Menu
Tax Notes logo

Corporation Argues Grants Were Excludable as Capital Contributions

DEC. 12, 2019

Commissioner v. BrokerTec Holdings Inc.

DATED DEC. 12, 2019
DOCUMENT ATTRIBUTES
  • Case Name
    Commissioner v. BrokerTec Holdings Inc.
  • Court
    United States Court of Appeals for the Third Circuit
  • Docket
    No. 19-2603
  • Institutional Authors
    Crowell & Moring LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-47116
  • Tax Analysts Electronic Citation
    2019 TNTG 3-32
    2019 TNTF 240-13

Commissioner v. BrokerTec Holdings Inc.

COMMISSIONER OF INTERNAL REVENUE,
Petitioner-Appellant
v.
BROKERTEC HOLDINGS, INC.
F.K.A. ICAP US INVESTMENT PARTNERSHIP,
Respondent-Appellee

IN THE UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

ON APPEAL FROM THE DECISION OF
THE UNITED STATES TAX COURT

BRIEF OF APPELLEE

David B. Blair
Robert L. Willmore
Teresa M. Abney
CROWELL & MORING LLP
1001 Pennsylvania Ave., N.W.
Washington, DC 20004-2595
(202) 624-2765
dblair@crowell.com

Counsel for Respondent-Appellee

CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 26.1 and Third Circuit LAR 26.1, BrokerTec Holdings, Inc. f.k.a. ICAP US Investment Partnership, makes the following disclosure:

1) BrokerTec Holdings, Inc. is a wholly owned subsidiary of CME London Limited, which in turn is a wholly owned subsidiary of CME Group Inc. CME Group Inc. is a publicly held company.

2) CME Group Inc. is the only publicly held entity owning 10 percent or more of BrokerTec Holdings, Inc.

December 12, 2019

DAVID B. BLAIR
Counsel for Respondent-Appellee


TABLE OF CONTENTS

CORPORATE DISCLOSURE STATEMENT

TABLE OF AUTHORITIES

STATEMENT OF THE ISSUE

STATEMENT OF THE CASE

A. Introduction

B. Tax Court Findings On Garban And First Brokers Relocations To New Jersey

C. New Jersey's BEIP Grants

D. The BEIP Application Process

E. Garban's And First Brokers' BEIP Applications And BEIP Agreements

F. BEIP Grant Payments

G. Economic Development Objectives Of The BEIP

H. Termination Of The BEIP

I. Decision Below

STANDARD OF REVIEW

SUMMARY OF ARGUMENT

ARGUMENT

A. Any Contribution To The Capital Of A Corporation Is Excluded From Gross Income Under The Governing Case Law, Section 118, And Treas. Reg. § 1.118-1.

B. Location Inducement Payments Are Contributions To Capital Under Governing Cases, Section 118, And Treas. Reg. § 1.118-1.

1. The Supreme Court and other courts have recognized that location inducement payments are quintessential examples of nontaxable contributions to capital.

2. Section 118 and Treas. Reg. § 1.118-1 incorporate the holdings of Brown Shoe and McKay Prods. that relocation inducements are contributions to capital.

3. The Commissioner's arguments that BEIP grant payments were not intended as contributions to capital are contrary to the findings of the Tax Court and rely on cases involving entirely different types of governmental payments.

a. There is no requirement that cash transfers be restricted to the purchase of hard assets such as land or buildings to qualify as contributions to capital.

b. Use of employee state tax withholdings to calculate the BEIP grant payments does not mean that the grants were not intended as contributions to capital to induce Garban and First Brokers to relocate to New Jersey.

c. The subjective intent evidence cited by the Commissioner for the proposition that New Jersey did not intend the BEIP grants as contributions to capital is inconsistent with the Tax Court's findings and disregards evidence directly to the contrary.

C. NJEDA Did Not Pay BEIP Grants To Garban And First Brokers In Exchange For Goods Or Services.

CONCLUSION

COMBINED CERTIFICATIONS

CERTIFICATE OF SERVICE

RULE 28(f) ADDENDUM

TABLE OF AUTHORITIES

Cases

Anderson v. City of Bessemer, 470 U.S. 564 (1985)

Arkansas Best Corp. v. Commissioner, 485 U.S. 212 (1988)

AT&T, Inc. v. United States, 629 F.3d 505 (5th Cir. 2011)

Baboquivari Cattle Co. v. Commissioner, 47 B.T.A. 129 (1942), aff'd, 135 F.2d 114 (9th Cir. 1943)

Bd. of Trade of the City of Chicago v. Commissioner, 106 T.C. 369 (1996)

Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950)

Commissioner v. Duberstein, 363 U.S. 278 (1960)

Commissioner v. McKay Prods. Corp., 178 F.2d 639 (3d Cir. 1949

Deason v. Commissioner, 590 F.2d 1377 (5th Cir. 1979)

Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943)

Diamond Bros. Co. v. Commissioner, 322 F.2d 725 (3d Cir. 1963)

Edwards v. Cuba R. Co., 268 U.S. 628 (1925)

Federated Dep't Stores, Inc. v. Commissioner, 426 F.2d 417 (6th Cir. 1970)

Federated Dep't Stores, Inc. v. Commissioner, 51 T.C. 500 (1968), aff'd, 426 F.2d 417 (6th Cir. 1970)

G.M. Trading Corp. v. Commissioner, 121 F.3d 977 (5th Cir. 1997)

Helvering v. Claiborne-Annapolis Ferry Co. of Annapolis, Md., 93 F.2d 875 (4th Cir. 1938)

HMW Indus., Inc. v. Wheatley, 504 F.2d 146 (3d Cir. 1974)

John B. White, Inc. v. Commissioner, 55 T.C. 729 (1971), aff'd, 458 F.2d 989 (3d Cir. 1972)

John Wyeth & Bro. Ltd. v. CIGNA Int'l Corp., 119 F.3d 1070 (3d Cir. 1997)

Lloyd v. Hovensa, LLC, 369 F.3d 263 (3d Cir. 2004)

Lykes Bros. S.S. Co. v. Commissioner, 126 F.2d 725 (5th Cir. 1942)

May Dep't Stores Co. v. Commissioner, 33 T.C.M. (CCH) 1128 (1974), aff'd, 519 F.2d 1154 (8th Cir. 1975)

National Carbide Corp. v. Commissioner, 336 U.S. 422 (1949)

Pullman-Standard v. Swint, 456 U.S. 273 (1982)

Smith v. Commissioner, 305 F.2d 778 (3d Cir. 1962)

Springfield Street Railway Co. v. United States, 577 F.2d 700 (Ct. Cl. 1978)

Sprint Nextel Corp. v. United States, 779 F. Supp. 2d 1184 (D. Kan. 2011)

Teleservice Co. of Wyoming Valley v. Commissioner, 254 F.2d 105 (3d Cir. 1958)

Texas & Pac. Ry. Co., 286 U.S. 285

United States v. Chicago, Burlington & Quincy R.R. Co. 412 U.S. 401 (1973)

United States v. Coastal Utilities, Inc., 483 F. Supp. 2d 1232 (S.D. Ga. 2007), aff'd, 514 F.3d 1184 (11th Cir. 2008)

United States v. U.S. Gypsum Co., 333 U.S. 364 (1948)

Statutes and Regulations

26 U.S.C. § 118

26 U.S.C. § 3402

26 U.S.C. § 7482

Treas. Reg. § 1.118-1

Business Employment Incentive Program Act, Assembly No. 1415 (N.J. introduced Jan. 29, 1996)

Act of June 30, 2016, ch. 9, 2016 N.J. Laws 112

N.J. Stat. § 54A:7-1

Miscellaneous

Fed. R. Civ. P. 52(a)

H.R. Rep. No. 83-1337 (1954), reprinted in 1954 U.S.C.C.A.N. 4017

H.R. Rep. No. 115-466 (2017)

S. Rep. No. 83-1622 (1954), reprinted in 1954 U.S.C.C.A.N. 4621


STATEMENT OF THE ISSUE

Whether the Tax Court erred in finding that cash grants paid by the New Jersey Economic Development Authority (“NJEDA”) to Garban1 and First Brokers2 were made to induce Garban and First Brokers to locate their businesses in New Jersey, and, as such, were nonshareholder contributions to capital excludable from gross income under Section 118 of the Internal Revenue Code (“Section 118”) and Treas. Reg. § 1.118-1.

STATEMENT OF THE CASE

A. Introduction

To induce Garban and First Brokers to relocate to New Jersey after they lost their New York headquarters in the September 11 attack, NJEDA offered them cash grants payable over ten years through its Business Employment Incentive Program (“BEIP”). As parent of the group that included Garban and First Brokers, BrokerTec,3 treated the BEIP grants as nonshareholder capital contributions and excluded them from gross income.

Any contribution to the capital of a corporation, by shareholders or nonshareholders, is excluded from the recipient corporation's gross income under Section 118. Grants from government or community groups to induce relocation are classic examples of nonshareholder contributions to capital. After hearing the evidence at trial and considering the Commissioner's contrary arguments, the Tax Court found Taxpayer properly treated the BEIP grants as contributions to capital. The Tax Court's decision should be affirmed.

In exchange for NJEDA's BEIP grants, each company agreed to relocate to Harborside Financial Center (“Harborside”) in Jersey City, New Jersey and maintain a minimum number of jobs there for fifteen years. To fulfill their agreements, and provide the facilities for hundreds of new jobs in Jersey City, Garban and First Brokers spent tens of millions of dollars on tenant improvement construction and technology at Harborside. To ensure that revenue generated from increased economic activity in the targeted community would exceed the BEIP grants, NJEDA measured each company's annual BEIP payment using a percentage of the New Jersey income tax withheld from the companies' new employees working full-time at Harborside.

On its consolidated federal income tax returns, Taxpayer treated the BEIP grants as nonshareholder contributions to capital under Section 118 and, therefore, not as gross income. This treatment followed the Supreme Court's holding in Brown Shoe Co. v. Commissioner, 339 U.S. 583 (1950), that relocation inducements are contributions to capital, and Treas. Reg. § 1.118-1, which states that, “[i]n the case of a corporation, section 118 provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer,” and, as an example, that “the exclusion applies to the value of land or other property contributed to a corporation by a governmental unit . . . for the purpose of inducing the corporation to locate its business in a particular community. . . .”

The intent of the contributor is determinative, and the Tax Court found that NJEDA made the BEIP grant payments for the specific purpose of inducing Garban and First Brokers to relocate to New Jersey to promote economic development and job growth in the State. Op/JA38-39. The Tax Court found that the “clear evidence” presented at trial showed that NJEDA's “intent and motivation for the BEIP grant was to provide a nontaxable contribution to capital.” Op/JA38. Accordingly, the Tax Court found the grants were contributions to capital under Brown Shoe and Treas. Reg. § 1.118-1.

The Commissioner contends the BEIP grants were not contributions to capital because the grants were not hard assets or restricted to purchases of hard assets and were calculated using a percentage of income tax withholdings from new employees working at the BEIP project site. He alternatively argues that the grants were not contributions to capital because New Jersey received a “direct benefit” through income taxes collected from the new employees. Neither argument has merit.

As the Tax Court explained, the Commissioner's first argument misinterprets Brown Shoe and this Court's decision in Commissioner v. McKay Prods. Corp., 178 F.2d 639 (3d Cir. 1949). Under these cases, which specifically addressed relocation inducement payments, there is no “hard assets” requirement built into the concept of contributions to capital. Rather, the issue is whether the contribution was to the corporations' capital, or was income. Op/JA42. Indeed, the Commissioner's argument that only hard assets or payments specifically earmarked to purchase hard assets can be considered contributions to capital is flatly inconsistent with the definition of “working capital” articulated in McKay Prods. In McKay Prods., this Court adopted a “common parlance” definition of “working capital” as “the value of that with which the enterprise carries on its activity.” 178 F.2d at 642; see Op/JA29-30, 42. As the Tax Court observed below, the Commissioner's first argument conflates the term “capital asset,” such as a factory or machine, with “working capital.” Op/JA41. For a brokerage firm, working capital includes the cash, which it can use to cover reserve requirements and carry on its business while awaiting payment of accounts receivable. Op/JA42. Moreover, the fact that the grant is calculated based on taxes withheld from employees does not convert the grants into an operating income subsidy.

The Commissioner's alternative argument, that BEIP grants cannot be contributions to capital because New Jersey received a “direct benefit” from taxing Garban's and First Brokers' employees, is equally incorrect. To be sure, a transfer of money or property to a corporation in exchange for a direct benefit — for receipt of goods or services — is not a contribution to capital because it is, in the ordinary sense, income from operations. See Detroit Edison Co. v. Commissioner, 319 U.S. 98 (1943). Where, as here, there is no direct nexus between a payment to a corporation and goods or services which it was the business of the corporation to provide, the State's receipt of an indirect benefit — economic development, jobs and expanded tax collections that economic development is intended to promote — does not convert the State's contribution to capital into income. See Federated Dep't Stores, Inc. v. Commissioner, 426 F.2d 417, 421 (6th Cir. 1970). Here, the Tax Court found that the goal of the BEIP was “to develop New Jersey's economy and revitalize its cities,” and additional tax revenue resulting from that objective was only an “indirect benefit” of the program. Op/JA43.

In sum, the Tax Court's decision was correct and should be affirmed.

B. Tax Court Findings On Garban And First Brokers Relocations To New Jersey

On September 11, 2001, terrorist attacks on the World Trade Center destroyed Garban's offices in both towers. Op/JA7. The nearby offices of First Brokers were uninhabitable after the attacks. Op/JA8. Both companies immediately began searching New York and New Jersey for new locations to rebuild their businesses. Op/JA8-9.

In searching for new headquarters, the companies sought to replicate their prior offices. Op/JA8. Garban required approximately 140,000 square feet for up to 750 employees, including a large, open space to build a trading room and support extensive telephony and computer infrastructure. JA112, 716. Because there was no pre-existing space that met Garban's needs, it leased raw space at Harborside in Jersey City and built out that space to its specifications. Op/JA8, 17.4 Garban initially budgeted between $50 million and $60 million for construction purposes. Op/JA8.

C. New Jersey's BEIP Grants

While searching for new locations, Garban and First Brokers learned of the BEIP, which was designed to induce businesses to relocate or expand in New Jersey by offering cash grants to do so. Op/JA9. The BEIP was the State's primary economic development tool from 1996 to 2013. JA174-75, 259. A key objective of the BEIP was to bring economic development and new jobs to urban-aid municipalities like Jersey City. Op/JA10-11. NJEDA hoped that new jobs, along with the substantial construction and other capital expenditures necessary to create and support such jobs, would attract additional businesses to the community, multiplying the grants' economic impact. Op/JA10-11.

BEIP grants were discretionary. Op/JA11. NJEDA staff evaluated BEIP applications and decided whether to recommend that the NJEDA Board offer grants. Op/JA9-10. The Board voted on grant applications, but the Governor could veto their vote. Op/JA9-11. Grants could be offered only to financially viable applicants that committed to creating a minimum number of jobs at an approved project site and showed the grant was a material factor in their decision to relocate to or expand in New Jersey. Business Employment Incentive Program Act, Assembly No. 1415 (N.J. introduced Jan. 29, 1996) (“BEIP Act”) ¶ 3.

A BEIP grant typically was paid over the first ten years of the applicant's fulfilling a fifteen-year commitment to maintain a minimum number of jobs at the approved site. Op/JA12. BEIP grant payments were computed as a percentage of New Jersey income taxes withheld from the grant recipient's new employees working full-time at the approved site. Op/JA12.

NJEDA did not begin paying BEIP grants until the company physically relocated to the approved site, employed persons at the site for at least a year, and remitted income taxes withheld from those employees' wages. Op/JA12. This ensured that the additional tax revenue generated by the economic development project would exceed the amount of the BEIP grant. Op/JA12. Only full-time employees working at the approved project site could satisfy the company's employment commitment. JA246. Because each grant was site specific, employees working in New Jersey, but not full-time at the project site, did not count towards the grant even if they paid New Jersey income taxes. JA244-46.

D. The BEIP Application Process

NJEDA could offer a BEIP grant to a company only if it determined that the grant was a material factor in the company's decision to relocate to New Jersey. BEIP Act ¶ 3. NJEDA therefore offered a BEIP grant only when New Jersey was in competition with another state for a project. JA183. In determining whether to recommend a project for approval, NJEDA staff considered the number and type of the new jobs being created, capital investment, resulting economic development, and other factors. JA180, 185; BEIP Act ¶ 3.

NJEDA staff would challenge an unreasonable investment estimate on a BEIP grant application. JA210. The staff was experienced in development and understood the difference in capital cost to a company of moving into an already built-out space versus slab-to-ceiling raw space like that at Harborside. JA210. The capital invested in a project was important to NJEDA because it brought additional investments and jobs to the community, revitalized markets and neighborhoods, and attracted more businesses to the community. JA181-82, 355.

Under the BEIP Act, NJEDA considered the following factors when deciding the size of the grant to offer:

1) Number of eligible positions to be created;

2) Expected duration of those positions;

3) Type of contribution the business can make to the long-term growth of New Jersey's economy;

4) Amount of other financial assistance the business will receive from New Jersey for the project; and

5) Total dollar investment the business is making in the project.

See BEIP Act ¶ 6(a); Op/JA11.

E. Garban's And First Brokers' BEIP Applications And BEIP Agreements

Garban and First Brokers separately applied for BEIP grants. Both applications highlighted significant construction and other capital investments required to recreate their offices in New Jersey and the number of new jobs at the site. Op/JA12-14, 21. Garban's BEIP application stated that Garban would invest $45 million in tenant improvements and $24.7 million in technology and furniture, fixtures, and equipment (“FF&E”). Op/JA13-14. Garban initially committed to creating 250 jobs, and later increased that commitment to 640 jobs as it became more confident about rebuilding its business. Op/JA18. First Brokers committed to invest tenant improvements of $2 million and $500,000 in technology and FF&E, and create 80 new jobs at the project site. Op/JA21-22. Each company certified its application was true, complete and accurate. JA216, 729.

The NJEDA staff conducted due diligence on Garban's and First Brokers' applications and used an internal scoring guideline to determine the BEIP grants to recommend to the Board. Op/JA14-17, 19. The NJEDA staff recommended offering Garban a ten-year grant equal to 80 percent of its eligible employees' New Jersey income tax withholdings during that period. It offered First Brokers a ten-year grant equal to 70 percent of its eligible employees' withholdings. Op/JA16-17, 22.

After negotiations, Garban and First Brokers accepted the BEIP grant offers. Op/JA17-18, 22-23. Each company entered into a separate BEIP Agreement with NJEDA. Op/JA18-19, 22-23. The BEIP Agreements detailed each company's and NJEDA's commitments. JA753-89, 815-52. Among other things, Garban committed to employ 640 full-time employees at Harborside and not to leave for fifteen years. JA753-89. First Brokers' BEIP Agreement was substantially similar, except that it committed to employing 80 full-time employees at Harborside. JA815-52. Each BEIP Agreement incorporated the company's BEIP application and required the company to notify NJEDA if any statement in the application became untrue. JA769-70, 831-32. The BEIP Agreements did not require either company to provide any goods or services to NJEDA or New Jersey. JA306, 753-89, 815-52.

Each BEIP Agreement included a Project Summary with information about the relocation project, including a yes/no box labeled “Construction.” JA783, 845. In both Garban's and First Brokers' Project Summaries this box was marked “no.” JA783, 845. The Commissioner asserts this meant that the project did not involve construction. Appellant's Brief (“Br.”) at 13. However, unrebutted trial testimony established that this question regarding “Construction” referred to whether there was ground-up construction of a new building versus interior tenant improvement construction within existing space. JA232-33. Contrary to the Commissioner's unsubstantiated claim, all parties understood there would be substantial buildout construction of the raw space at Harborside, which was a shell building at the time. Op/JA13-14, 19, 21.

The Commissioner's statement (Br.13) that “[n]either affiliate committed to making any capital investments” is likewise untrue. In their BEIP applications, both Garban and First Brokers represented they would be making substantial capital investments and provided certifications that their statements were true, complete, and accurate. JA210, 216, 729, 769-70, 831-32. The BEIP applications, in turn, were incorporated into the BEIP Agreements. JA769-70, 831-32. Moreover, NJEDA knew that Garban and First Brokers lost their World Trade Center offices and that recreating the offices in New Jersey would require substantial investments.

The Commissioner also misstates the facts when he asserts that Garban and First Brokers “faced no penalty” for failing to make any capital investments, but only for failing to create the promised new jobs. Br.13. Garban and First Brokers could not have moved their trading floor and businesses to Harborside and employed more than 700 employees there without making the capital investments detailed in their BEIP applications and incorporated into their BEIP Agreements. It is sophistry to argue that Garban and First Brokers could be penalized only if they failed to create the promised jobs when they could not have created those jobs without the construction and other investment in Harborside.

Once it had access to the building, it took Garban several months to build out the space at Harborside. JA144. Garban also installed a data center with hundreds of servers and a generator on the roof in case Harborside lost power. JA126. Garban moved to Harborside in November 2002. JA144.

F. BEIP Grant Payments

Under the BEIP agreements, grants were to be paid to Garban and First Brokers over ten years. Op/JA17, 22-23. No payment could be made, however, until each company had employees at Harborside for at least one year and remitted the New Jersey income taxes withheld from those employees' wages. Op/JA11-12, 19; BEIP Act ¶ 10. Garban's first BEIP grant payment was in May 2004. Op/JA19. First Brokers' first BEIP grant payment was in January 2005. JA489. When they received the BEIP grant payments, Garban and First Brokers invested the funds in stock of ICAP Holdings (USA), Inc. as “part of a series of transactions designed to expand petitioner's business in other trading markets.” Op/JA20-21, 24.

BEIP grant payments were not guaranteed; they were subject to annual appropriations by the New Jersey Legislature. Op/JA20. In some years the Legislature failed to appropriate funds, and the companies did not receive payments. Op/JA20, 23-24.

Each year, Garban and First Brokers submitted a report to NJEDA providing information on their employees at Harborside, the New Jersey withholding for each employee, and the jobs created and maintained during the year. JA243-44, 246. NJEDA forwarded the report to the New Jersey Division of Taxation to certify the withholding from eligible employees and confirm that those employees worked at Harborside full-time. JA244-46. Only if the Legislature had appropriated funding for the BEIP program, NJEDA then issued a check equal to the applicable percentage of withholding. JA206.

For its 2005 through 2014 tax years, Garban received BEIP payments totaling $147,450,030. Op/JA20. This was higher than Garban originally anticipated because Garban created more jobs at higher compensation levels. Op/JA40-41. During those tax years, First Brokers received $22,330,344 in BEIP payments. Op/JA23-24. During the four tax years at issue here (2010-2013), they excluded $55,657,497 from their gross income pursuant to Section 118. Op/JA24.

G. Economic Development Objectives Of The BEIP

Throughout his brief, the Commissioner characterizes the BEIP as a jobs program. In fact, although attracting jobs to New Jersey was of course part of the picture, the key objective of the BEIP was economic development in New Jersey, including by adding jobs in targeted industries such as the financial services industry and by attracting capital investment to urban-aid municipalities such as Jersey City. Op/JA10-11, 13, 43; JA174-75, 215, 259, 285-86.

In 2005, NJEDA commissioned Rutgers University to study the economic impact of BEIP grants. JA605-711. The study described the capital investment from BEIP projects. JA614, 650, 663, 682. The study said:

Capital expenditures are required by the BEIP protocols and are an inevitable part of new business initiatives. The expenditures are for new space, renovated space, equipment, supplies, and related start-up materials.

JA663.

NJEDA issued a press release stating that the Rutgers Study supports the effectiveness of BEIP as a tool to attract businesses to New Jersey, encourage business expansion, and grow our economy,” JA712, and that the study showed “the BEIP program is a highly successful tool in terms of job creation and capital investment.” JA713.

Each year NJEDA reported on the BEIP to the State Legislature and Governor. BEIP Act ¶ 15; JA710-11. In its BEIP Annual Report for FY2012, NJEDA stated: “Created in 1996, BEIP continues to be a vital economic tool for the State of New Jersey during these challenging economic times, supporting the relocation and/or expansion of nearly five hundred companies, the creation of over 100,000 jobs, and the estimated total capital investment of over $12.6 billion in New Jersey.” JA596.

Consistent with its economic development objectives, many BEIP grants were offered to successful and profitable financial services companies, including Goldman Sachs, JPMorgan Chase, Marsh & McLennan, Merrill Lynch, Morgan Stanley, Sumitomo Trust, and UBS Financial, to induce those companies to relocate to or expand their operations in New Jersey. JA552-54, 557, 705-09 (list of BEIP projects as of February 2005).

H. Termination Of The BEIP

NJEDA stopped accepting new BEIP applications in 2013. Act of June 30, 2016, ch. 9, 2016 N.J. Laws 112; JA259, 371. Many BEIP participants, including BrokerTec, have not received all of their promised grant payments because New Jersey's Legislature stopped appropriating funds for those payments. In 2016, New Jersey offered BEIP participants with unpaid BEIP grants the option to convert the unpaid grants to refundable tax credits to be used over subsequent years. Act of June 30, 2016, ch. 9, 2016 N.J. Laws 112; JA372. In 2016, after years of no appropriations to pay amounts due under BEIP grants, many BEIP participants with partially unpaid grants, including BrokerTec, opted to accept future tax credits instead. JA373. None of BrokerTec's tax years affected by this conversion are at issue in this case.5

I. Decision Below

The Tax Court held a trial on March 12-13 and May 3, 2018. It heard testimony from four witnesses and considered the stipulations, exhibits and arguments offered by Taxpayer and the Commissioner. After reviewing the facts presented at trial and relevant legal principles, the Tax Court issued its opinion in favor of Taxpayer on April 9, 2019. BrokerTec Holdings, Inc. v. Commissioner, T.C. Memo. 2019-32. The Tax Court found that the facts of this case “fall squarely within the four corners” of Treas. Reg. § 1.118-1, and are “strikingly similar” to those of Brown Shoe and McKay Prods. Under these authorities, the BEIP grant disbursements were contributions to the capital of Garban and First Brokers pursuant to Section 118(a). Op/JA39, 44. The Tax Court considered and rejected the Commissioner's contrary theories. On April 12, 2019, the Tax Court entered its decision that the Taxpayer had no deficiency in income tax. JA3.

STANDARD OF REVIEW

The Tax Court's findings of fact, based on the parties' stipulations and evidence presented at trial, are subject to the same clearly erroneous standard of review that applies to district court findings of fact. See 26 U.S.C. § 7482(a)(1); Fed. R. Civ. P. 52(a). Under that standard, a finding is “clearly erroneous” only where the “reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948). “Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous. This is so even when the district court's findings do not rest on credibility determinations, but are based instead on physical or documentary evidence or inferences from other facts.” Anderson v. City of Bessemer, 470 U.S. 564, 574 (1985) (citations omitted). “It is the duty of the Tax Court, in the first instance, to determine the credibility of the witnesses, to weigh the evidence, draw inferences from undisputed facts or facts found by it to exist, and to choose between conflicting inferences in reaching its ultimate findings.” Diamond Bros. Co. v. Commissioner, 322 F.2d 725, 730 (3d Cir. 1963). In his brief, the Commissioner has not challenged any finding of fact by the Tax Court as clearly erroneous.

Citing Teleservice Co. of Wyoming Valley v. Commissioner, 254 F.2d 105, 105-06 (3d Cir. 1958), the Commissioner implies that the Tax Court's findings regarding whether a payment is a contribution to capital “is a 'legal' question reviewed de novo.” Br.22. This is incorrect. The Tax Court's factual findings underlying its legal determination, including its factual findings regarding motive and intent, are all subject to the clearly erroneous standard. See Commissioner v. Duberstein, 363 U.S. 278, 289-91 (1960) (applying clearly erroneous standard to Tax Court's finding regarding intent to make gift); Smith v. Commissioner, 305 F.2d 778, 780 (3d Cir. 1962) (same); Diamond Bros., 322 F.2d at 730-31 (applying clearly erroneous standard to Tax Court's finding regarding whether advances to corporation were loans or contributions to capital).6

SUMMARY OF ARGUMENT

A corporation derives its funds from three sources: capital contributions, loans, and profits from operations. It is well established that any contribution of money or property to the capital of a corporation, whether by a shareholder or a nonshareholder, is not included in the gross income of the corporation. See Section 118; Treas. Reg. § 1.118-1.7 It is similarly well established that where a payment is for goods or services, or to subsidize a corporation's income or profit from providing goods and services, the payment is included in the corporation's income. See Detroit Edison, 319 U.S. at 102-03.

On its federal tax returns, Taxpayer treated the BEIP grants as nonshareholder contributions to capital under Section 118 and Treas. Reg. § 1.118-1 and thus not gross income. The Tax Court found this treatment correct based on the evidence presented at trial. Specifically, the Tax Court concluded that Taxpayer's treatment of the BEIP grant payments as contributions to capital was consistent with the Supreme Court's decision in Brown Shoe that the relocation inducements in that case, predominantly cash payments, were contributions to capital. It was also consistent with Treas. Reg. § 1.118-1, which states that the Section 118 exclusion applies to “any contribution of money or property” to the capital of a corporation, including, for example, “land or other property contributed to a corporation by a governmental unit . . . for the purpose of inducing the corporation to locate its business in a particular community. . . .” The Tax Court determined that New Jersey's intent and motivation — the key question — in giving the BEIP grants to Garban and First Brokers was to provide a nontaxable contribution to capital. Op/JA38. It further found the BEIP grants were not income subsidies or offsets for operating losses of the type that would qualify as income, rather than contributions to working capital.

Neither of the Commissioner's two objections to the Tax Court's decision has merit.

The Commissioner's first argument is that the BEIP grants were not contributions to capital because they were not restricted to the purchase of hard assets, such as land and buildings, and because employees' New Jersey income tax withholdings were used to calculate the amount of each BEIP grant payment.

But there is no hard assets requirement associated with the definition of contribution to capital for either shareholders or nonshareholders. As the Tax Court fully understood, the donor's intent or motive for a payment is critical to identifying a capital contribution. Op/JA38-40. And the Supreme Court made clear in Brown Shoe that intent or motive must be based on the purpose of the contribution at issue. 339 U.S. at 591.

The purpose of the BEIP grants was not to subsidize profits or support unprofitable operations by guaranteeing the income or reimbursing operational losses of BEIP recipients. To the contrary, many grant recipients were highly profitable banks and financial services companies that clearly did not need income subsidies or profit guarantees. Rather, the undisputed evidence showed that the purpose of the BEIP grants was to induce these companies to move to New Jersey by offering them substantial cash grants based on, among other factors, the number and quality of new jobs they would bring to and maintain in the State. As the Tax Court emphasized, Brown Shoe teaches, and Treas. Reg. § 1.118-1 reaffirms, location inducement grants like these are contributions to capital. Op/JA38-40.

The Commissioner's argument in large part is based on the theory that a nonshareholder contribution to capital “must become a permanent part of the transferee's working capital structure,” and that this means it must be in the form of hard assets like land or buildings. But that has never been the law.

Working capital is part of the capital structure of the corporation, and in arguing for a hard assets limitation, the Commissioner essentially is asking this Court to overrule its prior decision in McKay Prods. In McKay Prods., this Court explained: “'Working capital' in common parlance means the value of that with which the enterprise carries on its activity. How much is its stake in the game? What is the amount of money which is in the business?” 178 F.2d at 642. For a brokerage firm, that value does not reside so much in the land and buildings it occupies as in cash that it can use to cover reserve requirements and carry on its business while awaiting payment of accounts receivable. Op/JA42. As the Tax Court found, under this Court's definition of “working capital,” the BEIP grants were intended as working capital. Op/JA38, 42.

Moreover, the Tax Court found that the evidence showed that Garban and First Brokers invested tens of millions of dollars in the form of tenant improvements and new technology to create and maintain their businesses in New Jersey and thereby employ hundreds of employees in New Jersey. Op/JA8-9, 13-14.

The Commissioner's related argument that the use of employee state income tax withholdings to measure the amount of the BEIP grant payments means that the payments were not intended as contributions to capital is similarly misguided. This argument is based on cases that deal with payments made by governments to subsidize unprofitable operations or to guarantee a company a minimum income or profit. But there is no evidence whatsoever that NJEDA was seeking to subsidize unprofitable operations or to provide an income or profit guarantee to Garban or First Brokers. To the contrary, the Tax Court found that the undisputed evidence demonstrated that the purpose of the BEIP grants was to induce Garban and First Brokers to relocate to New Jersey. Op/JA38.

Equally meritless is the Commissioner's effort to distinguish the language of Treas. Reg. § 1.118-1 and suggest that it applies only to hard assets. That regulation incorporates the holding of Brown Shoe, which involved relocation inducements that were predominantly in the form of cash. Furthermore, the Commissioner omits the first sentence of Treas. Reg. § 1.118-1, which specifically states that “section 118 provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer.” (Emphasis added.)

The Commissioner also notes that to qualify as a capital contribution, a payment “may not be compensation, such as a direct payment for a specific, quantifiable service provided for the transferor by the transferee.” Br.25. But that principle does not reach this case because it is merely a restatement of the basic holding in Detroit Edison, 319 U.S. at 102-03, that customer payments to obtain electricity were not contributions to capital, but rather classic payments for services. The Commissioner's argument that New Jersey received a disqualifying “direct benefit” in exchange for the BEIP grants because it taxed employees of Garban and First Brokers working at Harborside would disqualify most if not all government grants as contributions to capital because States give these grants to foster economic development, resulting in increases in income and tax revenues. As the Tax Court found, the “goal of the BEIP was to develop New Jersey's economy and revitalize its cities.” Op/JA43. The additional tax revenue generated by new businesses and revitalized cities was only an “indirect benefit” of the program. Op/JA43. Moreover, it found “no nexus between the services provided by [Garban or First Brokers] and the aid provided by the [NJEDA].” Op/JA43.

Accordingly, the Tax Court's decision should be affirmed.

ARGUMENT

A. Any Contribution To The Capital Of A Corporation Is Excluded From Gross Income Under The Governing Case Law, Section 118, And Treas. Reg. § 1.118-1.

A corporation must derive its funds from three sources: capital contributions, loans, and profits from operations. National Carbide Corp. v. Commissioner, 336 U.S. 422, 434-35 (1949). It has long been established that any contribution of money or property to the capital of a corporation is not included in the gross income of the corporation. See Section 118.8 Moreover, it has long been understood that nonshareholders can contribute to the capital of a corporation, and such contributions are excluded from the corporation's income. See Treas. Reg. § 1.118-1 (“Section 118 also applies to contributions to capital made by persons other than shareholders.”). Of course, where a payment is for goods or services, or to subsidize a corporation's profits from operations, the payment is not a contribution to capital and is included in the corporation's income. See Detroit Edison, 319 U.S. at 102-03; see also Baboquivari Cattle Co. v. Commissioner, 47 B.T.A. 129, 129 (1942), aff'd, 135 F.2d 114 (9th Cir. 1943) (payments to compensate for soil conservation projects were income); Helvering v. Claiborne-Annapolis Ferry Co. of Annapolis, Md., 93 F.2d 875 (4th Cir. 1938) (payments in exchange for operation of ferry were income); Lykes Bros. S.S. Co. v. Commissioner, 126 F.2d 725, 727 (5th Cir. 1942) (payments for providing mail services were income). Finally, where a payment does not benefit the corporation, it is not a contribution to the capital of the corporation. See United States v. Chicago, Burlington & Quincy R.R. Co. (“CB&Q”), 412 U.S. 401, 413-14 (1973).

B. Location Inducement Payments Are Contributions To Capital Under Governing Cases, Section 118, And Treas. Reg. § 1.118-1.

The Tax Court found that NJEDA paid the BEIP grants to induce Garban and First Brokers to move their businesses to Jersey City. Op/JA10, 38. Payments to induce a corporation to locate in a community are classic examples of nonshareholder contributions to capital, as illustrated by the decision of the Supreme Court in Brown Shoe, and this Court in McKay Prods. Although courts have occasionally rejected some Section 118 claims, those cases — cited by the Commissioner — involved transfers in exchange for goods or services, or to subsidize or guarantee the transferee's income or profit from operations, or to reimburse the transferee for obligations imposed by the transferor on the transferee. In contrast, location inducements like BEIP grants, made to entice investment in particular locations and aid economic development in those locations, are treated as contributions to capital and excluded from gross income. Treas. Reg. § 1.118-1 follows this case law and includes a location inducement as its paradigm example of a nonshareholder contribution to capital.

1. The Supreme Court and other courts have recognized that location inducement payments are quintessential examples of nontaxable contributions to capital.

The seminal authority on location inducements as contributions to capital is Brown Shoe, in which Brown Shoe received $885,559.45 in cash and two factory buildings valued at $85,471.56 from community groups “as an inducement to the location or expansion of [its] factory operations in the communities.” 339 U.S. at 584, 586. Contracts with the community groups generally required Brown Shoe to locate, construct, or enlarge a factory in the community; to operate the factory for at least ten years; and to meet a minimum payroll or create a stipulated number of new jobs. Id. at 586-87. If Brown Shoe did not supply the stipulated payroll or jobs, it had to return the cash and buildings. Id. at 586. Some of the contracts did not impose any restriction on Brown Shoe's use of the cash, and Brown Shoe did not earmark the cash it received for, or apply the cash against, acquisitions in the communities. Id. at 587. Rather, it deposited the funds in its general bank account from which it paid operating expenses, including the cost of constructing or enlarging factories. Id.

Brown Shoe excluded the contributed cash and buildings from its gross income. Id. at 587 n.5. The IRS did not dispute this exclusion, but argued that Brown Shoe could not depreciate the buildings or property acquired with the contributed cash. Id. at 584-85. The Supreme Court rejected the IRS's position and held that Brown Shoe could depreciate the buildings and acquired property because the cash and buildings were contributions to capital. Id. at 589. In arriving at that conclusion, the Court held that the transferred cash and buildings were additions to Brown Shoe's “capital” as that term was commonly understood. Id. at 589.

The Commissioner argues that Brown Shoe is distinguishable because the transfers of cash were “made in consideration for the company's promise to construct or expand particular factories and to operate them for specified periods.” Br.60-61. The same facts are present here. The BEIP grants were made in consideration of Garban's and First Brokers' promises to move their businesses to Jersey City and construct and equip voice and electronic brokerage facilities at Harborside that could support over 700 employees for fifteen years. Op/JA18-19, 22-23.

Equally telling, the Supreme Court granted certiorari in Brown Shoe because of a conflict between the Eighth Circuit's decision in that case and this Circuit's decision in McKay Prods. Id. at 584. In McKay Prods., a community group transferred a plant to the taxpayer's predecessor to “bring industries to town for the obvious purpose of increasing local payrolls and thus to promote general prosperity.” 178 F.2d at 640. The community group agreed to purchase and improve a factory building and to deed the property to the taxpayer after it had moved to town and paid out $5 million in payroll over an estimated 10 years. Id. at 640 n.2.9

In McKay Prods., this Court held the transfer was a contribution to the taxpayer's working capital. Id. at 643. In so doing, it applied the “common parlance” definition of “working capital” as the “value of that with which the enterprise carries on its activity. How much is its stake in the game? What is the amount of money which is in the business?” Id. at 642.

This Court acknowledged its split with the Eighth Circuit. Id. at 643. In Brown Shoe, the Supreme Court resolved that conflict in favor of this Court's view that a transfer of money or property as a relocation inducement is a contribution to capital. 339 U.S. at 589-90. That the money or property comes from a nonshareholder, as opposed to a shareholder, does not change that it is value possessed by the company that allows the company to conduct its business. It is part of the “money . . . in the business.” McKay Prods., 178 F.2d at 642.

Other U.S. Courts of Appeals have held the same. In Federated Dep't Stores, a shopping center developer sought to induce the taxpayer to locate an anchor store in its development. 426 F.2d at 420. The developer transferred ten acres and agreed to pay the taxpayer $200,000 per year for ten years, with the majority of the payments occurring after the taxpayer built the store. Id.10 Over the government's objection, the Sixth Circuit held that the transfers — including the cash transfers — were contributions to capital under Section 118 and Treas. Reg. § 1.118-1. Id. at 421.

A few years later, again over the government's objection, the Eighth Circuit held that a developer's contribution to induce the location of an anchor store was a contribution to capital. May Dep't Stores Co. v. Commissioner, 33 T.C.M. (CCH) 1128 (1974), aff'd, 519 F.2d 1154 (8th Cir. 1975) (affirming on basis of Tax Court's opinion).

In G.M. Trading Corp. v. Commissioner, 121 F.3d 977 (5th Cir. 1997), the taxpayer surrendered $600,000 worth of Mexican national debt to the Mexican government, which then transferred approximately 1.7 billion pesos to G.M. Trading for the construction of a plant in Mexico. Id. at 978. The Fifth Circuit held that $600,000 worth of the pesos was received in exchange for debt extinguishment, but that the remaining pesos were a nontaxable contribution to capital by Mexico to the taxpayer. Id. Citing Brown Shoe, the court observed that a “payment to induce investment is the quintessential nontaxable contribution to capital.” Id. at 981.

2. Section 118 and Treas. Reg. § 1.118-1 incorporate the holdings of Brown Shoe and McKay Prods. that relocation inducements are contributions to capital.

Section 118 was enacted in 1954 to codify prior case law on the exclusion of contributions to capital from gross income. See H.R. Rep. No. 83-1337, at 17-18 (1954), reprinted in 1954 U.S.C.C.A.N. 4017, 4042 (“Your committee's bill provides that in the case of a corporation, gross income is not to include any contribution to the capital of the taxpayer. This in effect places in the code the court decision on the subject.”); S. Rep. No. 83-1622, at 18-19 (1954), reprinted in 1954 U.S.C.C.A.N. 4621, 4648 (same); see also Federated Dep't Stores, 426 F.2d at 421 (Section 118 restated existing cases); Bd. of Trade of the City of Chicago v. Commissioner, 106 T.C. 369, 378 (1996) (“Congress enacted section 118 to codify the preexisting concept of a capital contribution be a nonshareholder or shareholder.”) (citations and footnote omitted).

A few years later, the Treasury Department promulgated Treas. Reg. § 1.118-1, which also incorporates the holdings of Brown Shoe and McKay Prods. Specifically, the regulation includes an example stating that “the exclusion applies to the value of land or other property contributed to a corporation by a governmental unit or by a civic group for the purpose of inducing the corporation to locate its business in a particular community. . . .” Treas. Reg. § 1.118-1. Accordingly, the Commissioner's position here not only departs from Brown Shoe and McKay Prods., but also from Treas. Reg. § 1.118-1. The quoted example has been part of the regulation for six decades.

The Commissioner argues (Br.56-58) that the regulation's example does not quite fit this case because it refers to “land or other property” contributed to a corporation, not cash. But the Commissioner's argument cannot be reconciled with Brown Shoe, which involved relocation inducements to a corporation that were predominantly in the form of cash. 339 U.S. at 586. The Supreme Court held that the cash transfers were contributions to capital. Id. at 592. Similarly, in Federated Dep't Stores, the location inducement at issue included ten years of $200,000 cash payments per year. 426 F.2d at 420.

Moreover, the Commissioner's argument cannot be reconciled with the first sentence of Treas. Reg. § 1.118-1, which states that “section 118 provides an exclusion from gross income with respect to any contribution of money or property to the capital of the taxpayer.”11 (Emphasis added.) It further provides that “Section 118 also applies to contributions to capital made by persons other than shareholders.” Treas. Reg. § 1.118-1.

Contributions of cash to corporations are commonplace — indeed, cash may be the most common form of capital contribution — and there is nothing in Treas. Reg. § 1.118-1 stating that nonshareholders are restricted to contributing only certain types of assets to a corporation. If Treasury had intended to limit nonshareholder contributions to a particular type of property, it would have clearly stated that the “any contribution of money or property” rule in the first sentence of Treas. Reg. § 1.118-1 did not apply to nonshareholder contributions. Treasury included no such limitation in its regulation.

3. The Commissioner's arguments that BEIP grant payments were not intended as contributions to capital are contrary to the findings of the Tax Court and rely on cases involving entirely different types of governmental payments.

The Commissioner argues that the BEIP grants were not intended as contributions to capital because the cash proceeds, when paid to Garban and First Brokers beginning in 2004 and 2005, were not restricted to the purchase of hard assets such as buildings and land.12 The Commissioner further contends that the BEIP grant payments were income subsidies rather than contributions to capital because the amount of each payment was calculated as a percentage of the state individual income tax withholdings of eligible Garban and First Brokers employees. Neither argument holds water.

First, there is no hard asset requirement associated with contributions to capital. As noted above, most contributions to capital are in the form of money.

Second, under the controlling Supreme Court case law, because the BEIP grant was a relocation inducement made to provide indirect and speculative benefits to the general community in the form of economic development and job growth, the grant was a contribution to capital rather than income paid to Garban and First Brokers in exchange for goods and services. Such incentive payments bear little resemblance to the kind of income subsidies or operating loss offsets that the Commissioner apparently has in mind.

Moreover, the Commissioner's argument that the BEIP grant was not intended as a contribution to capital is inconsistent with the Tax Court's finding to the contrary:

The evidence presented at trial shows the intent or motive of the State of New Jersey in making the payments to petitioner's affiliates. . . . In the instant case we have clear evidence of the donor's intent, and we find that the EDA's intent and motivation for the BEIP grant was to provide a nontaxable contribution to capital.

Op/JA38.

The Commissioner's assertion (Br.45-48) that the Tax Court failed to base its decision on New Jersey's intent and motivation, but rather on the use of the BEIP grant proceeds to purchase stock of ICAP Holdings (USA), Inc., misrepresents the Tax Court's findings. Although the Tax Court noted that the proceeds were used to purchase stock (Op/JA20-21, 24), and that the grants thereby enhanced Garban's and First Brokers' businesses (Op/JA 42-43), it did not find that the BEIP grants were contributions to capital because the grant proceeds were used to purchase stock. Rather, as discussed above, the Tax Court based its finding on the clear evidence showing New Jersey's intent and motivation. Op/JA38.

a. There is no requirement that cash transfers be restricted to the purchase of hard assets such as land or buildings to qualify as contributions to capital.

In arguing that the BEIP grants cannot constitute contributions to capital because they were not hard assets or specifically restricted to the purchase of hard assets, the Commissioner cites the Supreme Court's decision in CB&Q, 412 U.S. 401. Specifically, it cites the statement in that case that in identifying whether a payment is a nonshareholder contribution to capital, the payment “certainly must become a permanent part of the transferee's working capital structure.” Id. at 413. This statement sets forth the first of five characteristics that a court may look to when determining whether a transferor intended to make a contribution to capital. Id. There is no suggestion in this statement that the only way a payment can be a permanent part of the “working capital structure” is by the purchase or construction of a hard asset.

Indeed, CB&Q focused on a different type of payment than is at issue here; it did not involve a location inducement. Rather it arose out of states requiring railroads to improve their lines to enhance public safety and expedite traffic flow. Id. at 404, 414 n.14. The states agreed to pay for these mandated improvements. Id. Although CB&Q involved constructing hard assets, the Court held the payments were not contributions to capital because the improvements were mandated by the states and did not materially benefit the corporation. Id. at 414. They were “not in any real sense bargained for by CB&Q,” “[a]ny incremental economic benefit to CB&Q from the facilities was marginal,” and the facilities “did not materially contribute to the production of further income by the railroad.” Id.

Nothing in CB&Q's analysis overturned the Brown Shoe and McKay Prods. decisions addressing location inducements. To the contrary, CB&Q carefully reconciled Brown Shoe and Detroit Edison, emphasizing that the key consideration is whether the transferor's “intent or motive” is to pay for a direct service or to obtain an advantage for the general community.

[W]here the transfers were made with the purpose, not of receiving direct service or recompense, but only of obtaining advantage for the general community, as in Brown Shoe, the result was a contribution to capital. . . .

[T]he decisional distinction between Detroit Edison and Brown Shoe rested upon the nature of the benefit to the transferor, rather than to the transferee, and upon whether that benefit was direct or indirect, specific or general, certain or speculative. These factors, of course, are simply indicia of the transferor's intent or motive.

Id. at 411 (footnote omitted). This case is like Brown Shoe, not like Detroit Edison.

In Detroit Edison, the Court held that payments the utility received from rural customers for extending power lines to their properties were payments in exchange for electric service, not contributions to its capital. 319 U.S. at 102-03. The CB&Q Court noted that “Detroit Edison, by itself, would appear almost to foreclose CB&Q's claims here.” 412 U.S. at 409. It nonetheless explained the difference between Detroit Edison and Brown Shoe. Id. Where a transfer is intended as payment for a direct and specific benefit to the transferor (as in Detroit Edison), the transfer is a taxable payment for goods or services. Where a transfer is intended to achieve an indirect and speculative benefit to the general community (as in Brown Shoe), it is a contribution to the transferee corporation's capital. Id. at 411.

As explained in Brown Shoe with respect to location inducements, that intent is inferred from the nature of the transfer:

Since in this case there are neither customers nor payments for service, we may infer a different purpose in the transactions between petitioner and the community groups. The contributions to petitioner were provided by citizens of the respective communities who neither sought nor could have anticipated any direct service or recompense whatever, their only expectation being that such contributions might prove advantageous to the community at large. Under these circumstances the transfers manifested a definite purpose to enlarge the working capital of the company.

339 U.S. at 591 (emphasis added).

The transferor's intent is easily inferred in location inducement cases because the government or community group is not obtaining goods and services from the transferee. It pays the inducement to achieve indirect and speculative benefits to the community at large, bringing new productive businesses into the community in hopes that the new businesses will generate economic development through new jobs and new investment, with all the multiplying effects such new businesses produce. Such economic development might benefit the transferor, but any such benefit would be indirect and speculative. This is precisely what led the Tax Court to find that any benefit to New Jersey from paying the BEIP grants was indirect. Op/JA43.

The Commissioner's argument that the lack of a restriction to purchasing hard assets shows that New Jersey did not intend the BEIP grants as contributions to capital also ignores that neither Brown Shoe nor Federated Dep't Stores concluded that a restriction to the creation of hard assets was necessary for cash payments to constitute contributions to capital. To the contrary, in Brown Shoe, the Court specifically noted that some of the contributed funds were unrestricted as to their use. 339 U.S. at 587-88. Likewise, in Federated Dep't Stores, the cash portion of the inducement was paid over ten years, with most occurring after the store was built. See Federated Dep't Stores, Inc., 51 T.C. at 517. Neither court found absence of the restriction the Commissioner urges here to be disqualifying.

Moreover, the Commissioner's argument that “working capital” is limited to hard assets such as land or buildings, or cash restricted to the purchase of such hard assets, is contrary to the definition this Court applied in McKay Prods. This Court used the following common parlance definition of working capital: “the value of that with which the enterprise carries on its activity. How much is its stake in the game? What is the amount of money which is in the business.” 178 F.2d at 642.

As the Tax Court observed, the Commissioner's argument “conflates 'capital asset' such as a factory or machinery with 'working capital.'” Op/JA41. Indeed, the Tax Court explained that a corporation's working capital will depend on the nature of its business. For example, although a shoe manufacturer's working capital may consist primarily of buildings and machinery, it also will need cash to pay workers in the interim between the date of manufacture and the date of collection on sales of the shoes.

By comparison, a brokerage company's working capital will consist of cash to cover its financial reserve requirements, pay its employees, and carry on the business while awaiting payment of accounts receivable. See Op/JA42 (noting that Garban and First Brokers, as financial services companies, relied primarily on human capital and substantial cash reserves). Particularly in our modern economy, a company's working capital — the value of that with which an enterprise carries on its activity — is more than just bricks and mortar. It includes cash. Under this Court's definition of “working capital” in McKay Prods., the BEIP grant was intended to be used as working capital, precisely as the Tax Court found. Op/JA38.13

The Commissioner also argues that the Supreme Court in Texas & Pac. Ry. Co. v. United States restricted the use of nonshareholder capital contributions to purchasing hard assets. It finds that restriction in the Court's observation that the income subsidy payments at issue in that case could be used for the payment of dividends or operating expenses. 286 U.S. 285, 289-90 (1932). But Texas & Pac. Ry. did not so hold. Brown Shoe, which treated unrestricted cash payments as capital contributions while citing Texas & Pac. Ry., 339 U.S. at 589 n.11, certainly did not read Texas & Pac. Ry. in the manner in which the Commissioner advocates here.

Texas & Pac. Ry. arose from the government's control of railroads during World War I, for which the railroads received compensation from the government, including a guaranteed “minimum operating income” for six months after the government relinquished control. 286 U.S. at 288. In rejecting Texas & Pacific's position that government payments were contributions to capital, the Court observed that the guarantee was intended to provide a minimum income from operations. Id. at 289 (“Clearly, then, the amount paid to bring the yield from operation up to the required minimum was as much income from operations as were the railroad's receipts from fares and charges.”) Contrary to the Commissioner's argument, the railroad's ability to use the payments to pay dividends or operating expenses was not the basis for the Court's holding; it was merely additional evidence the Court cited that the payments were intended to be income to the railroad. Id. Specifically, the Court observed that the payments:

were to be measured by a deficiency in operating income, and might be used for the payment of dividends, of operating expenses, of capital charges, or for any other purpose within the corporate authority, just as any other operating revenue might be applied. The government's payments were not in their nature bounties, but an addition to a depleted operating revenue consequent upon a federal activity.

Id. at 290 (emphasis added).14

Contrary to the Commissioner's argument, Texas & Pac. Ry. did not require that contributions to capital be restricted to purchases of hard assets such as land or buildings. Instead, Texas & Pac. Ry. recognized that, when a corporation receives a guarantee of a minimum operating income, payments under that income guarantee are taxable.

The Commissioner's argument that New Jersey should have restricted use of the BEIP grants to purchases of hard assets would impose an illogical condition given the manner in which the BEIP was structured. BEIP grant payments could not commence until the relocation or expansion in New Jersey was complete, capital improvements were in place, and employees had been hired and working at the project site for at least a year. Op/JA12. In this regard, it bears emphasis that, before they could receive the BEIP grants, Garban and First Brokers made substantial investments, in the tens of millions of dollars, to build out Harborside and purchase and install the sophisticated telephony and network systems to recreate their voice and electronic brokerage businesses and relocate hundreds of employees to Harborside. See Op/JA13-14, 16, 19, 21-22.

b. Use of employee state tax withholdings to calculate the BEIP grant payments does not mean that the grants were not intended as contributions to capital to induce Garban and First Brokers to relocate to New Jersey.

The Commissioner further argues that New Jersey could not have intended the BEIP grants as contributions to capital because the annual payments were calculated as a percentage of state income taxes withheld from eligible employees of Garban and First Brokers. For this proposition, he again cites cases involving payments to subsidize taxpayers' unprofitable operations or guarantee a minimum operating income or profit. See Texas & Pac. Ry. Co., 286 U.S. 285; AT&T, Inc. v. United States, 629 F.3d 505 (5th Cir. 2011); United States v. Coastal Utilities, Inc., 483 F. Supp. 2d 1232 (S.D. Ga. 2007), aff'd, 514 F.3d 1184 (11th Cir. 2008); Sprint Nextel Corp. v. United States, 779 F. Supp. 2d 1184 (D. Kan. 2011). These cases were not relocation inducement cases, and involved government payments with different purposes from the BEIP grants.15

As the Tax Court found, New Jersey intended the BEIP to induce Garban and First Brokers to move to Jersey City and promote economic development and job growth in that community. Op/JA10-11, 38. As a way to ensure that BEIP grants actually achieved the economic development New Jersey sought and keep the program revenue positive, the State measured the grant payments based on state taxes withheld from Garban's and First Brokers' qualified employees at the BEIP project site.16 Contrary to the Commissioner's argument, this aspect of the BEIP program does not demonstrate that New Jersey intended to subsidize the income of Garban and First Brokers or to insure them against operating losses. There is no evidence that New Jersey expected to subsidize or guarantee Garban's and First Broker's income. Moreover, this income or operational profits subsidy theory is, frankly, implausible given that the State specifically targeted highly profitable companies, such as Goldman Sachs and other banks to relocate their businesses to New Jersey, where costs were lower than New York City. New Jersey was not offering to guarantee the income of major banks; it was seeking to attract them to the State.

The cases the Commissioner cites establish that payments under guarantees of income or return on investment, or to protect against operating losses, are not capital contributions. However, they do not support an argument that whenever an expense related to the transferee's operations (e.g., taxable wages) is used to calculate a relocation inducement that inducement cannot qualify as a contribution to capital.

Texas & Pac. Ry. dealt with a government payment to compensate the railroad for operational losses suffered as a result of the government's wartime control of the railroad by guaranteeing a minimum operating income. 286 U.S. at 288. The other income subsidy cases cited by the Commissioner are likewise inapplicable here. Each arose from the Universal Service Fund (“USF”) payments to guarantee telephone carriers a minimum profit or return on investment from providing universal access to telephone service in rural, low-revenue, and high cost areas. See AT&T, 629 F.3d at 507-08; Coastal Utilities, 483 F. Supp. 2d at 1234; Sprint, 779 F. Supp. 2d at 1185. The carriers argued that the USF payments were contributions to capital rather than payments for telephone service.

In AT&T, the Fifth Circuit held USF payments were not capital contributions because the government made the payments to compensate for the telephone service AT&T was providing. 629 F.3d at 516. Because the payments were intended to “directly compensate AT&T for its lost revenue or increased expenses in servicing high-cost and low-income users,” and the program was to ensure “AT&T of competitive rates of income for [those] services,” the USF payments were taxable as compensation and were not contributions to capital. Id. The court further found that “the USF payments also were paid to AT&T to compensate it for providing certain specific services,” and, therefore, did not satisfy the second CB&Q factor. Id. at 518.17

Coastal Utilities and Sprint are essentially the same. See Coastal Utilities, 483 F. Supp. 2d at 1242 (“Because the universal support payments are based on investment return and expenses, the payments are supplemental income and not a contribution to capital.”); Sprint, 779 F. Supp. 2d at 1194 (universal support payments, like the “substitutes for revenue” in Texas & Pac. Ry., were “substitutes for operating revenue that carriers could otherwise seek to recover through the local ratemaking process”). In each of these cases, the government payments guaranteed a certain level of income or profit from operations the government was subsidizing. The language from these cases cited by the Commissioner in his brief is taken out context and does not stand for the much broader principle he urges this Court to adopt — that to qualify as a contribution to capital, a relocation inducement must not be measured in relation to any operational expense, such as salaries paid or taxes withheld.

There is no evidence, and the Commissioner cites none, that the BEIP grant was intended as an income subsidy or profit guarantee rather than a contribution to capital. As noted above, many of the BEIP grant recipients were highly successful and profitable financial services companies that in no sense needed an income subsidy or profit guarantee. JA552-54, 557.18 It would have been untenable for New Jersey to guarantee the income of healthy, financially strong companies such as these, and there is no evidence that they intended to do so. The BEIP grant was exactly what the Tax Court found it to be — a contribution to capital to induce these highly profitable companies to relocate their businesses to New Jersey and thereby promote economic development. Op/JA38-39.19

As the Supreme Court emphasized in Brown Shoe, and restated in CB&Q, the intent or motive of the transferor is the determinative consideration, and that intent or motive can be inferred from the purpose of the donation. In the above discussed cases cited by the Commissioner, that purpose was to provide the transferee with a substitute for lost income or profits. But here, as in Brown Shoe, the purpose was to induce Garban and First Brokers to relocate to a particular community. And, as the Court concluded in Brown Shoe, a location inducement purpose leads to an inference that the money being contributed qualifies as a capital contribution.

c. The subjective intent evidence cited by the Commissioner for the proposition that New Jersey did not intend the BEIP grants as contributions to capital is inconsistent with the Tax Court's findings and disregards evidence directly to the contrary.

Although the Commissioner disclaims any intention to challenge the factual conclusions of the Tax Court, he asserts (Br.14, 35) that two witnesses from NJEDA testified that New Jersey did not intend the BEIP grants as a contribution to capital. These witnesses did not, in fact, testify as to New Jersey's “intention” regarding the BEIP. What the witnesses actually testified to is that, at the time the BEIP grant payments were made — which necessarily commenced after the Harborside construction buildout had been completed and the eligible employees had worked for over a year at Harborside — NJEDA did not require that the BEIP grant payments be spent in any particular way. See JA324-25, 432-33. Indeed, one of the witnesses made clear under questioning from the trial judge that she was not expressing any opinion on whether the BEIP grants were a contribution to capital under federal law (JA335-37).

In any event, the Commissioner's argument that the intent and motivation underlying a grant should be determined through the subjective testimony of individual witnesses was rejected by the Tax Court in Bd. of Trade of Chicago, 106 T.C. at 382. There, the issue was whether certain transfer fees were made with an investment motive and could be treated as contributions to capital. In rejecting the subjective intent approach that the Commissioner advocates here, the court observed:

Direct proof of the motive of the payor is rarely available. Whenever state of mind is relevant under the tax laws, the most important operational question usually concerns the weight to be attached to external factors. . . . [M]otive or intent must be determined at the institutional level, which necessarily requires an examination of external factors. Therefore, we look to the objective facts and circumstances surrounding the payment to determine whether the members must or should be deemed to have an investment motive in paying the transfer fees.

Id. at 382 (citations and footnote omitted). For the reasons discussed above, the facts and circumstances surrounding the BEIP led the Tax Court to find that the BEIP grants were intended as relocation inducements and, as such, constituted contributions to capital under Brown Shoe and Treas. Reg. § 1.118-1.

Indeed, testimony by individual witnesses as to their opinions about whether New Jersey did or did not intend a capital contribution under federal law would seem to be the weakest form of evidence. That is far different, for example, than an official publication of an agency responsible for administering the program. Accordingly, were one to focus on subjective statements, the contemporaneous statements by the New Jersey Division of Taxation, which jointly administered the BEIP, would be far more probative. The Division published a quarterly newsletter, the New Jersey State Tax News, to update the public on issues concerning New Jersey tax laws. JA873, 913, 937. In the Summer/Fall 2002 edition, in response to a corporate taxpayer's inquiry, the Division stated that the BEIP grants were capital contributions not includible in gross income. JA896. The Division publicly reiterated this guidance in the Spring 2003 edition. JA918. Significantly, in both editions, the Division stated that the BEIP grant was “intended to produce indirect benefits to the general population.” JA896, 918. Although in 2010 the Division changed its position regarding the taxability of BEIP grants, it did not retract its earlier statements that BEIP grants were “intended to produce indirect benefits to the general population.” JA941.

It is not Taxpayer's argument that these newsletters were or should have been considered determinative by the Tax Court, which made no mention of them. However, this evidence directly supports the Tax Court's conclusions and demonstrates why the Commissioner's sideswipe at the Tax Court's factual determination is ill-conceived.

C. NJEDA Did Not Pay BEIP Grants To Garban And First Brokers In Exchange For Goods Or Services.

Citing CB&Q, the Commissioner contends that the BEIP grants cannot qualify as contributions to capital because New Jersey received a “direct benefit” in exchange, through the individual income tax payments of eligible Garban and First Brokers employees. Br.48-55. The Commissioner's argument invokes the second CB&Q factor, that a contribution to capital “may not be compensation, such as a direct payment for a specific, quantifiable service provided for the transferor by the transferee.” 412 U.S. at 413. In applying this factor, courts look to whether there is a nexus between the payment and goods and services the recipient offers in the normal course of its business. See Federated Dep't Stores, 426 F.2d at 421 (“In all the cases relied on by the government, the contributions had a reasonable nexus with the services which it was the business of the recipient corporation to provide.”). Here, as the Tax Court found, “there is no nexus between the services provided by [Garban and First Brokers] and the aid provided by” NJEDA. Op/JA43.

As an initial matter, the Commissioner's assertion that BEIP grants were “funded by the transferee” is simply wrong. BEIP payments were paid out of appropriations by the State Legislature and measured by the employees' taxes, not the companies' taxes. As the Tax Court found, “Although the grant was based on the withholding tax paid by employees, the grant was not a rebate of the tax paid. Rather, the grant was paid from the State's general appropriations.” Op/JA12.

The Commissioner's argument that Garban and First Brokers performed the service of collecting taxes from their employees for New Jersey ignores that neither the Federal government, through the IRS, nor the States pay compensation to employers for acting as withholding agents to collect taxes due from their employees. See, e.g., 26 U.S.C. § 3402 (mandating that employers withhold taxes from employee wages); N.J. Stat. § 54A:7-1 (same in New Jersey).

New Jersey's expectation of tax payments from Garban's and First Brokers' employees does not mean it was paying Garban and First Brokers for any service. This point is illustrated by Federated Dep't Stores., where as previously discussed, a real estate developer paid a department store to locate in its shopping center to help attract other tenants. 426 F.2d at 421. Although the developer expected to benefit indirectly from the payment, the Sixth Circuit rejected the argument that this expectation “warrant[ed] treating [the developer's] contribution as a payment to taxpayer for future services.” Id.

John B. White, Inc. v. Commissioner, 55 T.C. 729, 736 (1971), aff'd, 458 F.2d 989 (3d Cir. 1972), is similar. White operated a Ford dealership that promoted and sold Ford products. Id. Because Ford wanted to increase the promotion and sale of its products, it paid White to move its dealership to a better location. Id. The Tax Court concluded that “Ford thus anticipated that as the result of the relocation of White's dealership, it would derive valuable direct benefits from improved sales and promotional activities.” Id. Distinguishing Federated Dep't Stores, the court stated that “Ford's payments clearly had a 'reasonable nexus' with the services which White customarily provided: the sale and promotion of Ford products.” Id. at 737.

Here, the Tax Court found that New Jersey's increased tax revenue from new businesses brought to the State was only an indirect benefit of the BEIP. Op/JA43. As discussed above, the reason NJEDA provided BEIP grants was to improve New Jersey's economy through economic development and job growth. The “BEIP was designed '[t]o grow New Jersey's economy and revitalize its cities.'” Op/JA10 (quoting BEIP Act).

Moreover, the Commissioner's argument is inconsistent with the Tax Court's findings that NJEDA offered higher BEIP grants to companies in urban-aid municipalities, even though that did not lead to additional income tax revenues. See pp. 8, 17, supra; Op/JA11, 38. Similarly, although New Jersey received the same income tax revenue from a Garban or First Brokers employee who worked full-time elsewhere in New Jersey, only new employees who worked full time at Harborside — where NJEDA was seeking to promote economic development — counted when determining BEIP grant payments. See p. 9, supra; JA246. For similar reasons, NJEDA included in the BEIP calculation wages of Pennsylvania residents — notwithstanding that under a reciprocity agreement between the States those employees did not pay New Jersey income taxes. JA203-04.

As the Tax Court found, there was no nexus between the BEIP grants and services performed by Garban and First Brokers. Op/JA43. Both companies were in the business of providing voice and electronic brokering services. Unlike the “goods or services” cases cited by the Commissioner, Garban and First Brokers did not provide any service to NJEDA or New Jersey.

If the Commissioner's argument were correct, no relocation inducement provided by a governmental body — whether in the form of land, buildings or cash — could qualify as a nonshareholder contribution to capital under Section 118 because such relocation inducements are typically made to promote economic development and job growth, which necessarily leads to increased tax revenues. The Commissioner's argument therefore cannot be reconciled with Treas. Reg. § 1.118-1, which states that relocation inducements paid by governmental units constitute contributions to capital. The regulation also provides that “the exclusion does not apply to any money or property transferred to the corporation in consideration for goods or services rendered.” Obviously, the Treasury Department, in promulgating Treas. Reg. § 1.118-1, did not see governmental relocation inducements paid to corporations as “consideration for goods or services rendered.” No court has ever adopted the extreme view argued by the Commissioner here that when a government anticipates that its relocation inducements will generate additional taxes through economic development, those inducements cannot qualify as contributions to capital.

Accordingly, contrary to the Commissioner's argument, and consistent with Treas. Reg. § 1.118-1, the second CB&Q factor does not disqualify the BEIP grants as contributions to capital.20

CONCLUSION

The decision of the Tax Court should be affirmed.

Respectfully submitted,

David B. Blair
Robert L. Willmore
Teresa M. Abney
CROWELL & MORING LLP
1001 Pennsylvania Ave., N.W.
Washington, DC 20004-2595
(202) 624-2765
dblair@crowell.com

Counsel for Respondent-Appellee

December 12, 2019

FOOTNOTES

1ICAP, North America, Inc. f.k.a. Garban Intercapital North America, Inc.

2First Brokers Holdings, Inc. f.k.a. First Brokers Securities, Inc.

3BrokerTec Holdings, Inc. is the parent of the consolidated return group (“Taxpayer”).

4First Brokers initially found space in Hoboken, New Jersey, but ultimately, with NJEDA's approval, selected Harborside for its headquarters after Garban acquired First Brokers. Op/JA21-23.

5The Commissioner incorrectly states (Br.14, 36) that this conversion occurred in 2013. In fact, the statute permitting conversion was not enacted until 2016. See Act of June 30, 2016, ch. 9, 2016 N.J. Laws 112. Under the 2016 statute, unpaid BEIP grants were eligible for conversion to tax credits beginning in fiscal year 2017. Id. See also JA372 (2018 testimony by NJEDA witness that tax credit conversion option was adopted in last fiscal year).

6Moreover, the statement in Teleservice that the Commissioner cites was based on a distinction between ultimate and subsidiary findings of facts that the Supreme Court later rejected as inappropriate in Pullman-Standard v. Swint, 456 U.S. 273, 287 (1982) (“Rule 52(a) . . . does not divide findings of fact into those that deal with 'ultimate' and those that deal with 'subsidiary' facts.”)

7In the Tax Cuts and Jobs Act (2017), Congress amended Section 118(b) to provide that the term “contribution to the capital of the taxpayer” does not include contributions by a government entity or civic group (other than a contribution made by a shareholder as such). The change was effective after the years at issue here (after December 31, 2017). Congress scored the change as raising $6.5 billion over ten years. See H.R. Rep. No. 115-466 at 397-98, 688 (2017).

8Because Section 118 applies only to corporations, the Commissioner's reliance on cases involving individual taxpayers is misplaced. See Br. at 43 (citing Ginsburg v. United States, 922 F.3d 1320 (Fed. Cir. 2019); Maines v. Commissioner, 144 T.C. 123 (2015)).

9When the community group could not pay the mortgage, it waived the payroll obligation and transferred the building to the taxpayer. McKay Prods., 178 F.2d at 640 n.2.

10The cash payments began July 1, 1960, and construction occurred during taxpayer's fiscal year ending February 3, 1962. See Federated Dep't Stores, Inc. v. Commissioner, 51 T.C. 500, 517 (1968), aff'd, 426 F.2d 417 (6th Cir. 1970).

11As the court noted in G.M. Trading: “We find the use of the word 'any' [in Section 118(a)] to be significant.” 121 F.3d at 981.

12The Tax Court found that Garban and First Brokers used the cash to purchase stock of ICAP Holdings (USA), Inc. as part of a series of transactions designed to expand petitioner's business into other trading markets. Op/JA20-21, 24. Stock, of course, is a capital asset. See Arkansas Best Corp. v. Commissioner, 485 U.S. 212, 222-23 (1988) (“stock is most naturally viewed as a capital asset”).

13The Commissioner misrepresents the Tax Court's analysis when he claims the Tax Court relied on the accounting definition of working capital (Br.63). In fact, the Tax Court stated that it “believe[d] that the Supreme Court has adopted the common-sense definition of working capital used by the Court of Appeals for the Third Circuit.” Op/JA42.

14Similarly, in Edwards v. Cuba R. Co., 268 U.S. 628 (1925), the Court's statement that nothing indicated that the government subsidies at issue “could be used for the payment of dividends, interest or anything else properly chargeable to or payable out of earnings or income,” was made in the context of rejecting the Commissioner's argument that the payments were for transportation services the railroad rendered to Cuba rather than for construction and operation of the railroad. Id. at 632-33.

15The Commissioner also cites Springfield Street Railway Co. v. United States, 577 F.2d 700 (Ct. Cl. 1978), to support his position. But Springfield did not involve location inducements. Rather, they were unilateral rebates of excise tax that the taxpayer had previously paid. Id. at 701. The Court of Claims concluded that excise tax rebates did not qualify as capital contributions under CB&Q. Id. at 703-04. Similarly, in HMW Indus., Inc. v. Wheatley, 504 F.2d 146 (3d Cir. 1974), this Court held that income tax refunds granted Virgin Islands corporations were only intended as reductions in tax, not as contributions to capital. Id. at 155.

16The Commissioner implies (Br.41, 53) that the BEIP grant was a tax rebate. But that is not correct, as the Tax Court found. Op/JA12 (“Although the grant was based on the withholding tax paid by the employees, the grant was not a rebate of the tax paid. Rather, the grant was paid from the State's general appropriations.”).

17Similarly, Deason v. Commissioner, 590 F.2d 1377 (5th Cir. 1979), held that payments from the Department of Labor for an on-the-job training program were compensation for training services and not contributions to capital.

18One NJEDA witness testified that it was not the objective of NJEDA to guarantee the income of these companies, or of Garban and First Brokers. JA321.

19The Commissioner contends (Br.42) that the BEIP grant “could minimize the recipient's costs, but could never add to its working capital.” This plainly is wrong given that Garban and First Brokers used the BEIP grant payments to purchase stock of ICAP Holdings (USA), Inc. Op/JA20-21, 24.

20In a footnote at the end of his brief (Br.66 n.8) the Commissioner “notes” that the BEIP grant fails the fourth and fifth CB&Q factors; namely, that the “asset transferred foreseeably must result in benefit to the transferee in an amount commensurate with its value;” and that “the asset ordinarily, if not always, will be employed in or contribute to the production of additional income and its value assured in that respect.” CB&Q, 412 U.S. at 413. The Commissioner's position regarding the fourth and fifth CB&Q factors is a complete change from the position that he took before the Tax Court (see Respondent's Answering Brief, Doc. 43 at 163-69), where he argued that both of these CB&Q factors were irrelevant. See Lloyd v. Hovensa, LLC, 369 F.3d 263, 272-73 (3d Cir. 2004) (“Our Circuit adheres to a 'well established principle that it is inappropriate for an appellate court to consider a contention raised on appeal that was not initially presented to the district court.'”) (citations omitted). Moreover, “arguments raised in passing (such as, in a footnote), but not squarely argued, are considered waived.” John Wyeth & Bro. Ltd. v. CIGNA Int'l Corp., 119 F.3d 1070, 1076 n.6 (3d Cir. 1997).

END FOOTNOTES

DOCUMENT ATTRIBUTES
  • Case Name
    Commissioner v. BrokerTec Holdings Inc.
  • Court
    United States Court of Appeals for the Third Circuit
  • Docket
    No. 19-2603
  • Institutional Authors
    Crowell & Moring LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Tax Analysts Document Number
    2019-47116
  • Tax Analysts Electronic Citation
    2019 TNTG 3-32
    2019 TNTF 240-13
Copy RID