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New York City: Deemed Commission Payments to Federal “DISC” Held as Nondeductible for UBT Purposes

Decision No. TAT(H)17-21(UB), N.Y.C. Tax App. Trib., ALJ Div. (7/30/21). In a ruling involving a limited liability partnership (LLP) that made payments in the form of commissions to a federally-recognized domestic international sales corporation (DISC) with no employees and whose shareholders were all partners in the LLP, an administrative law judge (ALJ) with the New York City Tax Appeals Tribunal, ALJ Division, held that when the economic substance of the circumstances is analyzed as a whole, the payments effectively were made to the LLP’s partners for services or for their benefit and thus were nondeductible for New York City (City) Unincorporated Business Tax (UBT) purposes. The LLP unsuccessfully claimed that the payments at issue were deductible for UBT purposes because they were made to the federally-recognized DISC, which is not a partner, and none of the payments at issue were made on a partner’s behalf. The ALJ reasoned that the payments made to the DISC were effectively made to the LLP’s partners, and therefore, the LLP must add back its federal deduction for payments made to the DISC under City law that bars UBT deductions for amounts paid or incurred to a proprietor or partner for services or the use of capital. Please contact us with any questions.