreign partner. Section 1446(b)(1) provides
that “[t]he amount of the withholding tax payable by any partnership
under [section 1446(a)] shall be equal to the applicable percentage of the
effectively connected taxable income of the partnership which is
allocable under section 704 to foreign partners.” The “applicable
percentage,” in respect of any foreign partner, is the highest rate of tax
specified in either section 1 or section 11(b)(1), depending on whether
the foreign partner is a corporation. § 1446(b)(2). The term “effectively
connected taxable income” generally refers to “the taxable income of the
partnership which is effectively connected (or treated as effectively
connected) with the conduct of a trade or business in the United States.”
§ 1446(c).

In our prior opinion, we concluded that petitioners had failed to
meet their burden of proving that YA Global was not engaged in a U.S.
trade or business during 2006, 2007, and 2008. Again, petitioners offer
us no reason why that conclusion does not apply equally for the
partnership’s 2009 taxable year.

Under section 1461, withholding agents are personally liable for
the tax they are required to deduct and withhold under chapter 3
(sections 1441 through 1464). If the recipient of the income subject to
withholding pays the tax against which the withholding tax could be
credited, however, the withholding agent is relieved of liability for
withholding tax but not “for interest or any penalties or additions to the
tax otherwise applicable in respect of [the withholding agent’s] failure
to deduct and withhold.” § 1463.

Treasury Regulation § 1.1446-3(e)(1) applies the principle of
section 1463 to the specific case of partnership withholding under
section 1446:

[A] partnership that is required to pay 1446 tax but fails to
do so, or pays less than the amount required under this
section, is liable under section 1461 for the payment of the
tax required to be withheld under chapter 3 of the Internal
Revenue Code and the regulations thereunder unless, and
to the extent, the partnership can demonstrate pursuant to
paragraph (e)(2) of this section, to the satisfaction of the
20

[*20] Commissioner or his delegate, that a foreign partner has
paid the full amount of tax required to be paid by such
partner to the Internal Revenue Service.

A partnership seeking to rely on the exemption from liability must
“provide sufficient information to the IRS [Internal Revenue Service] to
determine that the partner’s tax liability was satisfied or established to
be zero.” Treas. Reg. § 1.1446-3(e)(2).

In his Reply Brief, respondent conceded that YA Offshore had
nonpartnership expenses for 2009 sufficient to offset its share of YA
Global’s ECTI. Accordingly, respondent conceded that, under Treasury
Regulation § 1.1446-3(e), YA Global had no section 1446 withholding tax
liability for 2009 in respect of YA Offshore. In that Brief, however,
respondent observed that petitioners had “made no arguments asserting
that any foreign partner, other than YA Offshore, paid its income tax
liability or had zero tax liability.” Respondent viewed petitioners as
having “conceded, therefore, that YA Global is liable for the section 1446
withholding tax attributable to YA Global’s other foreign partners for
2009.”

In an Order issued August 12, 2022, we posed questions to the
parties that we expected them to be prepared to address at a remote
Special Session scheduled for August 31, 2022. Among our questions for
petitioners were the following:

Do petitioners agree that, during 2009, YA Global had
partners other than YA Offshore who were either foreign
or from whom the partnership did not receive withholding
certificates under Treasury Regulation § 1.1446-1(c)(2)? If
so, do petitioners concede that, should the Court determine
that YA Global was engaged in a U.S. trade or business
during 2009, the partnership would be liable for
withholding tax under section 1446 on the portion of its
ECTI allocable to those other foreign (or deemed foreign)
partners?

Because we did not have sufficient time at the August 31 Special
Session to address all the questions we had for the parties, we scheduled
another remote Special Session for September 16, 2022. At the
September 16 Special Session, we asked petitioners’ counsel whether, “if
we determine that YA Global was [in] a U.S. trade or business in 2009,
the partnership would owe some withholding tax liability in regard to
21

[*21] those foreign partners other than YA Offshore.” Petitioners’
counsel responded: “Technically, I think it is correct. . . . I think
technically [the Foreign SPVs] were partners, and I can’t think of any
good reason around it. So I’m going to say yes.”

Following the September 16 Special Session, we issued an Order
(September 20 Order), directing the parties to submit written reports
addressing the questions discussed during that session. In the report
petitioners submitted in response to the September 20 Order (November
16 Report), petitioners asserted that the Foreign SPVs “were not
partners in any ongoing business of the Fund, and even if they were
technically members of the partnership, they would not have had
effectively connected taxable income . . . allocable to them under section
704.” “[B]y their very nature,” petitioners argued, the Foreign SPVs
“were not in a continuing partnership with the other investors in YA
Global.” They were “merely co-owners of illiquid assets, not partners in
any continuing venture.” “Even if the [Foreign] SPVs could somehow be
viewed as partners in [YA Global],” petitioners added, “any allocations
of income to them were not distributive shares under section 704 but
were, instead, made to them ‘other than in [their] capacity] as . . .
member[s] of [the] partnership.’” On the premise that “[a]ny allocations
to the [Foreign] SPVs were attributable to withdrawn capital,”
petitioners concluded that those allocations could not have been made
under section 704(b).

In a Response to petitioners’ November 16 Report, respondent
argued that we should not allow petitioners to raise the Foreign SPVs’
status as partners in YA Global because petitioners had not pleaded the
issue. Respondent claimed to be “unduly surprised and prejudiced.” He
continued:

Whether the [Foreign] SPVs were partners of YA Global
raises factual and legal questions quite unlike those that
were presented at trial with respect to YA Global’s lending,
underwriting, and financing activities. Had respondent
known that petitioners did not consider the SPVs to be
partners of YA Global, respondent would have sought to
discover additional information before trial and would have
sought to present additional evidence or elicit additional
testimony at trial. Respondent would face extreme
prejudice if he were required to mount a challenge to
petitioners’ new argument and factual assertions at this
stage, two years post-trial. The Court, therefore, in its
22

[*22] sound discretion, should decline to consider petitioners’
new argument.

On the merits of the issue, respondent argued, in essence, that
petitioners should be bound by YA Global’s tax reporting. As respondent
observed: “YA Global treated the SPVs like partners, maintaining
capital accounts on their behalf and allocating YA Global’s income and
loss to them.” Respondent dismissed as “immaterial” YA Global’s
reporting of a liability to the SPVs on its 2009 financial statements. “[A]
partnership,” he observed, “can owe a liability to a partner.”

In an Order issued January 12, 2023 (January 12 Order), we
noted that petitioners had “offered no explanation of why they had failed
to raise in either their opening or answering brief their argument that
no ECTI of YA Global for 2009 would be properly allocable to the foreign
SPVs.” “Before deciding whether to consider petitioners’ argument,” we
resolved to “give them the opportunity to explain why we should not
treat them as having conceded the argument and why raising the
argument for the first time more than two years after trial [would] not
[be] untimely.”

In a Supplemental Brief they filed in response to the January 12
Order, petitioners contended that the record was sufficient for us to
resolve the legal question of the Foreign SPVs’ status as partners of YA
Global. On that premise, petitioners argued that respondent would “not
be prejudiced by [our] consideration of th[eir] argument.” “The evidence
in the record,” in their view, “demonstrates that the Foreign SPVs were
not partners in YA Global.”

Petitioners’ Supplemental Brief also elaborated on their
substantive argument on the Foreign SPVs’ status and their entitlement
to allocations of YA Global’s ECTI. Petitioners claimed that the Foreign
SPVs had no intent to join in any business conducted by YA Global and
share in the profits or losses of that business. On that premise,
petitioners reasoned, the Foreign SPVs were not partners in YA Global
under the test enunciated in Commissioner v. Culbertson, 337 U.S. 733
(1949). As explained in more detail below, the Culbertson Court rejected
this Court’s view that “essential to membership in a family partnership
for tax purposes [is] the contribution of either ‘vital services’ or ‘original
capital.’” Id. at 741. It noted that its prior opinion in Commissioner v.
Tower, 327 U.S. 280 (1946), “provide[d] no support for such an
approach.” Commissioner v. Culbertson, 337 U.S. at 741. It added:
23

[*23] The question is not whether the services or capital
contributed by a partner are of sufficient importance to
meet some objective standard supposedly established by
the Tower case, but whether, considering all the facts . . .
the parties in good faith and acting with a business purpose
intended to join together in the present conduct of the
enterprise.

Id. at 742. (Although Culbertson, like Tower, addressed a family
partnership, courts have since used the Culbertson test to determine
whether partnerships involving unrelated persons should be recognized
for tax purposes. E.g., Bussing v. Commissioner, 88 T.C. 449, 460
(1987).)

Petitioners acknowledge that section 704(e)(1), as in effect for
2009, required that the owner of a capital interest in a partnership be
recognized as a partner if capital is a material factor in the production
of a partnership’s income. Petitioners argue, however, that “[f]ormer
section 704(e) was not intended to create an additional or alternative
test to Culbertson.” They claim support for that argument from a report
of the Staff of the Joint Committee on Taxation prepared in connection
with the 2015 repeal of section 704(e). Staff of J. Comm. on Tax’n, 114th
Cong., General Explanation of Tax Legislation Enacted in 2015, JCS-1-
16 (2015 Bluebook), at 83–84 (J. Comm. Print 2016). The 2015 Bluebook
explains that Congress repealed section 704(e)(1) “to eliminate any
argument that the provision applies an alternative test as to whether
the holder of a capital interest is a partner with respect to that interest,
or whether the interest constitutes a capital interest in a partnership.”
2015 Bluebook at 84.14

In a Response to petitioners’ Supplemental Brief, respondent
argued, among other things, that (1) the record is insufficient to support
a conclusion that the Foreign SPVs were not partners in YA Global, and
(2) the weight of the evidence that is in the record supports a contrary
conclusion. Respondent observed that any shareholders who wanted to
promptly terminate their indirect participation in YA Global could have
elected to receive in-kind distributions. “By not taking that option,”
respondent continued, “the ultimate investors through the Foreign SPVs
chose to remain in business with YA Onshore, YA Offshore, and the

14 By “alternative test,” the Joint Committee staff apparently meant an

alternative to the Culbertson test. In its description of pre-2015 law, the staff cited
Culbertson as having provided “the test of a partnership.” 2015 Bluebook at 83.
24

[*24] other SPVs.” Respondent infers that “[t]he Foreign SPVs wanted
YA Global to hold, sell, exchange, transfer, or otherwise manage and
deal with the securities YA Global held in 2009 and maximize the profits
on those securities before the Foreign SPVs’ interests were redeemed.”
Respondent dismisses as “immaterial” the Foreign SPVs’ lack of
participation in “new investments.” He contends:

The Foreign SPVs remained in partnership with YA
Onshore, YA Offshore, and the other SPVs for the ongoing
management of the currently held securities and profited
or lost on those investments accordingly. They depended
on YA Global’s hired investment manager to oversee the
securities and dispose of them in the partners’ best
interests. . . . As a consequence, the Foreign SPVs
continued to bear the risk of loss and enjoy the fruits of YA
Global’s activities.

B. Analysis

As we suggested in our January 12 Order, we do not view
petitioners as seeking to raise a new, unpleaded issue “but instead
raising for the first time after their submission of multiple briefs a new
argument in regard to an issue that has been in the case from the
outset.” In both their initial and amended Petitions, petitioners alleged
that “the Commissioner erred in determining that . . . the partnership
is liable for withholding tax [for 2009] in the amount of $6,748,616.”
Thus, as we observed in the January 12 Order, “[t]he assignments of
error in petitioners’ petitions are sufficiently broad to encompass the
question of whether any liability for 2009 withholding tax ultimately
determined should include amounts attributable to the [F]oreign SPVs.”
We also noted that “Rule 151(e)(5) . . . requires a party’s brief to contain
a statement of the party’s argument, setting forth and discussing ‘the
points of law involved and any disputed questions of fact.’” Citing
Gregory v. Commissioner, T.C. Memo. 2018-192, at *10–11, and Remuzzi
v. Commissioner, T.C. Memo. 1988-8, aff’d on other grounds, 867 F.2d
609 (4th Cir. 1989) (unpublished table decision), we warned that
“[a]rguments not made on brief may be treated as having been
conceded.”

Petitioners have failed to offer us a valid reason not to treat them
as having conceded that the Foreign SPVs were partners in YA Global
during 2009 and, as such, were entitled to receive allocations of ECTI.
Petitioners allege that the record is sufficient to allow us to resolve the
25

[*25] issue and that, consequently, respondent would not be prejudiced
by our allowing petitioners to raise the issue. The reason we treat
arguments not made on brief as conceded, however, is not to avoid
prejudice to the opposing party. Instead, treating an argument not
made on brief as conceded is a sanction for noncompliance with Rule
151(e).

Moreover, we do not agree that the record is sufficient for us to
determine whether the Foreign SPVs were partners in YA Global.
According to YA Global’s 2009 financial statements, the SPVs held “pro
rata participation interests” in securities. Petitioners point to no
evidence in the record that details the terms of the participation
interests or identifies how title to the securities covered by those
interests was held. Did the participation interests give the Foreign
SPVs undivided ownership interests in specified securities? Or were
they instead simply contractual rights to receive proceeds upon the sale
of those securities? The record does not say.

It does not follow, however, that respondent would be prejudiced
were we to address on the merits the question of the Foreign SPVs’
status. Because petitioners bear the burden of proof under Rule 142(a),
they bear the consequences of the record’s inadequacy. Therefore,
whether we treat petitioners as having conceded that the Foreign SPVs
were partners entitled to allocations of ECTI or instead address the
issue on the merits, we would reach the same result: YA Global’s
liability for section 1446 withholding tax for 2009 should take into
account the Foreign SPVs’ shares of the partnership’s ECTI for the year.

1. The Importance of the Terms of the Participation
Interests

We agree with petitioners that, if the participation interests the
Foreign SPVs held gave them undivided ownership interests in the
subject securities, the Foreign SPVs would not have been partners in YA
Global. But they may well have been more than “mere” co-owners.
While the Foreign SPVs, if co-owners, would not have been partners in
YA Global, they might have been (indeed, probably would have been)
partners with YA Global.15 Even if the participation interests gave the

15 Although petitioners argue that “the SPVs were merely co-owners of illiquid

assets,” they do not identify the other co-owner(s). We take it as a given, however, that
the Foreign SPVs were not co-owners with YA Onshore and YA Offshore. The parties
do not dispute that YA Global was a partnership or that YA Onshore and YA Offshore
were partners in that partnership. Therefore, YA Onshore and YA Offshore were, inter
26

[*26] Foreign SPVs title to portions of the securities, the Foreign SPVs’
interests apparently went beyond co-ownership of some of the securities
managed by the partnership. The Schedules K–1 issued to the Foreign
SPVs reported allocations to them of each item of income, loss, and
deduction shown on YA Global’s Schedule K. While the Schedules K–1
are not dispositive, they are evidence of the economic arrangement
between YA Global and the Foreign SPVs. Petitioners do not identify
any evidence that calls into question the accuracy of the Schedules K-1
in reflecting that economic arrangement. We can think of no economic
justification for allocating to the Foreign SPVs a share of each item of
income, loss, and deduction (including, for example, legal and other
professional fees) if the Foreign SPVs were merely co-owners, with YA
Global, of specified securities. If they were, indeed, co-owners, they also
shared economically in the results of activities that we have concluded
constitute a trade or business. See, e.g., Cusick v. Commissioner, T.C.
Memo. 1998-286, 1998 WL 440881, at *4 (“[T]he distinction between
mere coowners and coowners who are engaged in a partnership lies in
the degree of business activity of the coowners or their agents.”).

If the Foreign SPVs were partners with YA Global in a lower tier
partnership engaged in a U.S. trade or business, the Foreign SPVs
would have been allocated a share of the ECTI of that lower tier
partnership. Section 1446 withholding tax would have been owed in
respect to the Foreign SPVs’ share of that ECTI. But that section 1446
withholding tax would have been a partnership item of the lower tier
partnership. Our jurisdiction in the present cases allows us to
determine only YA Global’s partnership items. It does not extend to the
determination of any section 1446 withholding tax liability, or any other
partnership items, of any partnership that might have existed between
YA Global and the Foreign SPVs. In short, if the record established that
the participation interests distributed to the Foreign SPVs gave them
undivided ownership interests in the subject securities, YA Global’s
section 1446 withholding tax liability would not include any amounts
attributable to the Foreign SPVs. And we could not determine in these
cases any section 1446 withholding tax owed by any lower tier
partnership between YA Global and the Foreign SPVs.

But the record does not establish that the participation interests
distributed to the Foreign SPVs gave them undivided ownership
interests in the subject securities. We must therefore consider the

se, partners and not co-owners. If the Foreign SPVs were co-owners, they must have
been co-owners with YA Global itself.
27

[*27] consequences that would ensue if the participation interests
instead were contract rights that entitled the Foreign SPVs to share in
the proceeds received by YA Global from the sale of securities that it
owned outright. In that event, as explained below, the Foreign SPVs
would have been partners in YA Global, and the partnership’s section
1446 withholding tax liability for 2009 would have included tax on the
Foreign SPVs’ shares of the partnership’s ECTI. If the participation
interests were contract rights to shares of the proceeds from the sale of
specified securities owned by YA Global, then the Foreign SPVs owned
capital interests in YA Global and section 704(e)(1), as in effect for 2009,
would have required the Foreign SPVs to be recognized as partners in
YA Global. Moreover, even if petitioners were correct that section
704(e)(1) did not require recognition as a partner of a capital interest
owner who would not have been treated as a partner under the
Culbertson test, we would still conclude that petitioners have not met
their burden of proof. The record does not allow us to conclude that the
Foreign SPVs were not partners in YA Global under Culbertson.

2. The Foreign SPVs as Partners Under Section
704(e)(1)

If the participation interests distributed to the Foreign SPVs
provided them with contractual rights to proceeds from the sale of
securities owned entirely by YA Global, rather than direct ownership
interests in those securities, then the Foreign SPVs owned capital
interests in YA Global. Treasury Regulation § 1.704-1(e)(1)(v) provides:
“For purposes of section 704(e), a capital interest in a partnership means
an interest in the assets of the partnership, which is distributable to the
owner of the capital interest upon his withdrawal from the partnership
or upon liquidation of the partnership.”

If the Foreign SPVs owned capital interests in YA Global, the
plain terms of section 704(e)(1) would require that they be recognized as
partners. Before its repeal in 2015, section 704(e)(1) provided: “A person
shall be recognized as a partner for purposes of this subtitle if he owns
a capital interest in a partnership in which capital is a material income-
producing factor, whether or not such interest was derived by purchase
or gift from any other person.” Petitioners make no argument that
capital was not a material factor in producing YA Global’s income.

But petitioners would have us interpret section 704(e)(1) so that
it did not require recognition of the owner of a capital interest as a
partner in a partnership if the capital interest owner did not intend to
28

[*28] join in the conduct of the partnership’s business. Petitioners’
proposed interpretation would add a condition absent from the statutory
test for the recognition of a capital interest owner as a partner. Under
the plain terms of section 704(e)(1), the owner of a capital interest in a
partnership in which capital is a material income-producing factor must
be recognized as a partner regardless of the capital interest owner’s
subjective intent to participate in the partnership’s business. Moreover,
petitioners’ proposed interpretation of section 704(e)(1) is not only
contrary to the statute’s plain text; its adoption could also frustrate
Congress’s purpose in enacting the rule.

Congress enacted the predecessor of section 704(e)(1) in 1951, in
response to the Supreme Court’s opinions in Tower and Culbertson. As
noted, both cases addressed family partnerships, which the Tower Court
described as an “acute problem.” Commissioner v. Tower, 327 U.S. at
284. (In particular, the problem the Court saw was the use of family
partnerships to try “to escape surtaxes by dividing one earned income
into two or more.” Id.)

In a typical family partnership arrangement, a family’s primary
income-earner would make gifts to other family members. The donees
would then contribute the proceeds of the gift to a partnership with the
donor. If the arrangement were respected, income that would otherwise
have been taxed to the donor would instead be taxed (usually at lower
rates) to the donees. The Court in Tower and Culbertson sought to apply
to family partnerships fundamental concepts of the assignment of
income—in particular, the principle that income from property should
be taxed to its owner.

Tower involved a husband and wife who had been majority
shareholders in a corporation. (The husband had owned 445 out of 500
shares, the wife only 5 shares.) The husband transferred 190 shares to
his wife. The corporation then liquidated, and its assets were
contributed to a new partnership. The question before the Court was
whether the income attributable to the wife’s interest in the partnership
was taxable to her or to her husband. The Court wrote:

We are of the opinion that the . . . facts were
sufficient to support the Tax Court’s finding that the wife
was not a partner in the business. A partnership is
generally said to be created when persons join together
their money, goods, labor, or skill for the purpose of
carrying on a trade, profession, or business and when there
29

[*29] is community of interest in the profits and losses. When
the existence of an alleged partnership arrangement is
challenged by outsiders, the question arises whether the
partners really and truly intended to join together for the
purpose of carrying on business and sharing in the profits
or losses or both. . . . Here the Tax Court, acting pursuant
to its authority in connection with the enforcement of
federal laws, has found from testimony before it that [the
husband] and his wife did not intend to carry on business
as a partnership. This finding of fact, since supported by
evidence, is final.

Commissioner v. Tower, 327 U.S. at 286–87 (footnotes omitted). The
Court acknowledged the possibility that a husband and wife could form
a valid tax partnership. If, for example, the wife “either invests capital
originating with her or substantially contributes to the control and
management of the business, or otherwise performs vital additional
services, or does all of these things,” the Court accepted, “she may by a
partner.” Id. at 290. The Court added that, when the wife

does not share in the management and control of the
business, contributes no vital additional service, and where
the husband purports in some way to have given her a
partnership interest, the Tax Court may properly take
these circumstances into consideration in determining
whether the partnership is real within the meaning of the
federal revenue laws.

Id.

Culbertson involved a ranching business allegedly conducted by a
partnership among a father and his four sons. The business had
previously been operated by a partnership between the father and an
unrelated individual. After buying out his former partner, the father
sold interests in the cattle to his sons in exchange for notes that were
ultimately either forgiven or repaid from profits of the business. The
older son received a salary for serving as foreman on the ranch before
entering the Army. The second son also served in the Army. The two
younger sons were in school and worked on the ranch only in the
summer.

This Court declined to recognize a tax partnership among the
father and his sons. Culbertson v. Commissioner, 6 T.C.M. (CCH) 692
30

[*30] (1947), rev’d, 168 F.2d 979 (5th Cir. 1948), rev’d and remanded,
337 U.S. 733 (1949). We reasoned that the father was the source of all
capital in the business and the sons had not contributed sufficient
services to justify recognition as partners. (The oldest son, having been
paid for his services, made no contribution at all.)

The Supreme Court, on hearing the case, judged that we had been
too rigid in applying Tower. The contribution of either vital services or
original capital, the Court explained, is not essential for one to be
recognized as a partner. Instead, they are simply factors to consider.
The Court then described the governing inquiry as follows:

The question [of whether a family partnership is real for
income tax purposes] is not whether the services or capital
contributed by a partner are of sufficient importance to
meet some objective standard supposedly established by
the Tower case, but whether, considering all the facts—the
agreement, the conduct of the parties in execution of its
provisions, their statements, the testimony of disinterested
persons, the relationship of the parties, their respective
abilities and capital contributions, the actual control of
income and the purposes for which it is used, and any other
facts throwing light on their true intent—the parties in
good faith and acting with a business purpose intended to
join together in the present conduct of the enterprise.

Commissioner v. Culbertson, 337 U.S. at 742. The Supreme Court thus
remanded the case to this Court. It directed us to consider, as to each of
the sons, whether “there [was] a bona fide intent that they be partners
in the conduct of the cattle business, either because of services to be
performed during th[e] years [in issue], or because of contributions of
capital of which they were the true owners.” Id. at 748.

In response to Tower and Culbertson, Congress determined that
basic assignment of income principles should be applied in the context
of partnerships in the same way that they apply in other contexts. See
generally H.R. Rep. No. 82-586, at 32‒34 (1951), reprinted in 1951
U.S.C.C.A.N. 1781, 1815‒13; S. Rep. No. 82-781, at 38‒41 (1951),
reprinted in 1951 U.S.C.C.A.N 1968, 2008‒10. In other contexts, bona
fide gifts of property, such as real estate or corporate stock, shift to the
donee the incidence of taxation on the income produced by the property.
The same should be true, Congress determined, of a bona gift of a
partnership interest or capital used to acquire a partnership interest.
31

[*31] The committee reports accompanying the Revenue Act of 1951 do
not explicitly state an intent to overrule Tower or Culbertson. Instead,
they describe Congress as addressing “confusion” that arose from those
cases, “[w]hether or not the [Court’s] opinion[s] . . . afford any
justification for the confusion.” H.R. Rep. No. 82-586, at 33, reprinted in
1951 U.S.C.C.A.N. at 1814; S. Rep. No. 82-781, at 39, reprinted in 1951
U.S.C.C.A.N. at 2009.

Notwithstanding Congress’s deference to the Supreme Court, in
enacting the predecessor of section 704(e)(1) Congress called for a
different focus in the analysis of family limited partnerships. While
Tower and Culbertson focused on the parties’ subjective intent, Congress
focused the inquiry on the reality of capital ownership. Tower and
Culbertson left open the possibility that a taxpayer like Mrs. Tower, who
contributes no substantial services to a family partnership and whose
only contribution of capital to the partnership was funded by an
intrafamily gift, might not be recognized as a partner. Congress
intended that, as long as the gift was real, the donee partner should be
recognized as a partner. If section 704(e)(1) were interpreted to allow
withholding recognition of the donee as a partner unless the donee and
others involved really intended to carry on business as a partnership,
the statute would not have achieved Congress’s purpose of
“harmoniz[ing] the rules governing interests in the so-called family
partnership with those generally applicable to other forms of property
or business.” H.R. Rep. No. 82-586, at 32, reprinted in 1951
U.S.C.C.A.N. at 1813; S. Rep. No. 82-781, at 38, reprinted in 1951
U.S.C.C.A.N. at 2008. Dividends, for example, are taxed to the owner of
the stock on which the dividends are paid. If partnership income may
be taxed to someone other than the owner of the interest in the capital
that produced the income, depending on the parties’ subjective
intentions, basic assignment of income principles would not apply
uniformly to partnerships and “other forms of property or business.”

The 2015 Bluebook does not establish petitioners’ proposition
that, when Congress enacted section 704(e)(1)’s predecessor in 1951, it
did not intend to provide an alternative or additional test to that
articulated in Culbertson. The Joint Committee staff can speak with
some authority in 2016 on the reasons Congress repealed section
32

[*32] 704(e)(1) the previous year.16 It has little or no authority to
explain why Congress first enacted that statutory rule 65 years earlier.17

Moreover, the Joint Committee staff recognized that, before
2016,18 an argument could have been made that section 704(e)(1)
“provides an alternative test as to whether the holder of a capital
interest is a partner.” 2015 Bluebook at 84. Had that not been a
potentially valid argument, Congress would not have needed to take
action to “eliminate” the argument. Id.

The 2015 Bluebook indicates that Congress repealed section
704(e)(1) in response to TIFD III-E Inc. v. United States, 660 F. Supp.
2d 367, 394 (D. Conn. 2009), rev’d, 666 F.3d 836 (2d Cir. 2012), in which
the District Court for the District of Connecticut accepted the possibility
that an entity might not “qualify as a partner under Culbertson and still
. . . qualify as a partner in a partnership under section 704(e)(1).” The
case involved a partnership known as Castle Harbour, formed by
subsidiaries of General Electric Capital Corp. and two Dutch banks. In
its initial opinion in the case, the district court concluded that the
formation of Castle Harbour was not a sham transaction, the Dutch
banks were partners in Castle Harbour, and the allocations of
partnership income to them satisfied the substantial economic effect

16 In Redlark v. Commissioner, 106 T.C. 31, 45 (1996), rev’d, 141 F.3d 936 (9th

Cir. 1998), we wrote that, although a “Joint Committee Staff Explanation . . . is not
part of the legislative history,” it is nonetheless “entitled to respect.” We added,
however, that, “[w]here there is no corroboration in the actual legislative history, we
[would] not hesitate to disregard [a] General Explanation as far as congressional intent
is concerned.” Id. The Court of Appeals for the Ninth Circuit, in reversing our decision,
agreed that “post-enactment explanations,” such as those often provided by the Staff
of the Joint Committee on Taxation, “cannot properly be described as ‘legislative
history’” but accepted that “they are at least instructive as to the reasonableness of an
agency’s interpretation of a facially ambiguous statute.” Redlark v. Commissioner, 141
F.3d at 941. The “Bluebook” considered in Redlark, however, was prepared shortly
after and in connection with the legislation that enacted the statute in issue.
17 In Mars, Inc. v. Commissioner, 88 T.C. 428, 435 (1987) (quoting United States

v. Southwestern Cable Co., 392 U.S. 157, 170 (1968)), we wrote: “[I]t is well settled that
‘the views of one Congress as to the construction of a statute adopted many years before
by another Congress have “very little, if any, significance.”’” In Mars, we addressed
official legislative history: a report of the Senate Finance Committee. If postenactment
legislative history should be given little, if any, weight, even less weight should be
given to unofficial sources, such as Joint Committee staff explanations, purporting to
interpret legislation enacted “many years before.”
18 The Bipartisan Budget Act of 2015, Pub. L. No. 114-74, § 1102(b)(1) and (c),

129 Stat. 584, 639, repealed section 704(e)(1), effective for partnership taxable years
beginning after December 31, 2015.
33

[*33] requirement of section 704(b). TIFD III-E Inc. v. United States,
342 F. Supp. 2d 94, 109 (D. Conn. 2004), rev’d, 459 F.3d 220 (2d Cir.
2006). The U.S. Court of Appeals for the Second Circuit reversed on the
ground that the Dutch banks “were not bona fide equity partners in
Castle Harbour.” TIFD III-E, Inc., 459 F.3d at 240. The appellate court
nonetheless remanded the case to allow the district court to determine,
among other things, whether “the partnership was a family partnership
under the provisions of I.R.C. § 704(e).”19 Id. at 241 n.19. On remand,
the district court accepted that the Second Circuit’s opinion established
that “the Dutch Banks were not partners in Castle Harbour under
Culbertson.” 660 F. Supp. 2d at 395. Nonetheless, the court concluded
that section 704(e)(1) required the recognition of the Dutch banks as
partners. The Second Circuit then reversed the district court’s judgment
a second time. TIFD III-E Inc., 666 F.3d 836. The appellate court did
not reject the notion that section 704(e)(1) requires that the owner of a
capital interest be recognized as a partner regardless of that person’s
subjective intent to participate in the partnership’s business.20 Instead,
the court concluded that section 704(e)(1) did not apply. Because the
Dutch banks’ interests in Castle Harbour were overwhelmingly in the
nature of debt, if not outright debt, those interests, in the Second
Circuit’s view, were not capital interests within the meaning of section
704(e)(1).

We agree with the District Court for the District of Connecticut
that section 704(e)(1), interpreted in accordance with its plain terms and
consistent with the intent expressed by the Congress that enacted the
provision’s predecessor, may require the recognition as a partner of one
who holds a capital interest in a partnership but would not be recognized
as a partner under Culbertson’s intent test. We doubt, however, that
that situation would often arise. (Given the ultimate disposition of the
Castle Harbour litigation, it did not arise in that case.) It would be
unusual for a person to put capital at risk in a business in which the
person had no intention of participating. Putting capital at risk is itself
a form of participation. The cases before us, however, involve unusual
circumstances. While the Foreign SPVs may, depending on the terms of

19 Although section 704(e) was captioned “Family partnerships,” that caption

did not limit the provision’s scope. See, e.g., Carriage Square, Inc. v. Commissioner, 69
T.C. 119, 126 n.4 (1977); Evans v. Commissioner, 54 T.C. 40, 51 (1970), aff’d, 447 F.2d
547 (7th Cir. 1971).
20 In fact, the Second Circuit was willing to assume “that there may be

circumstances in which the application of Culbertson and § 704(e)(1) yields different
results as to whether the purported holder of a partnership interest qualifies as a
partner.” TIFD III-E, Inc., 666 F.3d at 847 n.8.
34

[*34] their participation interests, have owned capital interests in YA
Global, the Foreign SPVs’ owners had initiated a process that would
eventually lead to the liquidation of their indirect interests in YA Global.
It is that scenario that raises the prospect that section 704(e)(1) and
Culbertson might lead to different results.

For the reasons explained above, we conclude that, if the
participation interests held by the Foreign SPVs provided them with
contractual rights to proceeds from the sale of securities owned by YA
Global, so that the Foreign SPVs held capital interests in the
partnership, section 704(e)(1), as in effect for 2009, would have required
recognition of the Foreign SPVs as partners regardless of the extent to
which they intended to join YA Onshore and YA Offshore in the conduct
of YA Global’s business.

3. The Foreign SPVs as Partners Under Culbertson

Moreover, even if we were to accept petitioners’ claim that the
Foreign SPVs cannot be recognized as partners in YA Global unless they
satisfied the Culbertson test, we would conclude that petitioners have
not established that Culbertson precludes recognition of the Foreign
SPVs as partners in YA Global. The record establishes that the Foreign
SPVs were created for the benefit of investors in YA Offshore who sought
redemption of their indirect interests in YA Global but declined the
option of having their interests redeemed immediately by in-kind
distributions of securities. Instead, each investor chose to receive an
interest in a Foreign SPV so that the securities the investor would
otherwise have received in redemption would continue to be managed
by Yorkville Advisors on behalf of YA Global. As YA Global sold
securities in the ordinary course of what we have concluded to be a trade
or business, each Foreign SPV would receive a share of the proceeds
from the sale of those securities in which it held participation interests.
The Foreign SPV, we assume, would then distribute proceeds to the
ultimate investors. Once all the securities in which a Foreign SPV held
participation interests had been sold, the indirect interests in YA Global
of those investors who declined immediate in-kind distributions would
be fully liquidated. Petitioners would apparently impute to the Foreign
SPVs the intentions of their owners. Because the owners had initiated
a process that would eventually result in the complete liquidation of the
owners’ indirect interests in YA Global, petitioners argue that the
Foreign SPVs did not intend to join YA Onshore and YA Offshore in the
conduct of YA Global’s business.
35

[*35] If the owners of the Foreign SPVs had wanted to cease their
indirect participation in YA Global’s business, they would have chosen
to be redeemed by means of in-kind distributions. As respondent
observes, that the Foreign SPVs’ owners rejected that choice indicates
that they saw a benefit in allowing the continued joint management of
YA Global’s securities. They specifically chose to continue their
participation in YA Global’s business until all the securities in which
they held indirect interests had been liquidated in the course of that
business. Therefore, the evidence in the record does not establish that
the subjective intentions of the Foreign SPVs would preclude their
recognition as partners of YA Global under Culbertson.

Petitioners’ position, as we understand it, ultimately rests on a
false premise. A partner does not cease being a partner simply by
announcing an intention to withdraw from the partnership. Even if the
partner goes further and surrenders his partnership interest in
exchange for a right to share in the proceeds from sales of specified
assets, the partner still remains a partner until he receives the final
payment. That is the mandate of section 736, which provides rules
governing the treatment of withdrawing partners. Under that section,
a withdrawing partner remains a partner until his interest in the
partnership is completely liquidated.

Brennan v. Commissioner, T.C. Memo. 2012-209, 2012 WL
3000336, aff’d, 621 F. App’x 408 (9th Cir. 2015), illustrates the effect of
section 736 in a situation closely analogous to that of the owners of the
Foreign SPVs. The taxpayer in Brennan had been a partner in a
partnership that managed asset portfolios for wealthy individuals and
institutional investors. As part of a restructuring of the partnership in
2002, the taxpayer surrendered his membership interest. Thereafter,
his only interest in the partnership was a right to share in the proceeds
of the partnership’s sale of specified assets. The partnership reported
capital gains from that sale in 2003 and 2004. The taxpayer argued that
he should not have been allocated any shares of those gains because his
status as a partner terminated in 2002. We disagreed. Relying on
section 736, we concluded that the taxpayer remained a partner for tax
purposes in 2003 and 2004 and had to take into account his distributive
shares of the partnership’s capital gains in those years, along with
various other items. If the owners of the Foreign SPVs had held their
interests in YA Global directly, rather than through YA Offshore, they
would have been in the same situation as the taxpayer in Brennan. The
present facts are distinguishable from those of Brennan in that the
Foreign SPVs apparently had no interest in YA Global before they
36

[*36] received their participation interests. Nonetheless, Brennan
shows that the fundamental assumption that seems to underlie
petitioners’ position is contrary to the treatment of withdrawing
partners under section 736.

4. Allocations to Foreign SPVs as Distributive Shares

Petitioners thus have not met their burden of establishing that
the Foreign SPVs were not partners in YA Global. Petitioners argue,
however, that, even if the Foreign SPVs were partners, the allocations
they received were not distributive shares of partnership income.
Instead, petitioners claim, the Foreign SPVs received those allocations
in a capacity other than that of partners. They rely on section 707(a),
which provides rules that govern transactions between a partnership
and a partner in which the partner acts in a nonpartner capacity. For
example, if a partner leases property to the partnership, the
compensation for the use of the property is deductible by the partnership
and rental income to the partner rather than a distributive share of the
partnership’s income. If the partnership makes a purported distributive
share allocation to the partner as compensation for its use of the
property, the allocation will not be respected. Treas. Reg. § 1.704-
1(b)(1)(v). Petitioners fail to identify any transactions between YA
Global and the Foreign SPVs in which the latter acted in capacities other
than as partners. Petitioners appear to claim that none of the
allocations made to the Foreign SPVs can be distributive shares of YA
Global’s ECTI. They base that claim not on the Foreign SPVs’ role in
any particular transaction but on the Foreign SPVs’ status in relation
to YA Global. In short, their section 707(a) argument repeats, in a
different guise, their argument that the Foreign SPVs should not be
recognized as partners in YA Global. We have already concluded that
the record does not support that argument. Section 707(a) does not
provide grounds to treat allocations to the Foreign SPVs as other than
ECTI if those entities are recognized as partners of YA Global.21

Finally, petitioners rely on YA Global’s financial statements for
the proposition that “[a]ny allocations to the SPVs were attributable to
withdrawn capital . . . and therefore could not be allocations [of
distributive shares of partnership income] under section 704(b).” Our

21 A partnership’s income cannot be ECTI as to some partners but not others.

For the purpose of determining a partnership’s section 1446 withholding tax liability,
“[t]he calculation of partnership ECTI allocable to foreign partners . . . and the
partnership’s withholding tax obligation are partnership-level computations.” Treas.
Reg. § 1.1446-2(a).
37

[*37] response to that argument is simple: Financial statements do not
determine tax consequences.22

5. Conclusion

We thus conclude that YA Global’s section 1446 withholding tax
liability for 2009 includes the product of (1) the items of partnership
income, gain, loss, and deduction allocable to the Foreign SPVs,23 and
(2) the highest marginal tax rate specified in section 11(b)(1). Each
Foreign SPV’s shares of partnership income, gain, loss, and deduction
include (1) those items reported on the Schedule K–1 issued to it other
than the writeoff of interest receivable deemed uncollectible included in
the other deductions reported on line 13d,24 and (2) the Foreign SPV’s
share of YA Global’s mark-to-market gain for 2009 under section
475(a)(2).

III. Value of Accrued Interest on Debentures as of December 31, 2009

An Order issued August 10, 2022 (August 10 Order), listed the
initial questions to be discussed at the August 31, 2022, remote hearing.
Among other things, we asked whether “respondent agree[d] with
petitioners that the accrual of interest on a debenture held by [YA
Global] created an asset separate from the underlying debenture.” We
also asked about the interrelationship of sections 165, 166, and 475. In
particular, we asked whether, if YA Global’s convertible debentures
were subject to the mark-to-market rule of section 475(a)(2), as
respondent alleged, accrued interest on the debentures “would be taken
into account in determining the [debenture’s] basis and fair market
value for the purpose of determining the gain or loss that the
partnership would recognize under section 475(a)(2).” We noted that

22 Financial statements can, of course, be evidence of facts relevant to the
determination of tax consequences. That YA Global’s financial statements report the
distribution of participation interests to the Foreign SPVs as withdrawals of capital
may indicate that the participation interests provided the Foreign SPVs with
undivided ownership interests in the subject securities. The Schedules K‒1 issued to
the Foreign SPVs, however, point in the opposite direction, reporting substantial
capital accounts.
23 In our prior opinion, we concluded that petitioners had not established that

any portion of YA Global’s taxable income was not effectively connected with its U.S.
trade or business. YA Glob. Invs., LP, 161 T.C., slip op. at 62.
24 As explained infra Part III, to the extent that doubts about collectibility

reduce the value of the accrued interest on the debentures YA Global held on December
31, 2009, they should be taken into account in valuing the debentures for the purpose
of determining YA Global’s mark-to-market gain under section 475(a)(2).
38

[*38] respondent seemed to have “accepted the values at which the
partnership stated its debentures,” by using those values in computing
his mark-to-market adjustment, “but disregarded the partnership’s
write-off of accrued interest.” We asked whether respondent could
explain what we suggested may have been “inconsistent reliance on the
partnership’s financial reporting.” We also asked whether petitioners
would “hold to their contention that accrued interest is an asset separate
from the underlying debenture should we decide that the partnership’s
debentures are securities subject to the mark-to-market rule of section
475(a)(2).”

In a report submitted after the hearing, respondent advised us
that he “does not agree with petitioners that the accrual of interest on a
debenture held by the partnership created an asset separate from the
underlying debenture for purposes of section 475.” Respondent simply
chose not to contest the partnership’s treatment of accrued interest as a
separate asset. Instead, he “evaluated the accrued, but unpaid, interest
as a separate asset for purposes of disallowing the deduction claimed . . .
and not as part of the debentures for purposes of determining the
adjustment under section 475.”

Respondent rejected the notion that the write-off of allegedly
uncollectable accrued interest would be “subsumed within the mark-to-
market accounting” for the debentures. He argued for an approach
reflected in regulations proposed in 1995, but not yet adopted, under
which section 165 or 166, as applicable, would be applied before section
475(a)(2)’s mark-to-market rule. Prop. Treas. Reg. § 1.475(a)-1(f), 60
Fed. Reg. 397, 403 (Jan. 4, 1995). Under that approach, the basis of a
wholly worthless debt would be reduced to zero under the applicable
deduction provision and no gain or loss would be recognized under
section 475(a)(2).

Respondent denied that he had been inconsistent in his reliance
on YA Global’s financial reporting. According to his posthearing Report:

[R]espondent accepted, in the interest of sound tax
administration, values from the partnership’s financial
reports when the information provided to respondent
established that such values were sufficiently consistent
with tax principles but did not accept amounts from the
partnership’s financial reports when neither the financial
reports nor any other information provided to respondent
substantiated that the amounts in the partnership’s
39

[*39] financial reports were sufficiently consistent with tax
principles.

Respondent claims that “the partnership’s own description of its
accounting for its interest income is fundamentally inconsistent with
any assertion that its interest income is reported in its financial reports
at fair value.” While YA Global stated its debentures at fair value, it
stated accrued interest at either its full, nominal amount or zero.
“Because the partnership’s financial reports use different methods for
treatment and valuation of the debentures and the amount of the
interest accruals,” respondent argues, he “was not inconsistent in
accepting the valuation of the debentures while rejecting the amounts
reported for the interest accruals.”

In their posthearing Report, petitioners agreed with the
proposition that “if the Fund were a dealer in securities within the
meaning of section 475 and if the debentures it purchased were not held
for investment—then the plain language of section 475 and the
regulations thereunder would require that the loss in value of the
securities be treated as a reduction in the Fund’s income.” Regarding
respondent’s reliance on Proposed Treasury Regulation § 1.475(a)-1(f),
petitioners argue that “[p]roposed regulations . . . have no legal effect
unless and until they are adopted.”

Petitioners acknowledge that “[t]here were many times when the
Fund wrote off interest with respect to underlying debentures that were
reported at values below par.” Petitioners apparently mean that the
debentures were reported at values that, while below par, were greater
than zero. For example, YA Global wrote off all the interest that had
accrued on the debentures and promissory notes issued by Access
Beverage, Cobalis, Isonics, MM2, Poseidis, Speech Switch, Titan, and
US Helicopter. Even after the writedowns agreed to at the November
24, 2009, meeting of Yorkville Advisors’ Investment Committee,
however, the partnership continued to state those notes and debentures
at a substantial portion (50% to 80%) of their face value. Nonetheless,
petitioners characterize as “untenable” “[r]espondent’s willingness to
accept the determinations made by the Fund’s management and its
auditors with respect to the valuation of investments generally—but not
with respect to the valuation of interest receivable.”

Petitioners argue that “accrued interest receivable [can be
viewed] as an asset separate from its underlying debenture when doing
so is necessary to clearly reflect a taxpayer’s income.” Petitioners reason
40

[*40] that, if YA Global’s debentures were not subject to section 475(a),
treating the accrued interest and the underlying principal as separate
assets would have been necessary because the former would be an
ordinary income asset while the latter would be a capital asset.
Petitioners allow, however, that, “[i]f the debentures were subject to the
mark-to-market rules of section 475, it would not matter whether the
accrued interest were viewed as an asset separate from the underlying
debentures because any loss from the worthlessness of the interest or
the underlying principal invested would be ordinary in character.”

As noted supra Part I, our prior opinion establishes that, under
section 475(a)(2), YA Global is required 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 parties agree that, given that
conclusion, no grounds exist to treat interest accrued on a debenture and
the underlying debenture itself as separate assets. Respondent argues
that accrued interest and the underlying debenture can never be treated
as separate assets. Petitioners argue that accrued interest can be
treated as a separate asset if the underlying debenture is a capital asset.
Under section 475(d)(3), however, any gain or loss recognized by YA
Global under section 475(a)(2) is ordinary income or loss. Petitioners
accept that, under those circumstances, accrued interest need not be
treated as an asset separate from the debenture on which it accrued.
Each debenture and the interest accrued on the debenture can
appropriately be treated as a unitary asset for the purpose of
determining YA Global’s mark-to-market gain or loss under section
475(a)(2).

Under the circumstances, we also need not decide whether section
165 or 166 must be applied before section 475(a)(2). Respondent argues
that the basis of a worthless security should first be reduced to zero
under section 165 or 166, as applicable, before applying section
475(a)(2). Petitioners disagree. But respondent also argues that
petitioners have not established YA Global’s entitlement to a deduction
under section 165 or 166.25

25 As noted in the text, petitioners take the position that, if YA Global’s
debentures are subject to section 475(a)(2), neither section 165 nor section 166 would
be applied before applying section 475(a)(2). Instead, petitioners accept that any
decline in value of accrued interest because of doubts about collectibility would be
taken into account in computing the partnership’s mark-to-market gain or loss.
Because we have concluded that YA Global’s debentures are securities subject to
41

[*41] We thus face the factual question of the value of the debentures
YA Global held on December 31, 2009. In the December 1 Order, we
identified that question as one of the issues in regard to YA Global’s
2009 taxable year not resolved by our initial opinion. That Order invited
the parties to submit supplemental briefs on that and the other
remaining issues. Respondent, in his Supplemental Brief, pointed to
various discrepancies and incongruities in the record, contending that it
“does not include sufficient information to estimate the value of the
accrued interest YA Global claimed as a writeoff or to assess whether,
and to what extent, YA Global’s mark-to-market gains for 2009 should
be adjusted to account for any loss in value of its accrued interest.”

By contrast, petitioners’ Supplemental Brief directs us to four
pages of the Report they submitted after the August 31, 2022, remote
hearing. In that Report, petitioners maintained their positions (rejected
in our prior opinion) that YA Global was not engaged in a U.S. trade or
business, that it was not a “dealer in securities,” within the meaning of
section 475(c)(1), and that, even if it were, its securities would be
exempted from section 475(a)(2)’s mark-to-market rule by the exception
provided in section 475(b)(1)(A) for securities held for investment. As
noted above, petitioners allowed that, if the partnership were a dealer
and its securities subject to section 475(a)(2), doubts about the
collectibility of accrued interest on a debenture would be taken into
account in determining the partnership’s mark-to-market gain or loss.
And they agreed that, in that event, there would be no reason to treat
as separate assets accrued interest on a debenture and the debenture
itself. Given the procedural status of the cases, however, petitioners did
not specifically address the question of the value that should be ascribed
to the debentures if principal and accrued interest on each debenture
were treated as elements of a unitary asset.

Our December 1 Order gave each party the opportunity to submit
a reply to the other’s Supplemental Brief. Neither party did so.
Petitioners have thus left unchallenged respondent’s claim that the
record is insufficient to determine the extent to which the mark-to-
market gain that respondent determined for YA Global’s 2009 taxable
year should be adjusted to reflect doubts about the collectibility of
accrued interest on some of the debentures the partnership held on
December 31, 2009.

section 475(a)(2), we treat petitioners as having conceded respondent’s denial of the
partnership’s $46,506,023 deduction for allegedly uncollectible accrued interest.
42

[*42] Both parties’ positions have logical flaws grounded in YA Global’s
separate accounting for accrued interest on debentures and the
debentures themselves. Respondent would treat all accrued interest as
worth its full nominal amount, even if the underlying debenture were
determined to be worth less than face value. By contrast, petitioners
would have us accept that a debenture’s principal could be worth a
substantial portion of its face amount (e.g., 50% to 80%) while accrued
interest on the debenture was worthless.26

Even though respondent’s position, like petitioners’, is logically
flawed, we will nonetheless uphold the FPAA’s determination that YA
Global had mark-to-market gain under section 475(a)(2) of
$103,852,672. Petitioners have made no argument grounded in the
record about the extent of any adjustment to the mark-to-market gain
determined in the FPAA necessary to reflect doubts about the
collectibility of accrued interest on YA Global’s convertible debentures
and promissory notes.

IV. Requirement to Accrue Interest

In an amended Petition filed in June 2020, petitioners made an
affirmative claim that YA Global’s 2009 income “must be reduced by
$17,137,938,” which, they claim, “represents interest income that the
Partnership erroneously accrued in 2009 despite the fact that the
collection of such interest income was doubtful, and it was reasonably
certain that such interest income would never be paid.”

Treasury Regulation § 1.451-1(a) provides: “Under an accrual
method of accounting, income is includible in gross income when all the
events have occurred which fix the right to receive such income and the
amount thereof can be determined with reasonable accuracy” (all events
test). As the Supreme Court explained in Spring City Foundry Co. v.
Commissioner, 292 U.S. 182, 184 (1934), for taxpayers “[k]eeping
accounts and making returns on the accrual basis . . . it is the right to
receive and not the actual receipt that determines the inclusion of the
amount in gross income.”

26 Under its established accounting policies, YA Global writes off accrued

interest “when management determines that payment by the debtor is unlikely.” Even
if the payment of accrued interest is less likely than not, it would not follow that the
accrued interest adds nothing to the value of the underlying promissory note or
debenture.
43

[*43] Under an exception to the all events test, a taxpayer need not
accrue income whose receipt is sufficiently doubtful. The courts have
articulated the governing standard in various ways. According to the
Court of Appeals for the Second Circuit, income need not be accrued if
“it is of doubtful collectability or it is reasonably certain it will not be
collected.” Corn Exch. Bank v. United States, 37 F.2d 34, 34 (2d Cir.
1930). In the same opinion, however, the court wrote that income should
be accrued only if it is “likely to be paid or can be collected.” Id.

In Georgia School-Book Depository, Inc. v. Commissioner, 1 T.C.
463, 469 (1943), this Court identified two circumstances in which
accrual under the all events test would not be required. “To allow the
exception,” we wrote, “there must be a definite showing that an
unresolved and allegedly intervening legal right makes receipt
contingent or that the insolvency of his debtor makes it improbable.” On
the facts before us, we concluded that “there was no reasonable
expectation that [the amounts in issue] would not ultimately be paid.”
Id. at 471. We applied the “no reasonable expectation” standard again
in Chicago & North Western Railway Co. v. Commissioner, 29 T.C. 989,
996 (1958), concluding that the taxpayer before us was not required to
accrue interest on debt owed to it by a subsidiary we described as
“hopelessly insolvent.”

The reasonable expectancy of payment exception to the all events
test must be “strictly construed.” Eur. Am. Bank & Tr. Co. v. United
States, 20 Cl. Ct. 594, 605 (1990), aff’d, 940 F.2d 677 (Fed. Cir. 1991)
(unpublished table decision). Like any exception, it “must not be allowed
to swallow up the [general] rule.” Ga. School-Book Depository, Inc., 1
T.C. at 469. Applying the exception too broadly could allow a taxpayer
“at his own will [to] shift the receipt of income from one year to another
as should suit his fancy.” Id.

To our knowledge, the characterization of the caselaw offered by
the U.S. Court of Appeals for the Sixth Circuit in 1968 remains accurate:
“In all of the cases . . . which have held an item non-accruable because
of doubtful collectibility, substantial evidence had been presented as to
the financial instability or even the insolvency of the debtor.” Jones
Lumber Co. v. Commissioner, 404 F.2d 764, 766 (6th Cir. 1968), aff’g
T.C. Memo. 1967-81. Financial difficulties of a debtor that merely delay
payment are not sufficient to avoid accrual. See Hoffman v.
Commissioner, T.C. Memo. 1989-154; Koehring Co. v. United States, 190
Ct. Cl. 898, 910 (1970).
44

[*44] YA Global’s reporting of accrued interest demonstrates that it had
a reasonable expectation of receiving the interest accrued when it
recorded that interest. Under its established accounting policies, YA
Global stopped accruing interest when its general partner determined
that “there [was] reasonable doubt as to collectibility.” When
“management determine[d] that payment by the debtor [was] unlikely,”
the partnership wrote off accrued interest. In the August 10 Order, we
asked: “Given the description of YA Global’s accounting policies
included in its financial statements, does [the accrual of interest] not
indicate that the General Partner determined that there was no
‘reasonable doubt as to collectibility’ when the interest accrued and that
any doubts arose only thereafter?”

At the August 31, 2022, remote hearing, petitioners’ counsel
advised us: “[T]he way the accruals worked is that the fund
administrator just churned out this report every month. So it wasn’t
like they were making decisions on a monthly basis, accrue or don’t
accrue.” She added: “It was just was [sic] completely immaterial until
their financial reports. They had to do financial statements, and that’s
when they had to decide.”

In their posthearing Report, petitioners wrote:

[T]he Fund’s managers were not necessarily aware of
events demonstrating a portfolio company’s financial
distress the moment those events occurred, and the
financial statements do not suggest they would (or could)
be. It would not be reasonable for the Fund’s managers to
review the likelihood of collectability for every debenture
in the Fund’s portfolio every month. Thus, the fact that
management did not make the determination that interest
should be written off (or not accrued) with regard to a
particular debenture in a particular month did not reflect
any determination that there was no reasonable doubt as
to its collectability.

Exhibit 1290-P refutes petitioners’ claims. It shows that YA
Global did decide on a monthly basis whether to accrue interest on its
debentures or promissory notes.27

27 Respondent contends that Exhibit 1290-P is “unreliable and should not be

given any credence or weight.” Among other discrepancies, he observes that the
amount shown on Exhibit 1290-P as interest written off is $99 less than the
45

[*45] Given the clear implications of YA Global’s accounting policies,
petitioners can prevail on their affirmative claim only by presenting
evidence unavailable to YA Global’s general partner during 2009 as the
partnership accrued interest that establishes that the partnership
should have had no reasonable expectation, when the interest accrued,
of ultimately receiving it. In the report they submitted after the August
31, 2022, remote hearing, petitioners claim to “have presented objective
evidence of identifiable events demonstrating the worthlessness of the
interest receivables.” They refer us to proposed finding 232 in their
Opening Brief. That proposed finding lists four “identifiable events”
petitioners claim to be indicative of a portfolio company’s financial
distress:

(1) the financial statement auditor had expressed
substantial doubt as to whether the particular portfolio
company could continue as a going concern, (2) the portfolio
company was in bankruptcy or similar proceedings, (3) the
portfolio company was in default on its current obligations,
(4) the portfolio company suffered substantive negative
cash flows in its operations.[28]

Petitioners’ proposed finding 232 includes a table that lists 19 of
the issuers of debentures or promissory notes on which YA Global both
accrued and wrote off interest for 2009: Cobalis, Compass, Earth
Biofuels, Falcon, Futuremedia, Handheld, Ignis Petroleum, Innova
Holdings, Inc., Isonics, iVoice, MM2, Pacific Gold, Poseidis, Tech
Laboratories, Inc., Teleplus, Titan, TXP Corp., US Helicopter, and
Wherify.29 The table cites exhibits in the record that purportedly show

$46,506,023 that YA Global reported in its financial statements and on its tax return.
The $99 difference may indicate a transposition error. Regardless, for the reasons
explained in the text below, even if we were to accept the accuracy of Exhibit 1290-P,
we would conclude that petitioners have not met their burden of establishing that YA
Global overstated its 2009 interest income by $17,137,938.
28 We are unsure what it means for a company to have “substantive” negative

cashflow from operations. Perhaps petitioners meant to refer to a company’s operating
cashflow being substantially negative.
29 The table also includes McKenzie Bay International, Ltd., Savi Media Group,

Inc., and the Certo Group Corp. Of the 34 portfolio companies that issued debentures
or promissory notes on which YA Global accrued and wrote off interest for 2009,
petitioners make no mention in their briefs of 9 of them: Access Beverage, Corporate
Strat., EYI Ind., Macmin Silver Ltd., Natural Nutrition, Inc., PNG Ventures, Inc.,
Renewable Fuels, Inc., Speech Switch, Inc., and United Fiber Systems. Another six
issuers, BlueCreek Energy, Inc., CSI Business, KD Resources, Newgen Tech., NS8
Corp., and Terminal 1 receive only passing mention in petitioners’ briefs. Petitioners
46

[*46] that each portfolio company had suffered from one or more of
petitioners’ four “identifiable events.”

In their posthearing Report, petitioners argue:

It is clear from these identifiable events that these portfolio
companies were not in a financial position to make any
interest payments that became due in 2009. These
portfolio companies’ history of nonpayment of interest also
justified not accruing additional interest income in 2009.
By the end of 2008, the interest in arrears under each
debenture was already substantial . . . and the history of
nonpayment continued through 2009. . . . When the
substantial prior nonpayment of interest is viewed
together with the evidence of financial distress experienced
by these portfolio companies, there can be little doubt,
much less reasonable doubt, that the interest payables
were not collectible when each became due throughout
2009.

Most of the exhibits petitioners cite in their proposed finding 232
are filings made by the portfolio company under the federal securities
laws. And most of those filings cover periods ended on or before
September 30, 2008.30 We assume that YA Global’s general partner had
access to the information reported in those filings when it chose to
continue into 2009 the accrual of interest on debentures or promissory
notes issued by those portfolio companies. It follows that the
information reported in those filings did not prevent YA Global from

do not direct us to any evidence in the record as to the financial condition of any of
those six portfolio companies.
30 Petitioners refer us to a Form 10–Q filed by Earth Biofuels for the quarter

ended September 30, 2008, a Form 10–QSB filed by Falcon for the quarter ended
September 30, 2006, a Form 20–F filed by Futuremedia for the year ended June 30,
2007, a Form 10–Q filed by ZVUE Corp. (successor to Handheld) for the quarter ended
September 30, 2008, a Form 10–KSB filed by Ignis Petroleum for the year ended
January 30, 2008, a Form 10–QSB filed by Innova Robotics & Automation, Inc., for the
quarter ended September 30, 2007, a Form 10–Q filed by Pacific Gold for the quarter
ended September 30, 2008, a Form 10–QSB/A filed by Poseidis for the quarter ended
May 31, 2006, a Form 10–QSB filed by Techlabs, Inc. for the quarter ended March 31,
2007, a Form 10–Q filed by Teleplus for the quarter ended September 30, 2008, a Form
10–KSB/A filed by TXP Corp. for the year ended December 31, 2007, a Form 10–Q filed
by US Helicopter for the quarter ended September 30, 2008, and the following forms
filed by Wherify: a Form 10–KSB for the year ended June 30, 2006, a Form 10–KSB
for the year ended June 30, 2007, and a Form 10–QSB for the quarter ended March
31, 2008.
47

[*47] having a reasonable expectation, at the time of accrual, that it
would ultimately receive the interest accrued.

We have yet to address 6 of the 34 portfolio companies that issued
debentures or promissory notes on which YA Global both accrued and
wrote off interest for 2009: Cobalis, Compass, Isonics, iVoice, MM2, and
Titan. We address those remaining 6 portfolio companies below.

A. Cobalis

YA Global’s actions in accruing interest on its Cobalis debentures
in January 2009 and writing off all accrued interest the following month
show that, contrary to the claims of petitioners and their counsel, the
accrual of interest during a year was not automatic and that evaluations
of collectibility were made during the year. In particular, those actions
show that YA Global had no reasonable doubt in January about the
collectibility of the interest accrued on its Cobalis debentures but that,
in the next month, it determined that payment of that interest was
unlikely.

Petitioners’ proposed finding 232 lists for Cobalis both the “going
concern” and the “bankrupty/receivership” identifiable events. The
evidence of those circumstances to which petitioners point us does not
call into question the judgments reflected in YA Global’s treatment of
the interest accrued on its Cobalis debentures. Concerns about Cobalis’s
ability to continue as a going concern long predated January 2009. Yet
those concerns did not prevent YA Global from accruing interest on its
Cobalis debentures in that month. The bankruptcy proceedings
involving Cobalis also predated January 2009. Petitioners point to no
information about Cobalis’s financial condition in January 2009 that,
had it been available to YA Global’s general partner, would have caused
the general partner to conclude that there was reasonable doubt as to
the collectibility of the interest that accrued on the Cobalis debentures
in that month.

B. Compass

Petitioners’ proposed finding 232 lists for Compass only the
“bankruptcy/receivership” identifiable event. To demonstrate that
Compass was in “bankruptcy or similar proceedings,” petitioners cite the
April 22, 2009, “Circular to Creditors” prepared by Compass’s
administrator. We infer that YA Global, as a major creditor of Compass,
was well aware of the commencement of Compass’s voluntary
administration proceedings on January 29, 2009. Nonetheless, the
48

[*48] partnership continued to accrue interest on its Compass
debentures through May 2009, demonstrating that the partnership’s
general partner judged that, at that time, no reasonable doubt existed
as to the collectibility of the accrued interest. Petitioners do not claim
that any of the information provided to creditors in the April 22, 2009,
circular was unknown to YA Global but, had it been known, would have
affected its general partner’s decision to continue the accrual of interest
on the partnership’s Compass debentures through May 2009.
(Petitioners’ proposed finding 232 does not cite any specific page or
pages of the circular. They thus appear to cite the circular only to
establish that Compass entered voluntary administration on January
29, 2009.)

C. Isonics

Petitioners’ proposed finding 232 lists for Isonics the “going
concern” and “cash flow” identifiable events. The evidence of those
circumstances to which petitioners direct us does not call into question
the judgments reflected in YA Global’s treatment of the interest accrued
on its Isonics debentures and promissory notes. Given the going concern
qualification included in the report of the company’s auditors on its
financial statements for the year ended April 30, 2008, YA Global’s
general partner had reason to know, in January 2009, of doubts about
Isonics’s ability to continue operations as a going concern. It also had
reason to know of Isonics’s cashflow problems. Those problems seem to
have worsened between October 31, 2007, and October 31, 2008. But
those worsening cashflow problems did not prevent YA Global from
continuing to accrue interest on its Isonics debentures and promissory
notes through November 2009. Petitioners point to no information
about Isonics’s financial condition between January and November 2009
that, had it been available to YA Global’s general partner, would have
caused the general partner to conclude that reasonable doubt existed as
to the collectibility of the interest on the Isonics debentures and
promissory notes that accrued during those months.

D. iVoice

The partnership’s reporting of interest on its iVoice debenture,
accruing interest from January through May 2009, ceasing accrual
between June and October, and then writing off accrued interest in
November, shows the partnership had no reasonable doubt about the
collectibility of the accrued interest until June 2009.
49

[*49] Petitioners’ proposed finding 232 lists for iVoice the “going
concern” and “cash flow” identifiable events. The evidence of those
circumstances to which petitioners direct us does not call into question
the judgments reflected in YA Global’s treatment of the interest accrued
on its iVoice debenture. Although iVoice Technology’s 2008 Form 10–K,
iVoice’s September 30, 2009, Form 10–Q, and B Green’s 2009 Form 10–K
reported doubts about the company’s ability to continue as a going
concern, those doubts were not new. They dated back at least to 2007.
In the face of those doubts about the ability of iVoice and iVoice
Technology to continue as going concerns, and in the face of their
“historical negative cash flow,” YA Global continued to accrue interest
on its iVoice debenture through May 2009. We are not convinced that
the judgment reflected in that accounting was based on incomplete
information about iVoice’s financial condition between January and
May of 2009.

E. MM2

The partnership’s reporting of accrued interest on its MM2
debentures shows that it had no reasonable doubt about the collectibility
of the interest accrued on its MM2 debentures until December 2009.

Petitioners’ proposed finding 232 lists for MM2 the “going
concern,” “default,” and “cash flow” identifiable events. The evidence of
those circumstances to which petitioners direct us does not call into
question the judgments reflected in YA Global’s accrual of interest on its
MM2 debentures through November 2009. The factors cited in MM2’s
Form 10–Q for the quarter ended March 31, 2009, that led to doubt
about the company’s ability to continue as a going concern—losses and
deficiencies in cashflow—did not arise for the first time during that
quarter. Moreover, even after YA Global would have had access to the
information disclosed in MM2’s

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10501483. Public record. Not legal advice.