ALJ requires New York to exercise discretion to permit look-through broker-dealer sourcing for corporate tax purposes

In brief

A New York administrative law judge (ALJ) recently directed the Division of Taxation (division) to use its discretionary authority to adjust a taxpayer’s sourcing of receipts derived from brokerage commissions and other financial transactions and to use a census-based formula because the statutory formula yielded a distorted and unconstitutional result. The ALJ also rejected the division’s disallowance of the taxpayer’s (1) election to treat cash collateral and cash on hand as investment capital and (2) claimed investment tax credit and employee investment credit related to various property used by a broker-dealer subsidiary operating in New York City.

Observation: The ALJ’s 102-page decision was notable in that it directed the division to exercise its discretionary authority where application of the statute would result in distortion. ALJ decisions are technically not precedential for other taxpayers and it remains to be seen whether the division will appeal. Also of importance, the ALJ decision discusses the limited authority represented by New York tax guidances (NYT-Gs), which are issued as informational statements of the division’s interpretation of the law and regulations rather than having any legal effect or precedent. 

[In the Matter of the Petitions of Jefferies Group LLC & Subsidiaries, Division of Tax Appeals, Nos. 829218, 829219, 8/31/23]