Bd. of Trade of the Chicago & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 29 May 1996 |
| Docket Number | No. 8202-93.,8202-93. |
| Citation | 106 T.C. 369,106 T.C. No. 21 |
| Parties | The BOARD OF TRADE OF the CITY OF CHICAGO AND SUBSIDIARIES, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
George B. Javaras, Barbara M. Angus, Richard E. Peterson, and Raymond P. Wexler, for petitioner.
Joseph T. Ferrick, for respondent.
Petitioner (P) is a taxable membership corporation that operates a futures exchange. When a membership on the exchange is transferred, the transferee must pay P a transfer fee, which, under P's bylaws, is to be used to “purchase, retire or redeem the indebtedness encumbering the Board of Trade Building”, which houses P's trading floor and substantial office space leased to third-party tenants. Held, the transfer fees are nontaxable contributions to capital, rather than taxable payments for services, because the transferees pay the fees with an investment motive, as evidenced by (1) the earmarking of the fees for reduction of P's mortgage indebtedness, (2) the resulting increase in the members' equity in P, and (3) the members' opportunity to profit from their investment in P because of the lack of restrictions on the transferability of their membership interests.
Respondent determined deficiencies in petitioner's Federal income tax for the years 1988, 1989, and 1990 in the amounts of $108,859, $113,473, and $65,051, respectively.
The deficiencies arise from respondent's inclusion in petitioner's gross income of membership transfer fees. The sole issue is whether the membership transfer fees paid to petitioner during 1988, 1989, and 1990 are contributions to capital or payments for services. We hold the transfer fees to be excluded from gross income as contributions to capital.
The parties have stipulated some facts, and the stipulation of facts and the attached exhibits are incorporated in this opinion. At all relevant times, petitioner maintained its principal place of business in Chicago, Illinois.
Petitioner, the Board of Trade of the City of Chicago (commonly referred to as the CBOT), is a taxable membership corporation organized in 1859 under a special act of the Illinois legislature. Petitioner's principal business is the operation of a futures exchange. Petitioner owns and manages the commercial office building (CBOT building) that houses its exchange facilities. The bulk of the space in the CBOT building, approximately 80-85 percent, is leased to third-party tenants.
The CBOT building is the largest asset shown on petitioner's balance sheet. Petitioner's management believes that the current fair market value of the CBOT building is between $350 and $400 million. The CBOT building consists of the original landmark building constructed in the 1930's, a new trading floor that petitioner constructed in the early 1970's, and an adjacent 22-story commercial building that petitioner constructed in the early 1980's at a cost of between $110 and $120 million. Petitioner's borrowings to finance these acquisitions are represented by one consolidated and extended mortgage debt secured by the CBOT building.
During the years in issue, the mortgage debt encumbering the CBOT building represented petitioner's single largest liability. The amounts of the mortgage debt as of December 31, 1988, 1989, and 1990 were $33,315,792, $30,695,564, and $27,793,779, respectively. Petitioner made payments of principal and interest on the mortgage debt in the total amount of $5,914,269 in each of the years in issue.
Ownership of petitioner is vested in its members and is represented by five classes of transferable memberships: Full memberships, associate memberships, Government Instruments Market (GIM) memberships, Commodity Options Market (COM) memberships, and Index, Debt and Energy Market (IDEM) memberships.
Each class of membership carries specified voting rights, dissolution rights, and trading privileges. The most comprehensive membership, a full membership, has trading privileges on all markets on the CBOT, a full share on liquidation, and one vote on all matters voted on by CBOT members. The most restricted membership, an IDEM membership, has trading privileges only on the Index, Debt and Energy market, a one-half percent of one share on liquidation and voting rights to elect members of an IDEM liaison committee to the board of directors of the CBOT. The following chart shows the numbers of different memberships during the years in issue and summarizes the rights and privileges of each class:
+----------------------------------------------------------------------------------------+
¦Class of ¦Numbers of memberships as of: ¦Trading ¦Voting ¦Dissolution¦Transfer¦
+----------+-------------------------------+------------+-----------+-----------+--------¦
¦Membership¦1/1/88 ¦12/31/ ¦12/31/ ¦12/31/ ¦Privileges ¦Rights ¦Rights ¦fee ¦
¦ ¦ ¦88 ¦89 ¦90 ¦ ¦ ¦ ¦ ¦
+----------+-------+-------+-------+-------+------------+-----------+-----------+--------¦
¦ ¦ ¦ ¦ ¦ ¦All futures ¦ ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦contracts ¦1 vote on ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦and full ¦all matters¦ ¦ ¦
¦FULL ¦1402 ¦1402 ¦1402 ¦1402 ¦trading ¦voted on by¦1 share ¦$1,000 ¦
¦ ¦ ¦ ¦ ¦ ¦privileges ¦the owners ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦on the CBOT ¦of CBOT ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦and CBOE ¦memberships¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦** ¦ ¦ ¦ ¦
+----------+-------+-------+-------+-------+------------+-----------+-----------+--------¦
¦ ¦ ¦ ¦ ¦ ¦All futures ¦1/6 of 1 ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦contracts ¦vote on all¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦except ¦matters ¦1/6 of 1 ¦ ¦
¦ASSOCIATE ¦713 ¦722 ¦739 ¦748 ¦agricultural¦voted on by¦share ¦$1,000 ¦
¦ ¦ ¦ ¦ ¦ ¦and ¦the owners ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦associated ¦of CBOT ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦markets ¦memberships¦ ¦ ¦
+----------+-------+-------+-------+-------+------------+-----------+-----------+--------¦
¦ ¦ ¦ ¦ ¦ ¦Only ¦Voting ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦Government ¦rights to ¦11% of 1 ¦ ¦
¦GIM ¦1374* ¦1393* ¦1491* ¦1493* ¦Instrument ¦elect a GIM¦share ¦$350 ¦
¦ ¦ ¦ ¦ ¦ ¦Market ¦liaison ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦committee ¦ ¦ ¦
+----------+-------+-------+-------+-------+------------+-----------+-----------+--------¦
¦ ¦ ¦ ¦ ¦ ¦Only ¦Voting ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦Commodity ¦rights to ¦1/2% of 1 ¦ ¦
¦COM ¦* ¦* ¦* ¦* ¦Options ¦elect a COM¦share ¦$350 ¦
¦ ¦ ¦ ¦ ¦ ¦Market ¦liaison ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦committee ¦ ¦ ¦
+----------+-------+-------+-------+-------+------------+-----------+-----------+--------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦Voting ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦Only Index, ¦rights to ¦ ¦ ¦
¦IDEM ¦* ¦* ¦* ¦* ¦Debt and ¦elect an ¦1/2% of 1 ¦$0 ¦
¦ ¦ ¦ ¦ ¦ ¦Energy ¦IDEM ¦share ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦Market ¦liaison ¦ ¦ ¦
¦ ¦ ¦ ¦ ¦ ¦ ¦committee ¦ ¦ ¦
+----------+-------+-------+-------+-------+------------+-----------+-----------+--------¦
¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+----------------------------------------------------------------------------------------+
U.S.Tax Ct.,1996.Board of Trade of City of Chicago and Subsidiaries v. C.I.R106 T.C. No. 21, 106 T.C. 369, Tax Ct. Rep. (CCH) 51,366, Tax Ct. Rep. Dec. (RIA) 106.21
FN* These numbers are the totals of the combined GIM, COM and IDEM memberships on the dates indicated. There is no evidence in the record, other than records of the numbers of transfers during a year of each class of membership (see infra p. 6) of the specific numbers of each of these three classes of membership on any of the specified dates.FN** The Chicago Board of Option Exchange (CBOE) is an organization separate from the CBOT.
The bundles of rights inherent in CBOT memberships are divisible into two components: the ownership or equity component and the trading privilege component. Although all members of a class of membership have equal rights and privileges, approximately 35 to 40 percent of petitioner's members do not exercise their trading privileges. The owner of a membership is entitled to lease or delegate the trading privileges attributable to the membership. A member who leases or delegates trading privileges retains the voting and dissolution rights attributable to the membership. Included in the 35 to 40 percent of members who do not exercise their trading privileges are approximately 16 percent of petitioner's members who neither exercise their trading privileges nor lease or delegate them to third parties.
Petitioner's members may freely sell or transfer...
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