In Uncategorized on 04/09/2019 at 18:23

No, this is not a reprise of the game wherewith The Girl of My Dreams and her sister whiled away their childhood hours in the back of her father’s 1948 Ford coupe. Today we have before us the capital contribution of the State of New Jersey to Brokertec Holdings, Inc. f.k.a. ICAP US Investment Partnership, 2019 T. C. Memo. 32, filed 4/9/19.

Brokertec paid for its latest merger with the largesse showered upon it by the State of New Jersey Economic Development Program. And His Honor Big Julie, a/k/a Judge Julian I Jacobs, hereinafter “HHBJJJIJ” will tell us all about it.

The issue is whether the boodle bestowed on Brokertec when it fled Our Fair City after 9/11 (I will not mention that The Girl of My Dreams and I spent September nights volunteering at St Paul’s Chapel at Ground Zero in aid of the recovery teams) was payment for services or contribution to capital per the pre-2017 version of Section 118.

Brokertec’s predecessor fled as aforesaid, and agreed to provide jobs and rent specialty property immediately across the Hudson, in exchange for which the Garden State forked over around $170 million.

There were no restrictions on how Brokertec spent the money, so they merged as aforesaid. They could lose the money if they didn’t perform, but they did.

After plowing through years of caselaw, HHBJJJIJ says it comes down to intent of the transferor. Was the government paying for services like Detroit Edison, or helping out a business to grow like Brown Shoe? The cases are cited and elaborated in the opinion. The party contributing capital need not be a shareholder.

Anyway, “capital” is nowhere defined in the IRC, and the general meaning of “working capital” is “skin in the game.” Ultimately, the question is whether any benefit to the transferor from the grant to Brokertec was direct or indirect, specific or general, certain or speculative.

And of course there have to be factors, no one of which is ultimately dispositive and mere arithmetical tabulation is not sufficient. [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 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. 2019 T. C. Memo. 32, at pp. 32-33.

But HHBJJJIJ eschews a mere pedestrian trudge through all the foregoing.

“It is undisputed that [NJ]’s purpose in making the … 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 [NJ]’s intent and motivation for the… grant was to provide a nontaxable contribution to capital. The statute enacting the [program] 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 NJ gov’t]…stated that their only interest in making such grants was to bring new jobs to the State. The facts in this case fall squarely within the four corners of section 1.118-1, Income Tax Regs…..” 2019 T. C. Memo. 32, at pp. 35-36. (Names and citations omitted).

IRS objects that Brokertec went out of pocket to the extent of $40 million to run away, while raking in $170 million. But HHBJJJIJ says IRS is conflating capital assets with working capital, which is what businesses use to pay bills, operate and grow. And the NJ witnesses agree that the early grants were too rich, so they leaned out the mixture in amended statutes.

Besides, “[P]etitioner’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 grants a part of their stake in the game by using the funds to acquire all of the stock of [merger partner], which enhanced the efficiency of petitioner’s affiliates’ businesses.” 2019 T. C. Memo. 32, at pp. 39-40.

It’s the information age, y’know. The computer in a yurt in Mongolia equals glass-and-steel in FiDi or Jersey City.

Sure, NJ hoped for tax revenue. But they also hoped for thriving communities. And what Brokertec does (interdealer brokerage means making deals between other brokers, not dealing with the public) is not a service that NJ was buying.

No tax on the $170 million.

BTW, Judge, “FF&E” means furniture, fixtures and equipment; what you use to outfit a plant or an office.

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