New York: Broker-Dealer Sourcing Rules do not Extend to Non-Broker SMLLC

Recently, a New York Administrative Law Judge addressed broker-dealer sourcing rules and if they extended to non broker-dealer SMLLCs.

Podcast Transcript

Recently, an Administrative Law Judge (ALJ) addressed whether the corporate member of two SMLLCs was entitled to use the broker-dealer customer-based sourcing provisions to source the receipts of another SMLLC that was not a broker-dealer. The corporate taxpayer owned two SMLLCs. One was a broker-dealer, and the other was an SEC-registered investment adviser that earned fees for providing management and advisory services. On its original New York corporate franchise tax returns for the 2012 and 2013 tax years at issue, the taxpayer sourced the broker-dealer SMLLC’s receipts using the broker-dealer sourcing rules and sourced the investment advisor entity’s receipts using the regular rule for other business receipts. The taxpayer later amended its returns and used the broker-dealer rules to also source the investment advisor SMLLC’s receipts.  After the Department protested this treatment, the matter came before the ALJ.

Under the sourcing rules in effect for the years at issue, investment advisors sourced their receipts to New York to the extent the services generating the receipts were performed in New York. In contrast, broker-dealers used customer- based sourcing rules to source various types of receipts, including fees from management and advisory services.  The taxpayer’s position was, simply put, that because the broker-dealer was a disregarded SMLLC and a deemed division under the check-the-box rules, the taxpayer, by extension, was deemed a  registered broker-dealer that could use the broker-dealer sourcing rules for all its receipts, even those generated from the investment advisor entity.  The ALJ rejected this argument, holding that the SMLLC’s status as a registered broker-dealer did not carry over to the receipts earned by the SMLCC that was not a broker-dealer. It remains to be seen whether the taxpayer will appeal this decision. Please contact Russ Levitt at 212-872-6717 with questions on In the Matter of the Petition of BTG Pactual NY Corporation. 

To view past weeks of TWIST that you may have missed, please visit our TWIST homepage.

To receive the TWIST e-mail each Monday, make sure that State and Local Tax is checked off as one of your topics of interest on the KPMG Tax subscription site.