T.C. Memo. 2001-189
UNITED STATES TAX COURT
CHICAGO MERCANTILE EXCHANGE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 8984-95, 16082-95. Filed July 24, 2001.
Dennis E. Frisby, for petitioner.
Robert M. Ratchford and Dana E. Hundrieser, for respondent.
MEMORANDUM OPINION
LARO, Judge: This case was submitted to the Court without
trial under Rule 122. Respondent determined deficiencies of
$1,706,000, $2,725,835, and $444,347 in petitioner’s Federal
income tax for 1988, 1989, and 1990, respectively. We must
decide whether petitioner is entitled to investment tax credits
that it claims under the transition rules contained in section
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204(a)(7) of the Tax Reform Act of 1986 (TRA), Pub. L. 99-514,
100 Stat. 2146. We hold it is not. Unless otherwise indicated,
section references are to the Internal Revenue Code in effect for
the subject years. Rule references are to the Tax Court Rules of
Practice and Procedure.
Background
All facts were stipulated and are so found. The
stipulations of facts and the exhibits submitted therewith are
incorporated herein by this reference. Petitioner is a
corporation organized under the Illinois General Not for Profit
Corporation Act to operate a commodity exchange in Chicago,
Illinois. Its principal place of business is in Chicago, and it
did not own any stock in a corporation during the relevant years.
Petitioner primarily provides and regulates a commodity
exchange where futures contracts and options on futures contracts
are traded. Petitioner also establishes and enforces trading
rules, collects and disseminates information about its markets,
and provides the clearing mechanism for trades executed on its
commodity exchange. Petitioner has no shareholders but is owned
by its approximately 2,700 members, approximately 1/4 of which
are corporations and the remainder of whom are individuals. Its
member’s customers who have futures contracts and options traded
on its commodity exchange are located worldwide, and it receives
a significant portion of its income from foreign subscribers.
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In 1981, petitioner approved the construction of a new
complex/trading facility, the Chicago Mercantile Exchange Center
(CME Center), that would consist of a south tower, a north tower,
and two trading floors. On May 11, 1981, petitioner agreed to
lease 100,000 square feet on the upper lobby level and the entire
2nd through 6th floors of the south tower. This represented
approximately 10 percent of the total space available for lease
in the south tower when petitioner took possession of the
premises in November 1983. Petitioner’s total leased space
increased to approximately 17 percent of the south tower space
available for lease.
Also in 1981, petitioner became a 10-percent limited partner
in a partnership named CME Center Partnership (CCP);1 the other
partner (the general partner) was an entity that was unrelated to
petitioner. CCP was formed to construct, own, and operate the
CME Center’s south tower and to construct and sell its trading
facility. CCP owned indirectly the south tower, and a limited
partnership unrelated to petitioner owned indirectly the north
tower.
In addition to its corporate headquarters in Chicago,
petitioner maintained four other offices to promote the use and
trading of financial futures contracts. From 1979 through 1990,
1
Petitioner maintained that 10-percent interest until CCP
was dissolved in 1995.
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petitioner maintained the first office in London, England, with a
staff of 3 to 5 employees, including one of petitioner’s vice
presidents as managing director. From 1987 through 1990,
petitioner maintained the second office in Tokyo, Japan, with a
staff of 3 or 4 employees, including a managing director who
became a vice president of petitioner in 1988. Petitioner
maintained the other two offices in New York, New York, and
Washington, D.C., with a staff of 2 to 5 employees and 4 to 6
employees, respectively. The New York office also was managed by
one of petitioner’s vice presidents.
In December 1988, petitioner formed a second limited
partnership named P-M-T Limited Partnership (PMT). Petitioner is
a 10-percent general partner in PMT, and petitioner’s members and
clearing house members collectively own the remaining 90-percent
interest as limited partners. PMT was formed to create and
license a global electronic system for trading futures and
options on futures contracts during the non-trading hours of
petitioner’s commodity exchange.
Discussion
Before 1986, taxpayers who acquired certain machinery and
equipment for use in a trade or business were allowed an
investment tax credit against their income tax liability in an
amount equal to a percentage of the cost of the qualified
property. Secs. 38, 46, 48. TRA section 211, 100 Stat. 2166,
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generally repealed this credit for property placed in service
after December 31, 1985. One of the transitional rules to this
repeal is the world headquarters rule contained in TRA section
204(a). TRA section 204(a)(7) provides:
(7) Certain Leasehold Improvements.--The
amendments made by section 201 shall not apply to any
reasonable leasehold improvements, equipment and
furnishings placed in service by a lessee or its
affiliates if--
(A) the lessee or an affiliate is the
original lessee of each building in which
such property is to be used,
(B) such lessee is obligated to lease
the building under an agreement to lease
entered into before September 26, 1985, and
such property is provided for such building,
and
(C) such buildings are to serve as world
headquarters of the lessee and its
affiliates.
For purposes of this paragraph, a corporation is an
affiliate of another corporation if both corporations
are members of a controlled group of corporations
within the meaning of section 1563(a) of the Internal
Revenue Code of 1954 without regard to section
1563(b)(2) of such Code. Such lessee shall include a
securities firm that meets the requirements of
subparagraph (A), except the lessee is obligated to
lease the building under a lease entered into on June
18, 1986.
The requirements set forth in TRA section 204(a)(7) are
cumulative, and a taxpayer such as petitioner must prove all of
those requirements in order to receive the benefits of that
section. Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115
(1933); Payless Cashways v. Commissioner, 114 T.C. 72, 77 (2000).
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The fact that the parties submitted this case to the Court fully
stipulated does not change or otherwise lessen petitioner's
burden in this case. Rule 122(b); Kitch v. Commissioner, 104
T.C. 1, 8 (1995), affd. 103 F.3d 104 (10th Cir. 1996).
We focus on the text of TRA section 204(a)(7)(C); i.e., the
leased building described in section 204(a)(7) is “to serve as
world headquarters of the lessee and its affiliates.” TRA sec.
204(a)(7)(C). In accordance with this text, a corporate taxpayer
such as petitioner must establish that: (1) It has affiliates
and (2) the leased building serves as its world headquarters and
the world headquarters of its affiliates. Petitioner has not
established either of these requirements.
As to the first requirement, petitioner argues that its
members were its affiliates. We disagree. For purposes of this
case, we find illuminating United States v. Kjellstrom, 100 F.3d
482 (7th Cir. 1996), affg. 916 F. Supp. 902 (W.D. Wis. 1996), a
case decided by the court to which this case is appealable. In
Kjellstrom, a husband and wife and their four sons were the
shareholders of an S corporation named Wisco Industries, Inc.
(Wisco). The husband was Wisco’s chief executive officer, and
the four sons worked for Wisco in various officer or other
capacities. Wisco manufactured and sold metal stamping, and it
had its office and a separate assembly plant in Wisconsin and
another facility in Alabama.
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The taxpayers in United States v. Kjellstrom, supra, namely,
Wisco’s six shareholders, argued that Wisco qualified under TRA
section 204(a)(7). The Court of Appeals for the Seventh Circuit
disagreed. According to the court, Wisco had no affiliates. The
court also found that Wisco did not have a world headquarters.
Id. at 484-485.
We believe that the relationship of Wisco and its
shareholders is sufficiently similar to the relationship of
petitioner and its members to warrant application of United
States v. Kjellstrom, supra, to the facts herein. Petitioner and
Wisco are both corporations, and petitioner’s members and Wisco’s
shareholders are the owners of their respective corporations.
Whereas petitioner’s owners are called members and Wisco’s owners
are called shareholders, we conclude that this difference in
nomenclature is a mere distinction without a difference.
Petitioner’s members actively participated in its business, just
as Wisco’s shareholders did in Wisco’s business, and the members
and the shareholders were the heart and soul of the respective
businesses. Our review of the General Not For Profit Corporation
Act of the State of Illinois, in the light of the general
corporate scheme, also has uncovered no significant difference in
the rights, benefits, or obligations of a member vis-a-vis a
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shareholder. We conclude that petitioner’s members were not its
affiliates for purposes of TRA section 204(a)(7).2
Even if petitioner’s members were its affiliates for
purposes of TRA section 204(a)(7), petitioner would have failed
the second requirement; to wit, that the leased building serve as
the world headquarters of it and each of its affiliates.
Although the CME Center arguably served as petitioner’s “world
headquarters” in the sense that petitioner had offices and
employees located throughout the world, see Payless Cashways v.
Commissioner, supra, petitioner has not established that the CME
Center also served as the world headquarters of its approximately
2,700 members. Approximately 1/4 of those members are
corporations and the remainder are individuals. Under the
holding of the Court of Appeals for the Seventh Circuit in United
States v. Kjellstrom, supra, a corporation does not qualify for
the world headquarters exception merely by virtue of the fact
that the corporation is owned by individuals and has more than
one office.
2
Nor do we believe that petitioner was an affiliate of
either CCP or PMT for purposes of sec. 204(a)(7) of the TRA, Pub.
L. 99-514, 100 Stat. 2146. Petitioner looks solely to its 10-
percent ownership interest in each partnership and concludes from
this bare fact that it and the partnerships are affiliates. We
disagree. None of the shareholders in United States v.
Kjellstrom, supra, were considered by the Court of Appeals for
the Seventh Circuit to be Wisco’s affiliate, and the interest of
at least one of those shareholders was at least 16.6 percent.
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We hold that petitioner does not meet the requirements of
TRA section 204(a)(7). We have considered each of the parties’
arguments and have rejected those arguments not discussed herein
as without merit. Accordingly,
Decisions will be entered
under Rule 155.