Court Opinion

ID: 4385547
Source: CourtListenerOpinion
Date Created: 2019-04-10 05:01:32.233557+00
Date Added: 2024-06-11T14:50:24.876777
License: Public Domain

T.C. Memo. 2019-32

                        UNITED STATES TAX COURT

        BROKERTEC HOLDINGS, INC. f.k.a. ICAP US INVESTMENT
                    PARTNERSHIP, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent

      Docket No. 3573-17.                        Filed April 9, 2019.

      David B. Blair, Robert L. Willmore, and Teresa M. Abney, for petitioner.

      Frederick Petrino, for respondent.

            MEMORANDUM FINDINGS OF FACT AND OPINION

      JACOBS, Judge: Respondent determined deficiencies in petitioner’s

Federal income tax for tax years ended (TYE) March 31, 2010, 2011, 2012, and

2013 (years involved), as follows:
                                        -2-

[*2]           TYE Mar. 31                           Deficiency

                   2010                             $29,331,755
                   2011                               5,638,221
                   2012                               4,587,552
                   2013                               4,046,885

The deficiencies arise from members of petitioner’s consolidated group’s

(petitioner’s affiliates) participation in the State of New Jersey’s Economic

Development Program, wherein New Jersey made cash grants to petitioner’s

affiliates during the years involved. After concessions,1 the issue involved is

whether the cash grants are taxable, as respondent maintains, or nontaxable

contributions to capital, as petitioner maintains. Unless otherwise indicated, all

section references are to the Internal Revenue Code, as amended, in effect for the

years involved, and all amounts are rounded to the nearest dollar.

                               FINDINGS OF FACT

       Some of the facts have been stipulated and are so found. The stipulation of

facts and the exhibits attached thereto are incorporated herein by this reference.

       1
        The parties filed a Joint Stipulation of Settled Issues on August 2, 2017,
wherein they resolved the following two issues. (1) For TYE March 31, 2010,
respondent determined in the notice of deficiency that petitioner must include in
income a sec. 481(a) adjustment of $68,926,539 resulting from a change in method
of accounting for BEIP grants received by petitioner’s affiliates. The parties
agreed that no such adjustment would be included in petitioner’s gross income for
TYE March 31, 2010. (2) The parties agreed that petitioner would not be entitled
to a corresponding increase in the basis of certain stock.
                                         -3-

[*3] When petitioner filed its petition, its principal place of business and mailing

address were in Jersey City, New Jersey.2

I.    Petitioner

      During the years involved, petitioner was a financial services company,

specifically a voice and electronic broker-dealer. It was the parent of a

consolidated group that included ICAP, North America, Inc., formerly known as

Garban Intercapital North America, Inc. (Garban), and First Brokers Holdings

Inc., formerly known as First Brokers Securities, Inc. (First Brokers). Petitioner,

under its former name ICAP US Investment Partnership, filed a Form 1120, US

Corporation Income Tax Return, for each of the years involved for the

consolidated group.3 On October 2, 2014, petitioner converted to a Delaware

corporation as a result of a reorganization and changed its name to BrokerTec

Holdings, Inc.

      2
       Petitioner is a corporation organized and existing under the laws of the
State of Delaware.
      3
       The record does not reveal whether petitioner had elected, under the check-
the-box rules of secs. 301.7701-1, 301.7701-2, and 301.7701-3, Proced. & Admin.
Regs., to be treated as an association taxable as a corporation. Respondent does
not dispute that petitioner was entitled to file Form 1120 for the consolidated
group for the years involved.
                                        -4-

[*4] Garban was an interdealer-broker. It acted as an intermediary, arranging

transactions in the financial services industry, typically between banks and

investment banks. Garban arranged transactions in a wide array of products,

including securities, foreign exchange, and energy. Garban provided its clients the

opportunity to trade anonymously, through a neutral party, at the most attractive

prices available.

      First Brokers also was an interdealer-broker. It specialized in corporate

debt securities, high-yield securities, mortgage-backed securities, high-grade

industry securities, and various other debt-driven markets. Garban acquired First

Brokers on or about April 30, 2002.

II.   The Attack of September 11, 2001

      On September 11, 2001, Garban had offices in both towers of the World

Trade Center in New York City wherein it employed 750 brokers and other

employees. Each office was specially outfitted for Garban’s business, having a

large, open space for trading areas. The trading areas had false floors to allow

Garban to run lines from the telephone rooms and computer rooms to each

broker’s desk. Both of Garban’s offices were destroyed in the terrorist attack of

September 11, 2001. The day after the attack, Garban’s managers met in
                                        -5-

[*5] borrowed office space. Donald Marshall, one of Garban’s directors, was

tasked with quickly finding new temporary and permanent office space.

       On September 11, 2001, First Brokers employed approximately 80

individuals at its office near the World Trade Center. Although First Brokers’

office was not directly damaged by the attack, the destruction in the area rendered

it nearly impossible for First Brokers employees to return to the firm’s office to

conduct business. Consequently, First Brokers’ management concluded that the

firm had to search for permanent office space elsewhere in New York or in New

Jersey.

III.   Garban’s Search for a New Office

       Garban secured temporary office space in midtown Manhattan, but it was

not adequate to allow the company to fully resume business. Mr. Marshall’s

search for a permanent office was restricted because Garban needed a large, open

space to build a trading room with a false floor to support the expansive telephone

and computer networks required by the business. No preexisting space met

Garban’s needs; therefore Mr. Marshall sought new construction that could build

the office to its specifications. The firm budgeted $50 to $60 million for

construction purposes.
                                        -6-

[*6] Lower Manhattan was ruled out as a location because (1) a number of

Garban’s employees did not want to return to the vicinity of the World Trade

Center and (2) the State of New York was unable to offer financial assistance. On

the other hand, when Mr. Marshall contacted New Jersey, he learned that New

Jersey had a program, the New Jersey Business Employment Incentive Program

(BEIP), which offered financial incentives to attract businesses to move to the

State. The New Jersey Economic Development Authority (EDA) administered the

BEIP.

IV.     New Jersey’s Financial Assistance

        The EDA is an independent agency of the State of New Jersey. Its stated

mission is to develop New Jersey’s economy and revitalize its cities by inducing

businesses and not-for-profit organizations to move to or remain in New Jersey by

providing financial and technical assistance. During the years involved the EDA’s

staff included (1) a sales force that promoted the EDA’s programs to businesses;

(2) an underwriting group that determined whether the proposed projects qualified

for the EDA’s program offerings, which included cash grants, loans, loan

guaranties, and bond deals; and (3) a portfolio services group that worked with the

recipient through the life of the incentive project. Overseeing the staff was the

EDA board. The EDA board was charged by the BEIP’s enabling law to review
                                         -7-

[*7] and approve or disapprove financial assistance under the BEIP to entities

recommended by the staff. The EDA board comprised individuals from both the

State government and private industry, including the financial industry.

Overseeing the program was the Governor of New Jersey, who had unrestricted

veto authority over the action of the board.

      During the years involved, the EDA made cash grants under the BEIP.4

Enacted as part of the Business Employment Incentive Program Act, Assembly

No. 1415 (N.J. introduced Jan. 29, 1996) (enabling law), the BEIP was designed

“[t]o grow New Jersey’s economy and revitalize its cities through providing

financial and technical assistance to businesses, not-for-profits, and the local

government”. Specifically, the EDA used BEIP grants to induce companies to

locate in New Jersey.

      It was intended that a business attracted to New Jersey by a BEIP grant

would operate as an anchor for a neighborhood. This, in turn, would encourage

other large employers to move into the neighborhood, as well as attract other

businesses, such as restaurants and shops, that would be patronized by the BEIP

grant recipient’s employees. In addition to attracting businesses to New Jersey,

the State had compiled a list of municipalities, called “urban-aid municipalities”,

      4
          The BEIP is no longer used by the State of New Jersey.
                                         -8-

[*8] that demonstrated “certain demographic metrics that would show that there’s

been a lack of investment over time.” The State sought to encourage businesses to

move their operations to those urban-aid municipalities. Certain businesses, such

as financial services, were referred to as “target industries”. The State provided

larger BEIP grants to targeted industries willing to locate their business facilities

in urban-aid municipalities.

      The BEIP was a discretionary aid program. An applicant seeking to

participate in the program would not automatically receive a grant after filing an

application. Rather, the EDA board made a determination as to whether the

applicant would receive an award, and in what amount.5

      New Jersey’s enabling law directed that the award of BEIP grants be based

on criteria developed by the EDA after taking into consideration (1) the number of

eligible employees at the project site, (2) the expected duration of these positions,

(3) the type of contribution the business could make to the long-term growth of the

New Jersey economy, (4) the amount of other financial assistance the business

would receive from the State for the project, and (5) the total dollar investment the

business was making in the project. Applicants were required to relocate or

      5
       In contrast, in an entitlement program, or an as-of-right program, if the
applicant meets the stated criteria, it automatically receives the incentive or grant
upon filing the proper forms. No review by a board or commission occurs.
                                         -9-

[*9] expand a project in New Jersey and maintain a minimum employment level at

the project site. Applicants were also required to remain at the project site for a

period of at least 150% of the period over which the BEIP grant was paid. As cash

disbursements were usually paid over a period of 10 years, the grant recipient was

generally obligated to remain at the project site for 15 years. Grants were paid

after the creation of the jobs in New Jersey, beginning after the grant recipient had

operated under its agreement with the EDA for at least one year, and were based

on remitted New Jersey State income tax withheld from the recipients’ employees’

wages. The amount of the grant awarded by the EDA was 30% to 80% of the

recipient’s employees’ State income tax withholdings. The EDA had discretion in

determining this amount. 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.

V.    The BEIP Grant Applications

      A.       Garban’s BEIP Application Process

      Garban engaged Stadtmauer, Bailkin, Biggins, LLC (SBB), a Trenton, New

Jersey, law firm, to assist it in applying for BEIP grants.6 SBB Attorneys Jay

      6
          The law firm is now known as Biggins Lacy Shapiro & Co.
                                       - 10 -

[*10] Biggins, Joe Lacy, and Laura Gitlin guided Garban through each step of the

BEIP grant application process.

      Mr. Lacy drafted, and on September 28, 2001, submitted, Garban’s BEIP

application to the EDA. The goal of the application was to highlight each aspect

of Garban’s business that would make it attractive to the EDA. Garban’s

application emphasized the fact that Garban was a financial services company (one

of the EDA’s targeted industries) and that Garban intended to house its facilities in

Jersey City, New Jersey (one of the EDA’s targeted areas).7 In the application’s

cover letter, Garban stated that its move to New Jersey would involve the

following expenditures:

      Real Estate: The Company intends to lease an existing facility able to
      accommodate certain of the Company’s operations. The Company
      requires approximately 140,000 to 150,000 square feet. The space
      will require substantial tenant improvements estimated at $45 million.

      Employment/Payroll: The project will result in the relocation of
      approximately 350 new high quality jobs to the State of New Jersey.
      The new employees will have a minimum average salary of
      approximately $125,000, resulting in an estimated annual payroll of
      approximately $43 million.

      7
       The EDA allowed companies to receive a conditional approval with a “to
be determined” project site. However, the applicant was still required to inform
the EDA as to the actual project site in order to receive final approval.
                                                - 11 -

[*11] Technology and FF&E:[8] The Company anticipates an initial capital
      investment in technology and FF&E in [sic] of approximately $24.7
      million.

       The application letter highlighted that Garban’s heavy use of technology

would require it to make constant capital expenditures to keep the equipment up to

date. The letter stated that the build-out of the office space would create local

construction jobs and generate the sale of equipment and material as well as

capital expenditures necessary to construct office space. The application letter

also noted that the presence of the large number of new well-paid employees

would encourage other businesses to create jobs to cater to Garban’s employees

and that the presence of a financial services firm such as Garban would make the

Jersey City area more attractive to other high-end businesses.

       Although the EDA staff had discretion in calculating the grant amount, the

EDA staff used a standard “Business Employment Incentive Guidelines” form to

score the project in determining the grant percentage they would recommend to

the EDA board to consider. At the time Garban applied for a BEIP grant, the

guidelines were as follows:

PROJECT LOCATION

2=Targeted (defined as urban-aid municipalities only)
0=Non-targeted

       8
           The term “FF&E” is not defined in the record.
                                                - 12 -

[*12] CREATION OF ELIGIBLE NEW JOBS
If in targeted (urban-aid) municipality: If in a non-targeted (non urban-aid) municipality
4=200+                                            4=250+
3=126-199                                         3=151-249
2=76-125                                          2=126-150
1=25-75                                           1=75-125
[Note: Minimum of 25 jobs in an urban-aid municipality or 75 jobs in a non urban-aid municipality]

JOBS AT RISK

3=501+
2=210 to 500
1=25 to 200
0=1 to 24

INDUSTRY TYPE

2=Targeted
0=Non-Targeted

LEVERAGE OF PRIVATE INVESTMENT TO STATE INVESTMENT/EXPOSURE

2=3 to 1 and up
1=2 to 1
0=1 to 1

PRIVATE INVESTMENT (DEBT AND EQUITY) BY THE APPLICANT IN PROJECT

3=51% - 100%
2= 31% - 50%
1= 0% - 30%

AVERAGE WAGES OF ELIGIBLE NEW EMPLOYEES

3=$50,001+
2=$30,001 - $50,000
1=$18,001 - $30,000
0=$0 - $18,000

TOTAL POSSIBLE SCORE = 19 (maximum grant = 80%)
SCORE      GRANT        SCORE         GRANT                    BONUS INCREASES IN BEIP
16+        80%          10            50%                      GRANT PERCENTAGE[9]

       9
           Bonus increases could not result in an increase above the maximum 80%
                                                                         (continued...)
                                              - 13 -

[*13] 15          75%              9          45%
14                70%              8          40%              10%=If project is located in a UCC
                                                                Municipality
13                65%              7          35%              10%=If recycling a “Brownfield” site
12                60%              0-6        30%              10%=If job creation is 500 or more
11                55%

URBAN COORDINATING COUNCIL MUNICIPALITIES (new additions to list in “bold”):

Asbury Park              Neptune Township              Plainfield
Camden                   Newark                        Pleasantville
Elizabeth                New Brunswick/Franklin        Trenton
Jersey City              Perth Amboy                   Vineland
Long Branch

         Relying on the guidelines, the EDA Staff gave Garban the following scores:

                        Criteria                                       Score

                  Location: Jersey City                                  2
                  Job creation: 250                                      4
                  Jobs at risk: 0                                        0
                  Industry: financial services                           2
                  Leverage: UEZ tax exemption                            3
                  Equity (%): 100%                                       3
                  Wages: $125,000                                        3

                  Total score: 17 = 80%
                  Recommended term: 10 years
                  Estimated total project costs = $69,700,000

The EDA staff determined Garban was financially viable and that the BEIP grant

would be a material factor in Garban’s decision to locate in New Jersey. On

         9
             (...continued)
grant.
                                       - 14 -

[*14] October 11, 2001, the EDA staff recommended to the EDA board that

Garban receive an 80% grant for a period of 10 years.

      On November 8, 2001, the EDA sent a letter to Garban informing the

company that the EDA board had approved Garban’s application and offered the

company a BEIP grant for a 10-year period at the 80% level. Garban’s

representatives and the EDA then began negotiating a final agreement. The EDA

relied on a standard agreement, drafted by the New Jersey Office of the Attorney

General. Garban sought to modify that section of the agreement governing

remedies available to the State should Garban default on its obligations. The EDA

agreed to Garban’s modification request.

      Garban also sought several changes to the commitments it made on its BEIP

application after receiving the November 8, 2001, approval from the EDA board.

First, Garban sought to change the location of its office. In its application Garban

stated that the proposed project would be located at 545 Washington Boulevard, or

another facility within New Jersey to be determined, in Jersey City, New Jersey.

Subsequently, Garban decided to place its office in the Harborside Financial

Center in Jersey City. The EDA approved this request, noting that the move did

not affect Garban’s overall score because the project continued to be located in a

targeted location of Jersey City. In order to increase the amount of the BEIP grant,
                                        - 15 -

[*15] Garban sought to modify its employment commitment to increase the

number of employees located in New Jersey. In its application, Garban had

committed to hiring 250 employees. Garban chose this figure because of the

uncertainty in the business climate, i.e., in the aftermath of the September 11

terrorist attack the company was unsure as to the number of its employees willing

to continue to work. Because Garban would be subject to penalties under the

BEIP agreement if the company did not meet the employment goal, the company

made a conservative commitment. However, after receiving approval from the

EDA board, Garban had a higher level of confidence with respect to the business

climate and sought to increase its employment commitment to 640 employees.

Garban further sought to adjust its estimated average salary to $235,000 per

employee.10 On April 2, 2002, the EDA informed Garban that its requests had

been approved and Garban’s BEIP grant, originally estimated to be $8,300,000

paid over 10 years, was increased to an estimated $50,967,000 over 10 years.

      With these changes approved, Garban’s chief operating officer, James

Nance, signed the BEIP agreement on April 2, 2002. The BEIP agreement

      10
       Politics was also a factor in making this change. Mr. Marshall was
informed that the then-incoming Governor was considering capping BEIP grants
because of budget concerns; thus, the change was requested before the change in
administration.
                                        - 16 -

[*16] detailed Garban’s and the EDA’s commitments, rights, and responsibilities.

Garban committed to employing 640 full-time workers at the Harborside Financial

Center location for 15 years. Garban agreed that it could not move its New Jersey

office during that period and that it would not move its office to another State

without the express written approval of the EDA.

      Upon signing the BEIP agreement, Garban prepared to move to the

Harborside Financial Center in Jersey City. Construction of the Harborside

Financial Center began in the fall of 2001. In April 2002 Garban was given access

to the construction site to customize its office space to the standard of the World

Trade Center facilities. Garban installed an electric generator on the roof of the

building as a power backup. In a memorandum to its board of directors Garban

stated that, with respect to the Harborside Financial Center, “US management have

indicated that anticipated expenditure on the US build out is likely to be in the

region of US$42m (some US$38m has been committed). After taking account of a

US$6m landlord lease contribution, net cash outflows were predicted to be $36m.”

On November 15, 2002, Garban achieved the “minimum eligibility threshold”,

qualifying it to receive BEIP grant payments.

      Garban first received its BEIP grants in May 2004 after Garban made the

capital outlays necessary to build its office. As noted supra p. 9, the grant
                                         - 17 -

[*17] payments were to be made from the State’s general appropriations; however,

beginning in 2003, the EDA was authorized to issue bonds to fund the BEIP in

years in which a State appropriation was insufficient to pay grants. Because the

State legislature failed to appropriate sufficient funds in some years, Garban did

not receive all or any of its BEIP grant payments from State appropriations.

Garban received BEIP payments as follows:

               TYE Mar. 31                             Amount

                  2005                               $9,764,431
                  2006                               13,402,706
                  2007                               16,911,002
                  2008                                  -0-
                  2009                               18,781,003
                  2010                               21,900,336
                  2011                                  -0-
                  2012                               24,290,706
                  2013                               21,980,218
                  2014                               20,419,627

      Garban received a total of $147,450,03011 from the BEIP. The State of New

Jersey placed no restrictions on Garban’s use of this money. The BEIP grant

stabilized Garban’s financial position. Inasmuch as Garban was financially able to

pay for the improvements to its Harborside Financial Center office without the

grant moneys, Garban (as well as First Brokers, see infra p. 21) used all of its

      11
           This total represents the rounded sum of the BEIP grants.
                                       - 18 -

[*18] BEIP proceeds to acquire all of the stock of ICAP Holdings (USA), Inc.

This acquisition was part of a series of transactions designed to expand

petitioner’s business into other trading markets.

      B.     First Brokers’ BEIP Application Process

      After the September 11, 2001, attack First Brokers worked out of borrowed

office space. Requiring a permanent solution, First Brokers engaged SBB on

October 19, 2001, and filed a BEIP application with the EDA on October 23,

2001. In its application letter, First Brokers highlighted the following

expenditures:

      Real Estate: The Company intends to lease approximately 17,000
      square feet within an existing facility which is able to satisfy the
      company’s cost and facility/technology requirements. The space will
      require tenant improvements estimated at $2 million.

      Employment/Payroll: The project will result in the relocation of
      approximately 80 new high quality jobs to the State of New Jersey.
      The new employees will have a minimum average salary of
      approximately $218,000, resulting in an estimated annual payroll of
      approximately $17.44 million.

      Technology and FF&E: The Company anticipates an initial capital
      investment in technology and FF&E of approximately $500,000.

First Brokers’ application highlighted attributes similar to those highlighted by

Garban in its application and stated that First Brokers intended to move to a

facility in Hoboken, New Jersey.
                                       - 19 -

[*19] The EDA staff determined First Brokers was financially viable and found

that the BEIP grant would be a material factor in First Brokers’ decision to locate

in New Jersey. Relying on the same guidelines used for Garban, the EDA staff

gave First Brokers the following scores:

              Criteria                                    Score

      Location: Hoboken-targeted                            2
      Job creation: 80                                      2
      Jobs at risk: 0                                       0
      Industry: Financial services-targeted                 2
      Leverage: All private                                 2
      Equity (%): 100%                                      3
      Wages: $218,000 average                               3

      Total score: 14 = 70%
      Recommended term: 10 years
      Estimated total project costs = $2,500,000

The EDA board considered and approved a BEIP grant for First Brokers on

November 13, 2001.

      Before any other action was taken, Garban acquired First Brokers on or

about April 30, 2002. On August 13, 2002, Garban sent a letter to the EDA

requesting that the agency approve Garban’s acquisition of First Brokers and

approve changing First Brokers’ project location from Hoboken to Jersey City.

First Brokers informed the EDA that upon the acquisition (1) First Brokers would

retain its corporate existence and be a wholly owned subsidiary of Garban and
                                       - 20 -

[*20] (2) First Brokers would move into Garban’s Harborside Financial Center

office. Garban requested that the EDA incorporate First Brokers into Garban’s

agreement with the EDA. To that end, Garban requested that its job commitment

under the agreement be increased from 640 to 720 and that the average wages in

the BEIP agreement be increased to $260,000. Upon acceptance of these

modifications to the Garban BEIP agreement, First Brokers stated that it intended

to withdraw its BEIP application.

      The EDA partially approved Garban’s request: First Brokers was permitted

to change its project site from Hoboken to the Harborside Financial Center. But

the EDA declined to allow Garban and First Brokers to combine their grants as the

grants involved different percentages (i.e., 80% versus 70%) and different start

dates. On August 28, 2002, First Brokers and the EDA executed the BEIP

agreement.

      First Brokers received BEIP grants as follows:

             TYE Mar. 31                                Amount

                2005                                   $1,972,393
                2006                                    3,009,710
                2007                                    2,818,960
                2008                                    2,223,619
                2009                                       -0-
                2010                                    2,353,807
                2011                                    3,285,404
                                         - 21 -

[*21]            2012                                        -0-
                 2013                                     3,622,072
                 2014                                     3,044,380

As noted supra pp. 17-18, these amounts were used to acquire all of the stock of

ICAP Holdings (USA), Inc.

VI.     Petitioner’s Tax Returns

        Petitioner timely filed its Federal income tax returns for the years involved.

Petitioner excluded the following amounts of BEIP payments from those returns,

asserting they are nontaxable, nonshareholder contributions to capital:

              TYE Mar. 31                             Amount excluded

                 2010                                    $14,878,473
                 2011                                     16,109,204
                 2012                                      13,107,291
                 2013                                      11,562,529

                                       OPINION

I.      Introduction

        Gross income generally means all income from whatever source derived.

See sec. 61; sec. 1.61-1(a), Income Tax Regs. Because of the sweeping scope of

section 61, the Supreme Court has held that exclusions from income must be

narrowly construed. Commissioner v. Schleier, 515 U.S. 323, 328 (1995).
                                        - 22 -

[*22] Petitioner argues that it falls under one such exclusion: section 118(a),12

which provides that, in general, “[i]n the case of a corporation, gross income does

not include any contribution to the capital of the taxpayer.” As relevant in this

matter, section 1.118-1, Income Tax Regs., provides:

      In 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. * * * Section 118 also applies to
      contributions to capital made by persons other than shareholders. For
      example, 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, or for the purpose of enabling the
      corporation to expand its operating facilities. However, the exclusion
      does not apply to any money or property transferred to the
      corporation in consideration for goods or services rendered, or to
      subsidies paid for the purpose of inducing the taxpayer to limit
      production. * * *

      Section 118 was originally enacted as part of the Internal Revenue Code of

1954, ch. 736, 68A Stat. at 39, without counterpart in earlier versions of the Code.

While the section does not contain a definition of “contribution to the capital”, the

      12
        Congress amended sec. 118(b) to provide that the term “contribution to
capital” does not include “any contribution by any governmental entity or civic
group (other than a contribution made by a shareholder as such)”, effective as of
the date of enactment of the statute, December 22, 2017, except that contributions
made by a governmental entity pursuant to a master development plan approved
before the enactment date are not affected by the statute. Tax Cuts and Jobs Act of
2017, Pub. L. No. 115-97, sec. 13312(a)(1)-(3), 131 Stat. at 2132-2133.
                                        - 23 -

[*23] Senate Finance Committee report, S. Rept. No. 83-1622, at 18 (1954), 1954

U.S.C.C.A.N. 4621, 4648, stated:

      The House and your committee’s bill provide 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
      decisions on the subject. It deals with cases where a contribution is
      made to a corporation by a governmental unit, chamber of commerce,
      or other association of individuals having no proprietary interest in
      the corporation. In many such cases because the contributor expects
      to derive indirect benefits, the contribution cannot be called a gift; yet
      the anticipated future benefits may also be so intangible as to not
      warrant treating the contribution as a payment for future services.

We deem reviewing the judicial decisions as to the meaning of the term

“contribution to the capital of the taxpayer” within the purview of section 118 to

be instructive, and we now do so.

      In Edwards v. Cuba R.R. Co., 268 U.S. 628 (1925), the Supreme Court

articulated a functional use test with respect to the characterization of

contributions to a corporation that operated a railroad in Cuba. The Cuban

Government paid the taxpayer subsidies for the construction and maintenance of

certain railroad lines. Noting that the payments were not given as gratuities but

were provided to induce the construction and operation of railroads to serve the

public at large, the Supreme Court held that the payments were not “to be used for

the payment of dividends, interest or anything else properly chargeable or payable
                                        - 24 -

[*24] out of earnings or income”, were “not made for services rendered or to be

rendered”, and “were not profits or gains from the use or operation of the

railroad”. Id. at 632. Consequently, the Court held that the payments did “not

constitute income within the meaning of the Sixteenth Amendment.” Id. at 633.

      In contrast, in Tex. & Pac. Ry. Co. v. United States, 286 U.S. 285 (1932),

the Supreme Court concluded that income subsidies paid to the taxpayer railroad

were taxable. During World War I the Federal Government took control of the

railways. Upon relinquishing control, railroads were guaranteed a “minimum

operating income.” Id. at 288. If a railroad’s income fell below a fixed minimum,

the Government was obliged to make up the deficiency; if the railroad’s income

exceeded a certain amount, the railroad was bound to repay the excess payment to

the Federal Treasury. Id. at 289. The Supreme Court distinguished Cuba R.R.

Co., stating that in the earlier case

      the payments were conditioned upon construction work performed.
      Here, they 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 289-290.]
                                       - 25 -

[*25] Subsequently, in Detroit Edison Co. v. Commissioner, 319 U.S. 98, 99

(1943), the Supreme Court ruled on whether payments to the taxpayer telephone

company for the “estimated cost of the necessary construction” with regard to

extending “facilities” to service those customers were included in the taxpayer’s

basis for purposes of depreciation. The taxpayer added the disputed payments,

when received, to its surplus, and “[t]hey have not been taxed as income,

presumably because it has been thought to be precluded by this Court’s decisions

in Edwards v. Cuba R. Co.”. Id. at 103. Focusing on the motivation of the

contributors of the funds, the Supreme Court reasoned that “[i]t is enough to say

that it overtaxes imagination to regard the farmers and other customers who

furnished these funds as makers either of donations or contributions to the

Company.” Id. at 102. As a consequence of its finding that the payments were not

capital contributions but rather the “price of service”, the Supreme Court

concluded that in calculating cost basis for depreciation, the customer payments

could not be considered. Id. at 103.

      In 1949 the Court of Appeals for the Third Circuit, where an appeal in this

matter would ordinarily lie, decided Commissioner v. McKay Prods. Corp., 178
F.2d 639 (3d Cir. 1949), rev’g 9 T.C. 1082 (1947), a case similar to the case now

before us.
                                         - 26 -

[*26]          People in the community of Sayre, Pennsylvania, sought during
        the depression to bring industries to town for the obvious purpose of
        increasing local payrolls and thus to promote general prosperity. To
        this end, a group of citizens organized Valley Industries, Inc., a
        Pennsylvania non-profit corporation, and subscribed a sum of money
        to it. A company which is in fact the taxpayer’s predecessor, but will
        be referred to as the taxpayer moved to town and received a plant for
        the conduct of its business. * * * [Id. at 640.]

The terms of the agreement involved in McKay Prods. Corp. were that Valley

Industries would purchase and improve a vacant factory building to be occupied

by the taxpayer. The property would be deeded to the taxpayer once it had moved

to Sayre and had paid $5 million in payroll, which it was estimated would take

approximately 10 years. The payroll condition was later waived and the property

transferred to the taxpayer after the taxpayer had advanced money to Valley

Industries to enable it to meet its obligations. Id. n.2.

        The Court of Appeals addressed the issue of whether a corporation could

receive a contribution of capital from a nonshareholder. The court held that it

could and that the transfer of property by a nonshareholder was a capital

contribution, i.e., that Valley Industries contributed to the taxpayer’s working

capital. Id. at 643. The court stated that “‘[w]orking capital’ in common parlance

means the value of that with which the enterprise carries on its activity. How

much stake is in the game? What is the amount of money which is in the
                                         - 27 -

[*27] business?” Commissioner v. McKay Products Corp., 178 F.2d at 642. The

court found that the transfer was not a payment to the taxpayer for services. While

the taxpayer received consideration for the move to Sayre, i.e., the transfer of the

property, the mere presence of consideration did not preclude the treatment of the

contribution as a gift to the taxpayer. Id. at 643.

      The ruling by the Court of Appeals for the Third Circuit created a split with

the Court of Appeals for the Eighth Circuit, which had come to the opposite

conclusion with respect to contributions of property by nonshareholders in

Commissioner v. Brown Shoe Co., 175 F.2d 305 (8th Cir. 1949), rev’g 10 T.C.
291 (1948), rev’d, 339 U.S. 583 (1950).13 To resolve this split, the Supreme Court

granted certiorari in Brown Shoe Co.

      In Brown Shoe Co. v. Commissioner, 339 U.S. at 584, the taxpayer received

cash and other property from community groups in several different municipalities

to induce the taxpayer to locate or expand its factory operations within those

municipalities. The taxpayer entered into three main categories of agreements

      13
        The Court of Appeals for the Eighth Circuit had reversed the decision of
this Court, wherein we held that the community group contributions of property
and money were not “contribution[s] to capital” included in the taxpayer’s
computation of its equity invested capital under former sec. 718 but that property
acquired through the contributions could be depreciated as assets that the taxpayer
purchased directly.
                                       - 28 -

[*28] with the community groups: (1) build or enlarge a factory and operate it for

at least 10 years with a minimum payroll requirement, (2) enlarge a factory with a

stipulated minimum addition to personnel for 10 years, and (3) construct an

addition to an existing factory. Id. at 586. The Supreme Court noted that “[n]o

restriction was imposed in any instance as to the use which petitioner might make

of the property contributed or acquired with cash, or of the proceeds if the

property should be disposed of, after expiration of the required period of

operation.” Id. at 587.

      The cash payments the taxpayer received from the several community

groups

      were not earmarked for, or held intact and applied against, the plant
      acquisitions in the respective communities but were deposited in * * *
      [the taxpayer’s] general bank account from which were paid general
      operating expenses and the cost of all assets acquired, including
      factory buildings and equipment in the towns involved. The cash
      payments were debited to cash account on the assets side of * * * [the
      taxpayer’s] ledger and were credited to earned surplus either upon
      receipt or after having first been assigned to contributed surplus. * * *
      [Id.]

      Relying on Detroit Edison Co., the Internal Revenue Service (IRS) argued

that the taxpayer could not depreciate the property contributed or the property

acquired with the cash received from the community groups. See Brown Shoe Co.
                                       - 29 -

[*29] v. Commissioner, 339 U.S. at 584-585. The Supreme Court rejected the

IRS’ position, concluding that

      the assets transferred to petitioner by the community groups
      represented “contributions to capital” within the meaning of
      § 113(a)(8)(B) and required no reduction in the depreciation basis of
      the properties acquired. The values which the taxpayer received were
      additions to “capital” as that term has commonly been understood in
      both business and accounting practice; conformably with this usage
      the pertinent Treasury Regulations have consistently recognized that
      contributions to capital may originate with persons having no
      proprietary interest in the business. That this interpretation is in
      harmony with broad congressional policy as to depreciation
      deductions was emphasized by the Third Circuit when considering
      the similar situation presented in Commissioner v. McKay Products
      Corp., supra, 178 F.2d at 643 * * * [Id. at 589-590; fn. refs. omitted.]

The Supreme Court distinguished Detroit Edison Co., stating:

      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. [Id. at 591; fn. ref. omitted.]

      In Teleserv. Co. of Wyo. Valley v. Commissioner, 27 T.C. 722 (1957),

aff’d, 254 F.2d 105 (3d Cir. 1958), a reviewed Opinion of this Court, we held that

payments received from customers to finance the construction of a television

antenna system were payment for services and not contributions to capital. The
                                       - 30 -

[*30] taxpayer’s customers were required to make this contribution to be eligible

to receive television service, and the customer was required to make monthly

payments to receive the signals. Id. at 725. We found that these facts made the

case similar to Detroit Edison Co. We stated: “[T]here was nothing altruistic in

the motive which prompted the petitioner’s prospective customers to finance the

television antenna system; they wanted television service and they were willing to

pay for it.” Id. at 730.

      In contrast, in Federated Dep’t Stores, Inc. v. Commissioner, 426 F.2d 417

(6th Cir. 1970), aff’g 51 T.C. 500 (1968), the Court of Appeals for the Sixth

Circuit affirmed a decision of this Court holding that the contribution of land and

cash to the taxpayer was a capital contribution under section 118. In that matter, a

real estate developer induced the taxpayer to construct and operate a department

store in a shopping center it was developing by conveying 10 acres in the

development to the taxpayer and paying the taxpayer $200,000 per year for 10

years. Id. at 420.

      In affirming the Tax Court, the Court of Appeals acknowledged that these

inducements were made with the expectation that the department store would

promote the real estate developer’s financial interests. However, the Court of

Appeals concluded that “this expectation was clearly of such a speculative nature
                                       - 31 -

[*31] that any benefit necessarily must be regarded as indirect. In all the cases

relied upon by the government, the contributions had a reasonable nexus with the

services which it was the business of the recipient corporation to provide. Such is

not this case.” Id. at 421. Thus “any benefit expected to be derived by

Sharpstown [the real estate developer] was so intangible as not to warrant treating

its contribution as a payment to taxpayer for future services.” Id.; see also May

Dep’t Stores Co. v. Commissioner, T.C. Memo. 1974-253 (real estate developer’s

contribution of land to taxpayer in exchange for building and operating store for

25 years was a capital contribution), aff’d, 519 F.2d 1154 (8th Cir. 1975).

      Three years later, the Supreme Court decided United States v. Chi.,

Burlington & Quincy R. Co., 412 U.S. 401 (1973), wherein several States required

the taxpayer to construct numerous railroad safety improvements. The taxpayer

entered into a series of contracts in which States would fund some or all of the

costs incurred. The States were later reimbursed for these costs by the Federal

Government. Id. at 402. The taxpayer sought to depreciate certain of the

improvements paid for before June 22, 1954, from the public funds. See id. at

402-403.

      The Supreme Court held that these subsidies were not contributions to

capital within the context of former section 118(a)(8), and thus the taxpayer had a
                                        - 32 -

[*32] zero basis in the assets constructed with the subsidies. In reaching its

decision, the Supreme Court focused on the intent of the donors. The Supreme

Court reviewed its reasoning in Detroit Edison Co. and Brown Shoe Co. and those

cases’ differing holdings. “If at first glance Detroit Edison and Brown Shoe seem

somewhat inconsistent, they may be reconciled, and indeed must be, on the ground

that in Detroit Edison, the transferor intended no contribution to the transferee’s

capital, whereas in Brown Shoe the Transferor did have that intent.” Id. at 412.

Further, the Supreme Court stated:

             It seems fair to say that neither in Detroit Edison nor in Brown
      Shoe did the Court focus upon the use to which the assets transferred
      were applied, or upon the economic and business consequences for
      the transferee corporation. Instead, the Court stressed the intent or
      motive of the transferor and determined the tax character of the
      transaction by that intent or motive. Thus, the 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; fn. ref. omitted.]

      The intent of the States providing funding for the safety improvements was

not immediately obvious. To discern the donors’ intent, the Supreme Court listed

the following characteristics of a nonshareholder capital contribution:

      [1] It certainly must become a permanent part of the transferee’s
      working capital structure. [2] It may not be compensation, such as a
      direct payment for a specific, quantifiable service provided for the
                                        - 33 -

[*33] transferor by the transferee. [3] It must be bargained for. [4] The
      asset transferred foreseeably must result in benefit to the transferee in
      an amount commensurate with its value. And [5] 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. [Id. at 413.]

See S. Pac. Transp. Co. v. Commissioner, 75 T.C. 497, 758-759 (1980),

supplemented by 82 T.C. 122 (1984). This was not a new test, but rather was a

distillation of characteristics examined in Detroit Edison Co. and Brown Shoe Co.

      In rejecting the taxpayer’s contention, the Supreme Court held that the third

and fourth characteristics were not satisfied. With respect to the third

characteristic there was no real bargaining between the taxpayer and the States; it

was take-it-or-leave-it: “[E]xcept for the orders by state commissions and the

governmental subsidies, the facilities most likely would not have been constructed

at all”. Chi., Burlington & Quincy R. Co., 412 U.S. at 414. With respect to the

fourth characteristic, “[a]ny incremental economic benefit to CB&Q was marginal

* * *. The facilities were peripheral to its business and did not materially

contribute to the production of further income by the railroad. * * * [A]nd the need

of the railroad for capital funds was not considered”. Id. (fn. ref. omitted).

      It should be emphasized that Chi., Burlington & Quincy R. Co., did not

overrule Brown Shoe Co. or Detroit Edison Co. Moreover, the case did not

establish a strict formula by which governmental assistance should be judged.
                                         - 34 -

[*34] Rather, it established a way to infer the intent of the donor when the facts do

not make it clear. As we observed in State Farm Road Corp. v. Commissioner, 65
T.C. 217, 226 (1975) (quoting Chi., Burlington & Quincy R. Co., 412 U.S. at

408):

        That the [Supreme] Court did not intend to lay a rigid analytical
        framework for problems arising under section 118 is clear from its
        statement that:

              Whether the governmental subsidies qualified as income to
              the railroad is an issue not raised in this case, and we intimate
              no opinion with respect to it. * * *

        State Farm Road Corp. turned on whether moneys received by the taxpayer

from charges levied against prospective users to tie into a sewer system should be

included in income. Except in limited circumstances, the sewer tie-in charges

were nonrefundable, one-time charges for hooking up property to the sewer

system and were deposited into the corporation’s bank account. Id. at 221-222.

We did not rely on the factors enunciated in Chi., Burlington & Quincy R. Co.

Instead, after reviewing the legislative history of section 118, as well as the

decisions in, among other cases, Cuba R.R. Co., Brown Shoe Co., Federated Dep’t

Stores, Teleserv. Co. of Wyo. Valley, and Detroit Edison Co., we found the facts

to be substantially similar to those in Teleserv. Co. of Wyo. Valley and Detroit
                                         - 35 -

[*35] Edison Co., holding that the payments were not contributions to capital. Id.

at 230.

II.   Application

      We now apply the aforementioned judicial principles to resolve the dispute

before us. The evidence presented at trial shows the intent or motive of the State

of New Jersey in making the payments to petitioner’s affiliates. And the key to

determining whether payments from a nonshareholder (here the State of New

Jersey) are taxable to the recipient (here petitioner’s affiliates) or nontaxable as a

contribution to capital is the intent or motive of the nonshareholder donor.

      It is undisputed that the EDA’s purpose in making the BEIP grant to

petitioner’s affiliates was to induce them to establish their offices in a targeted

area, i.e., an urban-aid municipality, not only to bring in new jobs, but also to

revitalize the area. 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. The statute enacting the BEIP stated

that the purpose of the program was to develop New Jersey’s economy and

revitalize its cities by providing financial and technical assistance to, amongst

other entities, businesses. Both witnesses from the EDA, Ms. Hassett and Ms.

Butterfield, stated that their only interest in making such grants was to bring new
                                         - 36 -

[*36] jobs to the State. The facts in this case fall squarely within the four corners

of section 1.118-1, Income Tax Regs., and are strikingly similar to those of Brown

Shoe Co. and McKay Prods. Corp., wherein the donor entities sought to induce the

businesses in question to move to facilities within the donors’ localities.

      Respondent asserts that these cases are inapplicable because “Brown Shoe

was not decided on the basis that it was a ‘location inducement’ case” and “[t]he

McKay Products case was not a case involving the payment of grants in exchange

for making withholding payments relating to the creation of new jobs, it involved

a transfer of what was clearly a capital asset”, i.e., the plant that was acquired for

the taxpayer to occupy. Continuing, respondent asserts:

      In the instant case, unlike the cases Petitioner cites, the BEIP
      agreements do not provide that the Petitioner incur a specified
      amount of costs, or any cost at all, for capital assets or for any other
      type of asset. McKay Products and Brown Shoe involved the transfer
      of capital assets and a requirement to construct and enhance capital
      assets and did not require that the transferee pay a specified amount to
      the community groups based on wages paid to employees that were
      relocated from another state as a condition for the receipt of
      payments. * * *

      Respondent misinterprets the facts of those cases. Instead of focusing on

the intent of the donor, respondent focuses on the donee’s construction of capital

assets. In both Brown Shoe Co. and McKay Prods. Corp. the localities sought to

induce the taxpayers in question to move to their respective localities. The
                                        - 37 -

[*37] localities sought the economic benefits arising from the new jobs in the

areas, just as New Jersey did in this matter. The taxpayer in Brown Shoe Co. was

required to establish or expand facilities and then operate those facilities for a

minimum period, generally 10 years. It was the operation of the business that

generated the economic benefits the localities sought, not the construction of the

facilities. As the taxpayer in Brown Shoe Co. was a manufacturing company, the

hoped-for economic benefits required the construction or expansion of large

buildings with heavy machinery. Had the taxpayer failed to meet the requirements

of the agreement, it would have forfeited the aid it received. And once it had met

its requirements, the taxpayer was free to do with the facilities as it wished.

      The circumstances in McKay Prods. Corp. were similar. There, the donor

purchased a factory building and offered to give the building to the taxpayer once

the taxpayer moved its operations to Sayre and paid $5 million in payroll, which

was estimated to take 10 years. If it did not meet these obligations, the taxpayer

would not receive ownership of the factory. And the purpose of the donor was not

to induce the taxpayer to build or buy a factory but rather to induce the taxpayer to

move its business to the area and create jobs.

      Respondent objects that petitioner’s affiliates ultimately received

$169,780,375 in aid via BEIP grants while expending only some $40 million in
                                         - 38 -

[*38] moving to New Jersey. Respondent implies that this disparity in aid versus

the cost of establishing its office is excessive. Respondent would not be alone in

reaching this conclusion. Ms. Butterfield testified that in the early years of the

program, BEIP grants were too generous and the EDA subsequently changed its

BEIP grant policies.

      [T]here were multiple changes to the program. The program was very
      generous early on, in the early years. And later--and--and there were
      some studies done by Rutgers (indiscernible) School of public policy
      to evaluate the level of awards being given to companies and some
      recommendations made to cap the awards based on certain factors.
      Those caps were put into place around 2004, but they were
      prospective as to the newer applications, not retroactive to those that
      had been approved.

      But these facts do not affect our analysis. Petitioner’s affiliates were

required to establish facilities in New Jersey and to operate the facilities for a

minimum period with an agreed number of employees. Had petitioner’s affiliates

failed to do so, they would have forfeited their State aid.

      Respondent conflates “capital asset” such as a factory or machinery with

“working capital”. As the Supreme Court observed, the phrase “contribution to

capital” is not statutorily defined. Chi., Burlington & Quincy R. Co., 412 U.S. at

412. In Commissioner v. McKay Prods. Corp., 178 F.2d at 642, the Court of

Appeals for the Third Circuit used the common definition of the phrase, stating it
                                        - 39 -

[*39] meant “the value of that with which the enterprise carries on its activity.

How much stake is in the game? What is the amount of money which is in the

business?” The Supreme Court adopted this definition of working capital when

citing McKay Prods. Corp. with approval in Brown Shoe Co. v. Commissioner,
339 U.S. at 590. And in Chi., Burlington & Quincy R. Co., 412 U.S. at 412-413,

the Supreme Court cited Brown Shoe Co., stating that one characteristic of a

contribution to a company’s working capital was that the contributed funds were

intended to benefit not only the transferors but the transferee as well, as the assets

were put to immediate use by the taxpayer to generate additional income. Thus,

we believe that the Supreme Court has adopted the common-sense definition of

working capital used by the Court of Appeals for the Third Circuit.14

      Petitioner’s affiliates are financial services companies. They rely primarily

on human capital, i.e., their employees, as well as the substantial cash reserves

necessary to function as interdealer-brokers. Petitioner’s affiliates have no need

for massive facilities. Rather, an office with computers and telephones is

sufficient for them to conduct business. Petitioner’s affiliates made the cash

      14
        Our own jurisprudence has defined working capital, for example, as
“current assets less current liabilities (excluding current maturities of long-term
debt and line of credit)”. Estate of Gallagher v. Commissioner, T.C. Memo. 2011-
148, slip. op at 34, supplemented by T.C. Memo. 2011-244.
                                        - 40 -

[*40] grants a part of their stake in the game by using the funds to acquire all of

the stock of ICAP Holdings (USA), Inc., which enhanced the efficiency of

petitioner’s affiliates’ businesses.

      Respondent raises one more objection. Respondent asserts that “New Jersey

received direct and substantial benefits from having BEIP applicants commit to

creating jobs in New Jersey for 15 years by creating tax revenues that it would not

otherwise have received”. Thus, respondent asserts that petitioner’s affiliates

received the BEIP grant as a direct payment for a specific, quantifiable service,

i.e., New Jersey bought tax revenue. Respondent’s argument is not well taken.

Initially, we note that the goal of the BEIP was to develop New Jersey’s economy

and revitalize its cities. Of course New Jersey benefited from the increased tax

revenue of the new business brought to the State under the BEIP, but that is an

indirect benefit as contemplated by the legislative history. As in Federated Dep’t

Stores, Inc. v. Commissioner, 426 F.2d at 420, there is no nexus between the

services provided by petitioner’s affiliates and the aid provided by the donor.

Moreover, respondent’s argument runs afoul of the holding in Brown Shoe Co.,

wherein programs that included a requirement to remain in the locality for a set

time were found to be capital contributions.
                                         - 41 -

[*41] III.   Conclusion

      We find that the BEIP grant disbursements were contributions to the capital

of petitioner’s affiliates pursuant to section 118(a). The circumstances

surrounding the payments are substantially similar to those in Brown Shoe Co.

and McKay Prods. Corp. and manifest the definite purpose of enlarging the

working capital of petitioner’s affiliates.

      In the light of the foregoing,

                                                  Decision will be entered

                                        for petitioner.