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Parties in 5-Hour Energy Case Continue Talks, Note IRS's 'Inconsistent Position'

JUL. 10, 2019

Indu Rawat v. Commissioner

DATED JUL. 10, 2019
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Indu Rawat v. Commissioner

INDU RAWAT,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

UNITED STATES TAX COURT

JOINT STATUS REPORT

Pursuant to the Court's Order dated April 26, 2018, the parties submit the following Joint Status Report.

1. On April 25, 2018, the parties submitted a Joint Status Report. On the following day, April 26, 2018, the Court ordered that further status reports be filed no later than July 26, 2018, and every 90 days thereafter. Pursuant to that order, the parties last submitted their Joint Status Report on April 22, 2019 and now submit this Joint Status Report.

2. As previously reported, the petition in this case presents two primary issues for resolution; (1) whether petitioner, as a nonresident alien, is subject to tax on that portion of the gain on the sale of her interest in a U.S. partnership that is attributable to inventory (the "Inventory Gain Issue"); and (2) whether petitioner is subject to tax on the remaining balance of the gain on the sale of her partnership interest (the "Non-Inventory Gain" issue).

3. On October 9, 2018, the Court of Appeals for the D.C. Circuit heard oral argument in the case of Grecian Magnesite, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue, 149 T.C. No. 3 (2017), appeal docketed, No. 17-1268 (D.C. Cir. Dec. 18, 2017) (Grecian Magnesite). The parties have agreed to resolve the Non-Inventory Gain issue in accordance with the resolution of Grecian Magnesite.

4. On June 11, 2019, the Court of Appeals for the D.C. Circuit affirmed the Tax Court's decision. Grecian Magnesite, Industrial & Shipping Co., SA v. Commissioner of Internal Revenue, No. 17-1268 (D.C. Cir.). A petition for a writ of certiorari has not been filed in the case, although the time period for doing so remains open.

5. While the parties have made efforts to settle the Inventory Gain Issue, which was not specifically addressed in Grecian Magnesite, the parties have been unable to achieve a settlement of the Inventory Gain Issue. The parties anticipate further discussion of this issue after the Grecian Magnesite decision becomes final.

6. In addition, the parties also wish to notify the Court that in Innovation Ventures, LLC, Manoj Bhargava, Tax Matters Partner v. Commissioner of Internal Revenue, Dkt. No. 5741-19, respondent has taken an inconsistent position with respect to the transactions at issue in this case. That position is contrary to respondent's position in this case that Indu Rawat ("Rawat") has taxable income from the sale of interests in Innovation Ventures, LLC ("Innovation Ventures").

7. Specifically, in the Innovation Ventures case, respondent alleges that Innovation Ventures is not entitled to increase the inside basis of its assets on account of purchases of membership interests in 2008 from Rawat because, among other reasons: there was not a bona fide sale or exchange of membership interests that would give rise to a basis adjustment under section 743(b); the transactions at issue meet all the requirements for invocation of the anti-abuse provisions under Treasury Regulation section 1.701-2; or the increased basis of the goodwill should be disregarded for Federal tax purposes under judicial doctrines, including the economic substance doctrine and the step transaction doctrine.

8. The parties are continuing to discuss whether settlement can be reached. Moreover, petitioner is considering whether the "Inventory Gain" issue is subject to resolution by the Court on a motion for summary judgment.

9. The parties in this case will continue to report to the Court, with the next status report filed no later, than 90 days from the date hereof. By that date respondent will know whether Grecian Magnesite has become final, petitioner should know whether the remaining issue can be resolved on motion and the parties will report to the Court accordingly. Should a basis for settlement be reached prior to that date, the parties will promptly inform the Court.

Respectfully submitted,

DRITA TONUZI
Deputy Chief Counsel
Internal Revenue Service

CHRISTOPHER S. RIZEK
Counsel for Petitioner
Tax Court Bar No. RC0369
One Thomas Circle, N.W.
Suite 1100
Washington, DC 20005
Telephone: (202) 862-8852 
crizek@capda1e.com

July 9, 2019

H. BARTON THOMAS
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. TH0204
200 West Adams St., #2400
Chicago, IL 60606
Telephone: (312) 368-8155
barton.thomas@irscounsel.treas.gov

Date: July 9, 2019

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