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Corporation Seeks Tax Court Redetermination of Deficiencies

MAR. 2, 2020

ICAP Global Broking Inc. et al. v. Commissioner

DATED MAR. 2, 2020
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ICAP Global Broking Inc. et al. v. Commissioner

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

ICAP GLOBAL BROKING INC.
AND SUBSIDIARIES,
Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent.

 UNITED STATES TAX COURT

PETITION

Petitioner petitions for a redetermination of the deficiencies and penalties set forth by the Commissioner of the Internal Revenue Service (the “Commissioner”) in the Commissioner's notice of deficiency dated December 6, 2019 (the “Notice”), with respect to the taxable years ending March 31, 2015 through March 31, 2017 (“years at issue”). As the basis for its case, Petitioner alleges as follows:

Petitioner

1. Petitioner is a corporation organized and existing under the laws of the State of Delaware. Its principal place of business and mailing address is 101 Hudson Street, 12 Floor, Jersey City, New Jersey, 07302-3915. For the years at issue, Petitioner was the parent of a consolidated return group that included ICAP North America Inc., formerly known as Garban Intercapital North America, Inc. (“Garban”), and First Brokers Holdings Inc., formerly known as First Brokers Securities, Inc. (“First Brokers”). Petitioner electronically filed consolidated returns for U.S. federal income tax for the years at issue with the Office of the Internal Revenue Service at Ogden, Utah (the “2015-2017 tax returns”).

2. This case is related to BrokerTec Holdings, Inc. v. Commissioner, Tax Court Docket No. 3573-17, which is currently on appeal to the United States Court of Appeals for the Third Circuit.

3. For the following periods, Petitioner excluded the following amounts from gross income under Internal Revenue Code (“I.R.C.”) § 118(a):1

Tax Year Ending

Amount excluded under I.R.C. § 118(a)

March 31, 2015

$13,833,875

March 31, 2016

$13,823,675

March 31, 2017

$14,780,360

The Notice of Deficiency

4. The Commissioner mailed the Notice to Petitioner on December 6, 2019. The Office of the Internal Revenue Service at Springfield, New Jersey issued the Notice. A copy of the Notice, together with the accompanying explanation of adjustments and schedules, is attached as Exhibit A.

5. The Notice asserts adjustments to income, tax deficiencies, and penalties for each of the years at issue in the following amounts:

Tax Year Ending

Addition to Income

Tax Deficiency

I.R.C. § 6662(a) Penalty

March 31, 2015

$13,833,875

$4,452,638

$890,528

March 31, 2016

$13,823,675

$5,289,473

$1,057,895

March 31, 2017

$14,780,360

$4,583,654

$916,731

Petitioner disputes these asserted income adjustments, tax deficiencies, and penalties in their entirety.

Assignment of Error

6. The determination of the tax deficiencies and penalties set forth in the Notice are based on the following errors:

a. The Commissioner erroneously determined that Petitioner's Business Employment Incentive Program (“BEIP”) relocation inducement grants totaling $13,833,875 for the tax year ending March 31, 2015; $13,823,675 for the tax year ending March 31, 2016; and $14,780,360 for the tax year ending March 31, 2017, were not contributions to capital under I.R.C. § 118(a) and erroneously included such grants in the gross income of Petitioner.

b. The Commissioner erroneously determined that the asserted tax deficiencies of tax for the years at issue resulted from substantial understatements of income.

c. The Commissioner erroneously determined that Petitioner is liable for accuracy-related penalties for the years at issue.

d. The Commissioner does not appear to have made a determination that Petitioner failed to adequately disclose its tax treatment of the BEIP grants on its 2015-2017 tax returns or in statements attached to those returns. However, if the Commissioner made a determination that Petitioner failed to adequately disclose its tax treatment of the BEIP grants on its 2015-2017 tax returns or in statements attached to those returns, then any such determination by the Commissioner was erroneous.

e. The Commissioner does not appear to have made a determination that Petitioner did not have a reasonable basis for its tax treatment of the BEIP grants. However, if the Commissioner made a determination that Petitioner did not have a reasonable basis for the tax treatment of the BEIP grant payment on its 2015-2017 tax returns, then any such determination by the Commissioner was erroneous.

Factual Basis for Assignment of Error

7. The facts on which Petitioner relies as the basis for its case are set forth below:

a. Garban and First Brokers were financial services companies, specifically voice and electronic broker-dealers.

b. Garban's then-parent, ICAP US Investment Partnership, acquired First Brokers on or about April 30, 2002.

c. Before April 30, 2002, Garban and First Brokers were unrelated companies.

d. The September 11, 2001 terrorist attacks.

i. In September 2001, Garban's offices were located in Tower One and Tower Two of the World Trade Center in New York City.

ii. Garban's U.S. headquarters were destroyed in the September 11, 2001 terrorist attacks.

iii. In September 2001, First Brokers was located at 40 Rector Street in downtown Lower Manhattan.

iv. Due to First Brokers' proximity to the World Trade Center, the September 11, 2001 terrorist attacks displaced First Brokers from its office.

v. The September 11, 2001 terrorist attacks had a significant and sudden impact on the business operations of Garban and First Brokers.

vi. Immediately following the attacks, Garban and First Brokers operated out of temporary facilities.

vii. Both Garban and First Brokers immediately began searching for new, permanent headquarters.

viii. Garban and First Brokers separately retained an expert in location economics to assist in identifying a permanent headquarters and negotiating location incentives with the relevant state and local governments.

e. The Business Employment Incentive Program.

i. As part of their relocation searches, Garban and First Brokers separately applied for, negotiated, and executed BEIP relocation inducement grant agreements with the New Jersey Economic Development Authority (“NJEDA”).

ii. The NJEDA offered BEIP grants to induce companies to relocate or expand in New Jersey in order to strengthen the economies of the state and local communities.

iii. The NJEDA had discretion as to which companies were offered BEIP grants and each grant had to be approved by the Board of Directors of the NJEDA.

iv. To be eligible for a BEIP grant, an applicant had to show that the BEIP grant was a material factor in its decision to relocate to or expand in New Jersey and that it would benefit the people of New Jersey by increasing opportunities for employment and strengthening the state's economy.

v. The BEIP grant required the applicant to create a minimum number of new jobs in New Jersey.

vi. The minimum job creation level varied depending on whether the applicant was expanding or relocating its operations to a targeted or non-targeted area within the state of New Jersey.

vii. The annual BEIP grant was equal to a percentage of the New Jersey individual income taxes withheld by the business from the wages of its qualifying employees.

viii. When determining the percentage to offer to a grant applicant, the NJEDA considered several factors, including the number of jobs to be created, the contribution to the long-term growth of New Jersey's economy, and the total dollar investment the business would make in the project.

f. Garban's and First Brokers' BEIP Applications.

i. Garban applied for the BEIP grant on or about September 28, 2001.

ii. After lengthy discussions and negotiations with the NJEDA, Garban and the NJEDA executed a BEIP agreement dated April 2, 2002.

iii. First Brokers applied for the BEIP grant on or around October 23,2001.

iv. After lengthy discussions and negotiations with the NJEDA, First Brokers and the NJEDA executed a BEIP agreement dated August 28, 2002.

g. Garban's and First Brokers' BEIP Agreements.

i. Garban and First Brokers had separate BEIP agreements.

ii. Under the terms of Garban's BEIP agreement, Garban committed to maintaining 640 employees at the Harborside Financial Center in Jersey City, New Jersey for 15 years.

iii. Under the terms of Garban's BEIP agreement, Garban's annual BEIP grant was equal to 80 percent of the New Jersey individual income taxes it withheld from the wages of its qualifying employees at Harborside Financial Center.

iv. Under the terms of First Brokers' BEIP agreement, First Brokers committed to maintaining 80 employees at the Harborside Financial Center in Jersey City, New Jersey for 15 years.

v. Under the terms of First Brokers' BEIP agreement, First Brokers' annual BEIP grant was equal to 70 percent of the New Jersey individual income taxes it withheld from the wages of its qualifying employees at Harborside Financial Center.

vi. The NJEDA did not offer Garban and First Brokers BEIP grants to allow them to maintain a certain level of operating income.

vii. Neither Garban nor First Brokers provided goods or services to New Jersey in exchange for the BEIP grants.

h. Garban's and First Brokers' BEIP grants.

i. Garban received its first BEIP grant payment in May 2004.

ii. First Brokers received its first BEIP grant payment in January 2005.

iii. Garban and First Brokers satisfied the terms of the BEIP agreement each year of their respective commitments.

iv. The NJEDA paid the annual BEIP grants from the state's general fund.

v. Each year's BEIP grant could be paid only if the New Jersey Legislature appropriated sufficient funds to make all of the NJEDA's grant payments for that year.

vi. In some years Garban and First Brokers did not receive all or any of the BEIP grant payments because the New Jersey Legislature did not appropriate sufficient funds to pay all the BEIP grants.

vii. Petitioner used the BEIP grant payments it received exclusively for capital purposes.

viii. Petitioner consistently treated the BEIP grants as capital contributions excludible under I.R.C. § 118.

i. Accuracy-Related Penalty under Section 6662(a).

i. If this court finds a “substantial understatement of tax,” as that term is defined in I.R.C. § 6662(d), Petitioner adequately disclosed its tax treatment of the BEIP grants on the tax returns or in statements attached to the returns for the years at issue and it had a reasonable basis for its position.

ii. Petitioner had a reasonable basis for its treatment of the BEIP grants as capital contributions under I.R.C. § 118, including Treas. Reg. § 1.118-1 and governing case law.

Related Litigation

8. Concurrent with this petition, BrokerTec Holdings Inc. is filing a petition for redetermination of the deficiency and penalty set forth by the Commissioner for its tax year ending March 31, 2014, which relates to Garban's and First Brokers' BEIP grants in the 2014 tax year.

9. This instant petition and BrokerTec Holdings Inc.'s petition involve the same issue — the tax treatment of Garban's and First Brokers' BEIP grants.

10. These actions involve separate taxpayer-petitioners because Garban and First Brokers were owned by BrokerTec Holdings Inc. during the 2014 tax year at issue in the BrokerTec Holding Inc.'s petition and were owned by ICAP Global Broking Inc. during the 2015-2017 tax years at issue in the instant petition.

WHEREFORE, Petitioner prays that this Court:

1) determine that the Commissioner erred as alleged in Paragraph 6 above;

2) determine that there are no deficiencies in income tax for the 2015 through 2017 tax years;

3) determine that there is no basis for imposing accuracy-related penalties or other penalties on Petitioner for the 2015 through 2017 tax years; and

4) grant such and further relief to which Petitioner may be entitled.

DAVID B. BLAIR
Tax Court Bar Number: BD0759
Crowell & Moring LLP
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004-2595
(202) 624-2765

ROBERT L. WILLMORE
Tax Court Bar Number: WR0836
Crowell & Moring LLP
1001 Pennsylvania Avenue, N.W.
Washington, DC 20004-2595
(202) 624-2915 
rwillmore@crowell.com

TERESA M. ABNEY
Tax Court Bar Number: AT0121
Crowell & Moring LLP
1001 Pennsylvania Avenue, N.W.
Washington, DC 2004-2595
(202) 624-2667
tabney@crowell.com

Dated: March 2, 2020

Counsel for Petitioner

FOOTNOTES

1 All section references are to the Internal Revenue Code in effect for the year at issue. In December 2017, Congress amended Section 118(b) to provide that the term “contributions to capital” does not include any contribution by a government entity or civic group (other than a contribution made by shareholders as such). Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, sec. 13312(a)(1)-(3), 131 Stat. at 2132-2133

END FOOTNOTES

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