On April 28, YA Global Investments, LP (“YA Global”) filed an appeal in the 3rd Circuit, contesting the Tax Court’s decision in YA Global Investments, LP v. Commissioner, which we discussed here and here.

In YA Global Investments, the court found that YA Global’s activities – conducted through its agent, Yorkville Advisors, LLC (“Yorkville”) – produced taxable income that was effectively connected with a U.S. trade or business, which obligated YA Global to withhold under Code Section 1446. The court concluded that because YA Global’s activities went beyond the scope of a typical investor who invests capital or manages investments, YA Global did not qualify for the securities trading safe harbor under Code Section 864(b)(2)(A).

In its initial statement to the court, the now-defunct YA Global identified six issues to be raised on appeal:

1. Whether Yorkville’s activities were attributable to YA Global under relevant legal principles.
2. Whether YA Global was engaged in a U.S. trade or business and had income effectively connected with that trade or business under Code Section 864.
3. Whether the Tax Court properly applied the mark-to-market rules of Code Section 475 to YA Global.
4. Whether the statute of limitations barred the Commissioner from making adjustments to YA Global’s income and liability for its 2006 and 2007 years.
5. Whether the Tax Court correctly determined that YA Global’s malpractice suit against its former accountants, filed in 2015, negated its claim that it reasonably relied on those accountants (and other advisors) in determining it had no trade or business in 2006-2010.
6. Whether the Tax Court held YA Global to the correct standards of proof.

YA Global’s challenge reopens the discussion on the characterization of a U.S. trade or business and the trader/dealer distinction of Section 475. Although the facts of YA Global Investments are considered by many practitioners to be unique, the breadth of the Tax Court’s analysis is such that it could be applied to other, more common facts. Accordingly, taxpayers should monitor YA Global’s appeal, as the 3rd Circuit’s decision could have a significant impact on the way they conduct their investment and trading activities.