Deficiency Redetermination, Refund Decision Requested in 5-Hour Energy Case

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

UNITED STATES TAX COURT

PETITION

Petitioner, Indu Rawat ("Petitioner"), hereby petitions for a redetermination of the deficiency set forth by the Commissioner of Internal Revenue ("Respondent") in a Notice of Deficiency (Letter 894(cg)-c) dated May 13, 2016 with respect to the taxable years ending December 31, 2008 and December 31, 2009. Petitioner further petitions for an overpayment determination with respect to tax, interest and penalties paid on June 1, 2016 for the taxable year ending December 31, 2008. As the basis for her case, Petitioner alleges as follows:

1. Petitioner is an individual nonresident alien with an address of 50 Raffles Place #30-30, Republic of Singapore, 048623. Petitioner did not file an original Form 1040 series U.S. Individual Income Tax Return for the 2008 or 2009 tax year.

2. Respondent issued a Notice of Deficiency to Petitioner for the 2008 and 2009 tax years. The Notice of Deficiency (a redacted copy of which is attached as Exhibit A) is dated May 13, 2016, and was issued by the Internal Revenue Service Appeals Office in Detroit, Michigan (Service symbols: AP:TS:MI:DET:AFS).

3. In the Notice of Deficiency, Respondent determined deficiencies, penalties and additions to tax in the following amounts:

Tax Year	Deficiency	Additions to Tax
2008	$3,833,820	$958,454.99	(Code § 6651(a)(1))1
2009	$2,555,880	$575,073.00 $638,970.00 $46,768.98	(Code § 6651(a)(1)) (Code § 6651(a)(2)) (Code § 6654)

All of the determined deficiencies, penalties and additions to tax are in dispute. In addition, Petitioner invokes this Court's overpayment jurisdiction under Code § 6512(b) with respect to $2,942,000.27 in tax, interest, penalties and additions to tax paid on June 1, 2016 for the 2008 tax year.

4. The Commissioner's determinations of tax, penalties and additions to tax for the 2008 and 2009 tax years as set forth in the Notice of Deficiency, and the overpayment of tax, interest, penalties and additions to tax for the 2008 tax year, are based on the following errors:

a. Respondent erred in determining that Petitioner, as a nonresident alien, is subject to U.S. income tax on the January 4, 2008 sale of her membership interest in Innovation Ventures, LLC ("Innovation Ventures").

b. Respondent erred in determining that Petitioner, as a nonresident alien, is subject to an increase in tax in the 2008 and 2009 tax years equal to the amount of interest determined under Code § 453A(c)(2).

c. Respondent erred in assessing tax against Petitioner for the 2008 tax year pursuant to a Notice of Computational Adjustment dated February 10, 2012, by failing to take into consideration the fact that, as a nonresident alien, Petitioner was not subject to U.S. income tax and, more specifically, was not subject to U.S. income tax with respect to the adjustment of partnership items of Innovation Ventures for the 2008 tax year.

d. Respondent erred in assessing tax against Petitioner for the 2008 tax year pursuant to a Notice of Computational Adjustment dated February 10, 2012 by failing to apply the installment method of accounting set forth in I.R.C. § 453 to an adjustment of partnership items of Innovation Ventures for the 2008 tax year.

e. Respondent erred in determining that Petitioner is subject to an addition to tax under Code § 6651(a)(1) for the 2008 tax year.

f. Respondent erred in not determining that Petitioner's failure to file a federal income tax return for the 2008 tax year was due to reasonable cause and not due to willful neglect.

g. Respondent erred in determining that Petitioner is subject to additions to tax under Code §§ 6651(a)(1), 6651(a)(2) and 6654 for the 2009 tax year.

h. Respondent erred in not determining that Petitioner's failure to file a federal income tax return for the 2009 tax year was due to reasonable cause and not due to willful neglect.

i. Respondent erred in not determining that Petitioner's failure to pay the amount shown as tax on any return filed for the 2009 tax year was due to reasonable cause and not due to willful neglect.

5. The facts upon which Petitioner relies as the basis for her assertion that the Commissioner's determinations of tax, penalties and additions to tax set forth in the Notice of Deficiency are erroneous, and as the basis for her assertion that there is an overpayment for 2008, are that:

a. Petitioner is a citizen of Canada and was a citizen of Canada during the 2008 and 2009 tax years.

b. During the 2008 tax year Petitioner was, for United States income tax purposes, a resident of the Republic of India.

c. Petitioner was not a resident of the United States during the 2008 or 2009 tax years.

d. Innovation Ventures was formed as a Michigan limited liability company on December 15, 2000.

e. Innovation Ventures was, during the 2008 and 2009 tax years, treated as a partnership for federal income tax purposes.

f. Innovation Ventures has, since 2000, maintained an office or fixed place of business in the United States.

g. Innovation Ventures has never been engaged in the business of selling membership interests in limited liability companies or partnership interests in partnerships.

h. Between December 15, 2000 and January 1, 2007, Petitioner acquired 300,000 Class A membership units in Innovation Ventures.

i. From December 15, 2000 through January 4, 2008, Petitioner was a non-managing member of Innovation Ventures.

j. For the 2000 through 2007 tax years, Petitioner filed IRS Form 1040NR U.S. Nonresident Alien Income Tax Returns reporting and paying tax on her allocated share of Innovation Ventures' items of income, loss, deduction and credit.

k. On December 28, 2007, Petitioner contributed 5,000 Class A membership units in Innovation Ventures to Rural India Supporting Trust, leaving Petitioner with 295,000 Class A membership units in Innovation Ventures.

l. On January 4, 2008, Petitioner sold to Innovation Ventures Acquisition Co., LLC all 295,000 Class A membership units that she then held in Innovation Ventures for an aggregate purchase price of $438,075,000.

m. The $438,075,000 aggregate purchase price was paid by delivery to Petitioner of a promissory note (the "Note") in the full amount of the aggregate purchase price.

n. The Note was issued on January 4, 2008 and required that its $438,075,000 principal balance be paid in full on or before January 1, 2028, with interest payable quarterly.

o. Petitioner has never been engaged in a U.S. trade or business, other than the U.S. trade or business she was deemed to have been engaged in by owning, as a non-managing member, membership units in Innovation Ventures.

p. Petitioner has never been engaged in the business of selling membership interests in limited liability companies or partnership interests in partnerships.

q. Petitioner has never had an office or fixed place of business in the United States.

r. The economic gain Petitioner recognized on the January 4, 2008 sale of her Class A membership units in Innovation Ventures was not effectively connected with a U.S. trade or business.

s. The economic gain Petitioner recognized on the January 4, 2008 sale of her Class A membership units in Innovation Ventures was not attributable to an office or fixed place of business in the United States.

t. The IRS conducted an examination of the IRS Form 1065 U.S. Returns of Partnership Income filed by Innovations Ventures for the tax years ending December 31, 2007 and December 31, 2008 (the "TEFRA Examination").

u. Through 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 accepted on behalf of Respondent on April 28, 2011 (the "Form 870-LT"), Petitioner and Respondent agreed to the resolution of specified issues arising in connection with the TEFRA Examination.

v. Pursuant to Code § 751, the Form 870-LT determined, as a partnership item of Innovation Ventures, that $6,523,176 of the aggregate purchase price paid for Petitioner's membership units in Innovation Ventures was attributable to inventory items of Innovation Ventures.

w. Part II of the Form 870-LT purported to resolve "partner level determinations (affected items) as shown on the attached schedule of adjustments."

x. The schedule of adjustments attached to the Form 870-LT showed only partnership-level determinations with respect to Innovation Ventures and did not show any partner-level determinations (affected items) with respect to Petitioner.

y. Petitioner's status as a nonresident alien is not a partnership item or an affected item of Innovation Ventures.

z. Petitioner's status as a nonresident alien and her liability as a nonresident alien for the adjustment to partnership items of Innovation Ventures as reflected on Part I of the Form 870-LT is not referenced or shown on any schedule of adjustments attached to the Form 870-LT.

aa. Whether application of the adjustment of partnership items of Innovation Ventures is subject to reporting by Petitioner under the installment method of accounting set forth in Code § 453 is not a partnership item or an affected item of Innovation Ventures.

bb. Application of the installment method of accounting set forth in Code § 453 to the adjustment to partnership items of Innovation Ventures agreed to in Part I of the Form 870-LT is not referenced or shown on any schedule of adjustments attached to the Form 870-LT.

cc. On February 10, 2012, the IRS issued a Notice of Computational Adjustment to Petitioner purporting to compute the tax and additions to tax for the 2008 tax year arising from the Form 870-LT.

dd. On March 19, 2012, the IRS assessed $2,258,984 in tax against Petitioner for the 2008 tax year pursuant to the February 10, 2012 Notice of Computational Adjustment.

ee. On March 19, 2012, the IRS assessed penalties or additions to tax against Petitioner for the 2008 tax year pursuant to Code §§ 6651(a)(1) and 6654.

ff. On May 10, 2012, the IRS corrected the calculations shown on the February 10, 2012 Notice of Computational Adjustment to take into account, as an itemized deduction, the carryover of a charitable contribution deduction pursuant to Code § 170(b)(1)(D).

gg. A portion of the tax and additions to tax assessed on March 19, 2012 was subsequently abated to reflect the carryover of the charitable contribution deduction.

hh. On June 1, 2016, Petitioner full paid the tax, penalties and additions to tax assessed on March 19, 2012 for the 2008 tax year, together with interest thereon.

ii. In not filing U.S. nonresident income tax returns (IRS Forms 1040NR) for the 2008 and 2009 tax years, Petitioner reasonably and in good faith relied on her professional U.S. tax advisors.

jj. In not paying U.S. income tax for the 2009 tax year, Petitioner reasonably and in good faith relied on her professional U.S. tax advisors.

kk. Respondent has not made a return for Petitioner for the 2009 tax year that satisfies the requirements of Code § 6020(b).