New York State and Local Tax Update—Third Quarter 2023

The New York State Department of Taxation and Finance in August proposed long-awaited regulations on the state’s corporate tax reform for tax years starting from 2015, with a comment filing deadline of Oct. 10. Numerous comments have been filed, with many focusing on the effective date of the regulations and urging the tax department to apply the regulations on a prospective-only basis. The department can either adopt the regulations or reopen the comment period for an additional 45 days if it has substantial revisions.

Nonqualified Deferred Compensation

The Division of Tax Appeals ruled in Matter of Techar that a nonresident taxpayer’s distributive shares of nonqualified deferred compensation must be allocated to New York using the business allocation percentage for the years the services were performed that gave rise to the income.

The DTA rejected the taxpayer’s arguments that the compensation should be allocated using the BAP of the year the distributive share was included in federal adjusted gross income. The decision largely was based on 20 N.Y.C.R.R. 132.4(c), which provides that compensation for services performed in New York are “received in a taxable year after the year in which the services were performed” regardless of whether the compensation is included in federal adjusted gross income.

The DTA also upheld the imposition of penalties. The taxpayer argued it was entitled to an abatement because it sought tax advice from an accounting firm. The DTA rejected this argument, holding that the tax advice “contradicted the explicit instructions” in the tax department’s technical bulletin.

Alternative Sourcing Method

Another case, Matter of Jefferies Group LLC & Subs., included the question of when an alternative sourcing method should be used because the applicable sourcing method doesn’t “fairly and properly” apportion the taxpayer’s income reasonably attributable to the state.

Under the pre-reform tax rules, the location of the broker-dealer’s customer determined the receipts factor used for registered securities or commodities broker-dealers. The tax department argued that Jefferies was required to source receipts to the location of the registered investment advisers and institutional customers that directly paid Jefferies their fees.

Jefferies claimed that this sourcing method led to a grossly distorted result. It argued that it was entitled to a discretionary adjustment of its allocation percentage based on a reasonable approximation of the locations of the underlying investors of the institutional intermediaries.

The DTA held that the tax department’s allocation method was distortive and that the department was required to apply discretionary authority to allocate receipts based on the location of the underlying investors. The DTA ruled that allocation based on New York’s percentage of the US population was reasonable to determine the location of these individual investors.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Liz Cha is a partner at Eversheds Sutherland. She counsels clients on state and local taxation matters, including tax planning, audit defense, and litigation.

Chelsea Marmor is an associate at Eversheds Sutherland. She counsels clients on state and local tax matters, including compliance, planning, litigation, controversy, and audit defense matters.

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