Government Notes Recent Decision on Transferor Intent in Appeal

September 3, 2020

By CM/ECF
Christopher M. Wolpert, Esquire
United States Court of Appeals for the Tenth Circuit
Office of the Clerk
Byron White Court House
1823 Stout Street
Denver, CO 80257

Re:Reserve Mechanical Corp. v. Commissioner (10th Cir. — No. 18-9011)

Dear Mr. Wolpert:

The Government filed its brief in this case on July 6, 2020, and the taxpayer's reply brief is due September 11, 2020. Under Rule 28(j), the Government invites the Court's attention to the Third Circuit's recent decision in Commissioner v. BrokerTec Holdings, Inc., 967 F.3d 317 (July 28, 2020) (copy attached).

One of the issues in our case is whether amounts transferred to the taxpayer (Reserve) by a related party — and reported by Reserve as income on its tax returns — were indeed taxable income to Reserve, or were instead (as Reserve claims) nontaxable, indirect capital contributions to Reserve by the common shareholders of the transferor and Reserve. (Gov't Br. 63-72.) In our brief, we emphasized that “the controlling consideration” in evaluating Reserve's claim that the payments were capital contributions is “'the intent or motive of the transferor.'” (Id. at 67 (quoting United States v. Chicago, Burlington & Quincy R.R. (“CB&Q”), 412 U.S. 401, 411 (1973), and citing Hayutin v. Commissioner, 508 F.2d 462, 480 (10th Cir. 1974).)

In BrokerTec, the Third Circuit considered whether amounts paid by the State of New Jersey to the taxpayer there pursuant to a relocation incentive program were taxable income to the taxpayer or nontaxable capital contributions. The court reaffirmed that, “[i]n determining whether a transfer is income or a contribution to capital, [courts] consider 'the intent or motive of the transferor.'” (Op. 9 (quoting CB&Q, 412 U.S. at 411).) Because the taxpayer could not show that New Jersey intended the payments to be capital contributions (rather than income supplements), the court held that the payments were taxable income to the taxpayer. (Op. 19.)

This analysis applies with equal force here. As noted in our brief, although CB&Q and Hayutin (and now, BrokerTec) involved nonshareholder payments, “'the payor's motive controls . . . whether the payor is a nonshareholder . . . or a shareholder.'” (Gov't Br. 67 n.17 (quoting Board of Trade v. Commissioner, 106 T.C. 369, 381 (1996).) And the Tax Court here found that Reserve failed to identify any evidence regarding the requisite intent. (Gov't Br. 68.)

Kindly distribute this letter and attachment to the panel assigned to this case.

Sincerely yours,

GEOFFREY J. KLIMAS
Attorney, Appellate Section

cc:
Counsel for appellant (via CM/ECF)