Nonresident Alien Individual And Sale Of Partnership Interest Attributable To Inventory In U.S.

Rawat v. Comm’r, T.C. Memo. 2023-14| February 7, 2023 | Gustafson, J. | Dkt. No. 15340-16

Summary: This case arises at the confluence of two areas of tax law—partnership taxation (subchapter K of the Code) and U.S. taxation of international transactions (subchapter N of the Code).

Ms. Rawat was a nonresident alien individual for federal income tax purposes during 2008 and 2009. She did not file returns for the 2008 and 2009 tax years. Innovation Ventures, LLC (“IV LLC”), is a U.S. business that manufactures and sells popular consumer products including 5-hour Energy drinks. IV LLC was treated as a partnership for federal income tax purposes. Ms. Rawat owned a 30% interest in IV LLC. In January 2008, Ms. Rawat executed a note for the sale of her interest in IV LLC to Manoj Bhargava for $438 million. The note provided for interest-only payments until 2028, when the note would mature. At the time the note was executed, IV LLC had inventory items with a basis of $6.4 million, which it held for future sale in the U.S. IV LLC later sold those inventory items for a profit of $22.4 million, and Ms. Rawat’s share of income “attributable to the inventory” was $6.5 million. Of the $438 million sale price, $6.5 million was allocable to inventory held in the U.S. for sale therein (“Inventory Gain”).

The IRS conducted an examination of IV LLC for the 2007 and 2008 tax years. The IRS issued Form 5701, “Notice of Proposed Adjustment”, to IV LLC and to Ms. Rawat, proposing to include in Ms. Rawat’s income for 2008 $6.5 million arising from the Inventory Gain issue. Ms. Rawat and the IRS signed an IRS Form 870–LT, “Agreement for Partnership Items and Partnership Level Determinations as to Penalties, Additions to Tax, and Additional Amounts and Agreement for Affected Items”. The Form 870-LT included a “Schedule of Adjustments” that included, under “Other income (loss)”, an adjustment of $6,523,176, with the explanation that “[o]ther income relates to unrealized receivables as defined under Section 751.”
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