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State and Local Tax Blog

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Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group. The weekly reports are intended to go out within 24 hours of the Division of Tax Appeals’ (DTA) publication of new ALJ Determinations and Tribunal Decisions. In addition to the weekly reports TiNY may provide analysis of and commentary on other developments in the world of New York tax law.  

TiNY Report for March 14, 2019 (covering DTA cases issued March 7)

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So a guy walks into a bar to get some lunch.  He decides to order a hamburger, and the bartender asks, “How would you like it done, and do you want us to Zen it?”  The patron replies, “Medium rare, and what the heck do you mean by ‘Zen it’”?  And the bartender says, “That is when we make you ‘one with everything.’”

This week the DTA almost Zenned it with one order, one determination, and one Tribunal decision—a Tribunal order shy of the full cycle. This week there were no timeliness issues, which makes things a bit more interesting, and representing the Petitioners in the order is TiNY’s Chris Doyle.


Matter of Scarfi and Metro Enterprises Corp.; Judge: Russo; Division’s Rep: Osborne K. Jack; Petitioners’ Rep: Christopher Doyle; Article 28 and 29.

Petitioners filed a petition for revision of a determination or for a refund of sales and use taxes. At issue was almost 21 million dollars in taxes, interest and penalties. After the Division filed its answer, Petitioners served a demand for a bill of particulars. Included in the demand was a request for a statement specifying the basis for the Division’s affirmative allegation in its answer that Metro and certain unrelated clubs in which it did business were jointly liable for the taxes due. The Division’s response stated that its basis was that Metro and Scarfi admitted in their petitions to selling scrip that was used by patrons to pay admission charges to or for the use of places of amusement. Petitioners filed a motion for an order precluding the Division from offering evidence in this matter, other than Petitioners’ petitions, to support its position on joint liability as they argued the response was deficient.

The Judge found that the Division’s response to Petitioners request was timely and that it provided Petitioners with a basis for its position that Metro was jointly liable for taxes owed by the unrelated clubs. Petitioners argued that Division’s response was additionally deficient because, as Petitioner asserted in paragraph 96 of Metro’s petition, the notice of determination is premised on the Division piercing the corporate veil, and the Division bears the burden of proof. However, the Judge noted that the Division denied paragraph 96, and Petitioner did not seek particularization of that response, so the Judge found the argument without merit. The Judge in the end denied Petitioners’ motion for an order of preclusion.  

ALJ Determination

Matter of BTG Pactual NY Corporation; Judge: Law; Division’s Rep: Jennifer M. Baldwin; Petitioners’ Rep: Michael Zagari; Article 9-A.

Petitioner, a New York corporation, is a wholly owned subsidiary of BTG Pactual Holding International SA, which is a wholly owned subsidiary of Banco BTG Pactual SA, a Brazilian investment bank. Petitioner is the sole member of BTG Pactual US Capital LLC (“US BD”) and BTG Pactual Asset Management US LLC (“US AM”).  US BD began operations as a broker-dealer in 2009 and is registered both with the SEC and FINRA. US BD is a resident of the Unites States for tax purposes, but it was also subject to Brazilian withholding income tax for stock trades and underwriting activities from Brazilian sources. US AM began operations as an investment adviser in 2011. US AM is registered with the SEC, and it earned fees for providing advisory and management services. US AM is listed as an organizational affiliate of US BD on FINRA’s BrokerCheck Report because they are under common ownership of Petitioner. However, for SEC and FINRA purposes, both US AM and US BD are separate legal entities, and, as such, neither US AM nor Petitioner are registered as broker-dealers, and neither Petitioner nor US BD are registered investment advisers.

For both New York State corporation franchise tax purposes and federal income tax purposes, US BD and US AM are treated as disregarded entities. Instead, they are treated as intracorporate divisions of Petitioner. On Petitioner’s originally filed CT-3 for the years at issue, 2012 and 2013, it sourced US BD’s receipts using the broker-dealer sourcing rules and US AM’s receipts based on where the services were performed, and it added back its Brazilian withholding income tax to compute entire net income. Petitioner then timely filed an amended CT-3 and CT-3M/4M. The amended returns sourced the US AM receipts using the broker-dealer sourcing rules, and the Brazilian withholding income tax was no longer added back. The Division began an audit of Petitioner’s amended CT-3is for 2012 and 2013. Petitioner filed a petition with the DTA seeking a refund for those same years, and the Division continued auditing the claim for refund.  

The first issue was whether Petitioner, as the sole member of two single member LLCs, one of which is a registered broker dealer, may use the broker-dealer sourcing rules to source its receipts from the non broker-dealer LLC. Petitioner argued that since US BD was a disregarded entity and a deemed division under the check-the-box regulations, that it is also deemed a registered broker-dealer, so it may also use the broker-dealer sourcing rules for US AM’s receipts. The Judge agreed that as the sole member of US BD, petitioner properly sourced US BD’s receipt using the broker-dealer sourcing rules. However, the Judge found that US BD’s status as a broker-dealer did not carry over to the receipts of the non broker-dealer LLC. Rather, the check-the box regulations dictate which entity is taxed on an LLC’s receipts, but do not dictate whether US AM’s receipts are broker-dealer receipts.  

Petitioner attempted to argue that the legislative intent of the sourcing rules were also meant to apply to situations where the broker-dealer operations and advisory operations were separated into two LLCs. The Judge didn’t agree and said that the statute clearly states that this was not the case. Ultimately, the Judge found that Petitioner was bound by its choice to create two separate LLCs and that it may not use the broker- dealer sourcing rules for the non broker-dealer LLC’s receipts.

The second issue was whether the Brazilian withholding income tax should be added back to federal taxable income in computing entire net income. Entire net income is comprised of total net income without the deduction, exclusion, or credit of “taxes on or measured by profits or income.” Tax Law § 208 (9) (b) (3). Thus, the question became whether the Brazilian withholding income tax is a “taxes on or measured by profits or income.” Petitioner provided an English translation of the legislation and argued that the tax is a gross receipts and not income tax, but then didn’t cite anything for this proposition. Instead, the Judge found that the translated statute indicated that it was a tax “on or measured by profits or income,” and thus it must be added back to compute entire net income.

Petitioner also threw in due process, equal protection, and commerce clause violation arguments, but the Judge found that it did not really provide any support for this argument. Ultimately, Petitioner’s petition was denied and the Division’s denial of claims for refund were sustained.

Tribunal Decision

Matter of Greenfield; Division’s Rep: Christopher O’Brien; Petitioners’ Rep: Melissa Perry, LLP; Article 22.

Petitioners, Walter and Chaya, filed an IT-201 resident income tax return for 2004 on November 25, 2005. They then filed their IT-201 for 2005 and 2006 on March 21, 2008, which they filed directly with the auditors and in response to requests from the Division. Their audit coincided with the then-ongoing audit of B&H Healthcare Services, of which Walter was President and held between a 2.5% and 3.75% ownership interest during the audit period. The audit resulted in several adjustments which increased Petitioners’ income for the years at issue. The Division made many requests from Petitioners for documents concerning the adjustments, to which Petitioners did not respond. A letter dated July 31, 2013, stated that if no documents were provided by August 30, 2013, the audit would be closed. Petitioners still did not provide any documents. The Division then issued a Notice of Deficiency. Over a year later, the auditor received an amended resident income tax return for 2004, 2005, and 2006 from Petitioners’ then-representative, but none of them were signed by either the Petitioners or the preparer, so the auditor did not accept them.  

At the hearing, Petitioners submitted a one page document which summarily disputed all of the Division’s audit adjustments, claiming that the income it attributed to Petitioners was not received and three spreadsheets which appeared to attempt to show that Walter had not received this income, but there was no explanation of them on the record. Then, on March 17, 2017, Petitioners requested a 60-day extension to a file a reply brief, which the ALJ denied due to numerous prior extension requests, and when Petitioner filed the brief late, the ALJ returned it and refused to consider it.

Ultimately, The ALJ found that Petitioners did not meet their burden of showing the additional tax was in error, and noted that they had not responded to repeated request for documents and offered only unsubstantiated allegations.

Petitioners argued on exception that the Division failed to show that Petitioners actually received the income at issue, and that the ALJ’s denial of the extension for the reply brief indicated his bias against them.

The Tribunal began by noting that it is the Petitioners who bear the burden of showing that a deficiency assessment is erroneous, and Petitioners failed to meet this burden.  Rather, they did not repeatedly fail to respond to the Division’s request, which they were aware of, and the one page document submitted to the ALJ was insufficient.

With regard to the bias allegations, the Tribunal explained the proper procedure for where the petitioner believes the ALJ has a personal bias.  Petitioners did not follow these procedures, despite having time to do so. Further, the Tribunal found that the denial of an additional extension was not an abuse of discretion as judges have discretion in fixing the time for filing papers, and Petitioners had a pattern of late-requested extensions. The Tribunal denied the exception and affirmed the ALJ determination.

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