New York denies broker-dealer sourcing from a related disregarded LLC

Apr 20, 2020


In a significant decision for New York taxpayers, the New York State Tax Appeals Tribunal (Tribunal) ruled in Matter of the Petition of BTG Pactual NY Corp., DTA No. 827577 (Mar 24, 2020) that a sole member of two limited liability companies, one of which is a broker-dealer, could not use the broker-dealer customer-based sourcing rule to source receipts from the other LLC. This decision could result in significantly greater tax burdens for many New York taxpayers.

The taxpayer is the sole member of an LLC registered as a broker-dealer with the U.S. Securities and Exchange Commission (SEC). It is also the sole member of another LLC that is a registered investment advisor with the SEC. The taxpayer elected to treat the LLCs as disregarded entities and sourced the investment advisor LLC receipts using New York’s broker-dealer sourcing rules. The Tribunal ruled that the taxpayer could not use the broker-dealer sourcing rule for the investment advisor LLC’s receipts.

In March 2019, an administrative law judge (ALJ) for the New York State Department of Taxation and Finance, Division of Taxation, rejected taxpayer’s argument concluding that the sourcing rules for broker-dealers was unambiguous. The ALJ stated that the taxpayer had used two separate LLCs for its operations and was bound by the tax consequences of the form chosen. The Tribunal affirmed the ALJ conclusions. The Tribunal ruled that because the investment-advisor LLC was not a registered broker dealer with the SEC, the taxpayer was not entitled to source receipts using the broker-dealer sourcing rules.

Rejection of the application of check-the-box principles

The taxpayer’s primary argument was that the broker-dealer’s status as a registered broker-dealer should be imputed to the taxpayer, its single member, in the same manner as a sole proprietorship pursuant to the check-the-box regulations. The taxpayer’s position was consistent with various other advisory opinions issued by the state (see TSB-A-13(11)C, Dec. 20, 2013 and TSB-A-16(1)C, Jan. 11, 2016), which imputed broker-dealer status by a disregarded entity to its owners. In 2017, the department issued an Office of Counsel Memorandum, NYT-G-17(2)C, Aug. 2, 2017, modifying its position so that only the receipts from a disregarded entity that is a registered broker-dealer are eligible for the special sourcing rules. The Tribunal’s decision is consistent with the Department’s latest guidance, finding that the check-the-box treatment “plays no role in determining how its receipts should be sourced.”

Potential reach of the decision

The decision itself involved a refund of New York State corporate taxes paid for the years 2012 and 2013. Effective for tax years beginning on or after Jan. 1, 2015, New York State and New York City moved from a sourcing approach based on ‘place of performance’ to a ‘customer or market-based’ sourcing approach for most receipts for corporate taxpayers. Companies that have previously taken a position to apply broker-dealer sourcing rules based on the check-the-box regulations should consider the impact of the decision on open audits and litigation, and any financial statement positions previously taken. For post-tax reform years, there may be some differences between the broker-dealer sourcing regulations and general market-based sourcing provisions, but the overall impact is expected to be minimal for corporate income taxes.

As a Tribunal decision, this decision is considered binding precedent on New York City taxes with similar provisions. The New York City Unincorporated Business Tax, which is an entity level tax imposed on partnerships and LLC’s conducting business in New York City, and the General Corporation Business Tax, which is limited to S corporations, have not conformed to the general customer or market-based sourcing methodology adopted for other taxes beginning in 2015. Accordingly, there can be significant benefits for New York-based firms to be permitted to use customer-based sourcing as a broker-dealer in lieu of the current place of performance rules. Similar to the New York State advisory opinions and guidance discussed above, New York City initially issued several rulings that would seem to follow the check-the-box regulations for broker-dealer determinations (see NYC Finance Letter Rulings #12-4934/UBT (Aug. 19, 2013), #13-4950/UBT (Mar. 28, 2014)) only to subsequently issue an Update on Audit issues, NYC Dept. of Finance, Nov. 25, 2016, modifying its previous rulings to limit customer-based sourcing only to receipts generated by registered broker-dealers. Accordingly, taxpayers in the financial service industry that have used broker-dealer sourcing provisions to source investment advisory or other receipts by other disregarded entities should review the impact of this decision.


Many single-member LLC taxpayers have used the broker-dealer sourcing rules in these situations. It is unclear if this matter will be appealed. If the decision is not appealed or if the division’s positon is upheld, taxpayers will need to evaluate the sourcing methodology they use. While the inability to use the broker-dealer sourcing rules may result in greater tax liability, there may be structural ways to minimize those burdens. New York taxpayers that may be impacted by the decision should consult with their tax advisors for more information.

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