About This Blog
Taxes in New York (TiNY) is a blog by the Hodgson Russ LLP State and Local Tax Practice Group members Chris Doyle, Peter Calleri, and Zoe Peppas. The weekly reports are intended to go out every Tuesday after the New York State Division of Tax Appeals (DTA) publishes 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.
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LinkedIn ProfileTiNY Report for March 31, 2020 (reporting on DTA case issued March 24)
Last week I wrote that I was worried we’d not see any output from the DTA for a while. Then I woke this morning to find the Tribunal dropped a decision on the DTA’s website yesterday. Bonus!
These are stressful times. Before summarizing the decision I offer the following tale to, I hope, relieve some of your tension:
Distraught and exhausted, Chris goes to his analyst complaining of severe anxiety that is disturbing his sleep. The analyst asks, “When you are asleep, do you dream?” Chris replies, “Yes.”
The analyst asks, “And do you remember your dreams?” Chris responds, “Yes. I have two recurring dreams. In the first one, I see myself looking down on an old-fashioned three-ring circus. I feel driven to protect the people watching the circus from rain and the other natural elements. The responsibility makes me very apprehensive.”
“Ah, I see,” says the analyst. “And what do you think that dream means?” Chris says, “I don’t know.”
The analyst asks about the second dream, and Chris reports, “In the other dream, which also makes me feel very anxious, I am off camping with a family. During the day, I am stuffed away in a backpack, but, at night, I am stretched, strung-out and gaze down on the family while they sleep safely underneath me in the forest.”
The analyst says, “I think I know what your problem is. You’re two tents.”
On a much less humorous note (and just to close the loop on this issue), New York State has officially extended the 2019 state tax return filing and payment deadline from April 15 to July 15, 2020. There is no requirement to file an extension request to obtain this automatic deferral to July 15, 2020.
For estimated tax filers for 2020, the deadline for filing and payment of the first 2020 estimated tax installment is also deferred from April 15 to July 15. There is no deferral as of yet regarding the second 2020 estimated tax installment due June 15. I mentioned this in the March 26, 2020 TiNY Report and now we have clarity from the NYS powers that be.
DECISION
Matter of BTG Pactual NY Corporation; Division’s Rep.: Jennifer Baldwin; Petitioner’s Rep.: Michael Zargari; Article 9-A (pre-reform) (by Chris Doyle)
This is a decision on a rare exception to an even rarer Article 9-A determination that we reported on here.
Petitioner, a corporation, was 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 was registered both with the SEC and FINRA. US BD was 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 was registered with the SEC, and it earned fees for providing advisory and management services. US AM was listed as an organizational affiliate of US BD on FINRA’s BrokerCheck Report because it was under common ownership of Petitioner. However, for SEC and FINRA purposes, Petitioner, US AM, and US BD were separate legal entities, and, as such, neither US AM nor Petitioner were registered as broker-dealers, and neither Petitioner nor US BD were registered investment advisers.
For both New York State corporation franchise tax purposes and federal income tax purposes, US BD and US AM were treated as disregarded entities. As such, they were treated as intra-corporate divisions of Petitioner. On Petitioner’s originally-filed Forms CT-3 for the years at issue, 2012 and 2013, it sourced US BD’s receipts using special favorable customer-based sourcing available to registered broker-dealers, and sourced US AM’s receipts based on the general rules that sourced receipts to where the services were performed. Petitioner also added back its Brazilian withholding income tax when computing entire net income. Petitioner then timely-filed amended Forms CT-3 and CT-3M/4M. The amended returns sourced the US AM receipts using the special broker-dealer sourcing rules, and the Brazilian withholding income tax was no longer added back. While the Division was auditing Petitioner’s amended CT-3s for the years at issue, Petitioner filed a petition with the DTA pursuing its refund.
The ALJ ruled that Petitioner was not permitted to use the favorable broker-dealer sourcing rules to source its receipts from the advisory/management fees earned by US AM. 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 US AM. The Judge determined that the check-the box regulations dictate that the parent taxpayer is taxed on income earned by a disregarded LLC’s, but that the classification of the income flowing to the parent taxpaying entity occurs at the disregarded LLC level. 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.
On the second issue of whether the Brazilian withholding income tax should be added-back to federal taxable income in computing entire net income, the Judge determined that 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). The Judge found that the Brazilian withholding income tax is a “taxes on or measured by profits or income” and thus required to be added back to compute Petitioner’s entire net income.
The Judge also found that Petitioner did not provide support for its arguments that the Division’s position violated the due process, equal protection, and commerce clauses. Ultimately, Petitioner’s petition was denied and the Division’s denial of claims for refund were sustained.
On Exception, the Tribunal cited the clear language of the New York statute to affirm the ALJ’s ruling that broker-dealer sourcing applied only to the receipts from US BD. According to the Tribunal: “[T]the statutory text of Tax Law former § 210 (3) (a) (9) is unambiguous in that it applies only to registered brokers or dealers. Further illustrating this point is the clause that follows, wherein the statutory text makes clear that a registered securities or commodities broker or dealer means ‘a broker or dealer registered as such by the securities and exchange commission or the commodities futures trading commission . . .’ (Tax Law former § 210 [3] [a] [9] [B]).” The Tribunal also agreed with the Judge that Petitioner failed to prove any Constitutional infirmities in the Division’s position and that the Brazilian withholding tax was not a tax on net income required to be added-back in calculating Petitioner’s ENI.
I have a couple of observations: (1) On the statutory construction issue, the Tribunal does not state or imply (using the “only reasonable construction” trope applied in credit cases) that it is deferring whatsoever to the Division’s interpretation of the statute, which is great. As has been oft-stated in TiNY, the Tribunal should never defer to the Division’s interpretation of the statute. It is easier for me to swallow a taxpayer loss on a legal issue when the Tribunal applies an independent analysis. (2) Almost all withholding taxes are gross revenue-based, so it’s hard to understand why Petitioner was unable to demonstrate that the Brazilian withholding tax wasn’t like most others.
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