CF Headquarters Corp. v. Commissioner, 164 T. C. No. 5 (U. S. Tax Ct. 2025)

CF Headquarters Corp. received a $3. 1 million grant from the Empire State Development Corp. post-9/11 for business recovery. The U. S. Tax Court ruled that these proceeds were taxable income, not excludable as capital contributions, gifts, or disaster relief under I. R. C. §§ 118, 102, and 139, but found the company not liable for an accuracy-related penalty due to substantial authority for its position.

Parties

CF Headquarters Corporation, a Delaware corporation wholly owned by Cantor Fitzgerald, L. P. , was the petitioner. The Commissioner of Internal Revenue was the respondent. The case was filed in the United States Tax Court with docket number 22321-12.

Facts

In the aftermath of the September 11, 2001, terrorist attacks, the State of New York established the World Trade Center Job Creation and Retention Program (JCRP) to aid affected businesses. CF Headquarters Corp. (petitioner), a holding company owned by Cantor Fitzgerald, L. P. , received a $3,107,500 grant in 2007 under the JCRP as reimbursement for rent expenses paid by its affiliates, Cantor Fitzgerald and Cantor Fitzgerald Securities. The grant was governed by an Amended and Restated Grant Disbursement Agreement (ARDA) which required the petitioner to maintain certain employment levels in New York City. The grant proceeds were lent to Cantor Fitzgerald in exchange for a 49-year promissory note. On its 2007 federal income tax return, the petitioner excluded the grant proceeds from gross income, which the Commissioner contested, asserting the proceeds should be included in gross income and that the petitioner was liable for an accuracy-related penalty under I. R. C. § 6662(a) and (b)(2).

Procedural History

The Commissioner issued a Notice of Deficiency determining a deficiency of $1,056,550 and an accuracy-related penalty of $211,310 for the tax year 2007. CF Headquarters Corp. timely filed a petition with the United States Tax Court to contest the deficiency and penalty. The case was reviewed by the full court, and the opinion was written by Chief Judge Kerrigan.

Issue(s)

Whether the $3,107,500 in grant proceeds received by the petitioner under the JCRP are excludable from gross income under I. R. C. § 118 as contributions to capital, I. R. C. § 102 as gifts, or I. R. C. § 139 as qualified disaster relief payments?

Whether the petitioner is liable for the accuracy-related penalty under I. R. C. § 6662(a) and (b)(2) due to a substantial understatement of income tax?

Rule(s) of Law

I. R. C. § 61(a) defines gross income broadly to include all income from whatever source derived, unless excluded by law. I. R. C. § 118(a) excludes from gross income any contribution to the capital of a corporation by a nonshareholder, provided such contribution does not constitute payment for goods or services rendered. I. R. C. § 102(a) excludes from gross income the value of property acquired by gift. I. R. C. § 139(a) excludes from gross income any amount received by an individual as a qualified disaster relief payment. I. R. C. § 6662(a) and (b)(2) impose a 20% accuracy-related penalty for a substantial understatement of income tax, but this penalty does not apply if there is substantial authority for the taxpayer’s position.

Holding

The grant proceeds received by the petitioner are not excludable from gross income under I. R. C. § 118 as they were not intended to become part of the petitioner’s permanent working capital. The grant proceeds are also not excludable under I. R. C. § 102 as they were not given out of detached and disinterested generosity. Lastly, the proceeds are not excludable under I. R. C. § 139 as this section applies only to individuals and not corporations. The petitioner is not liable for the accuracy-related penalty under I. R. C. § 6662(a) and (b)(2) because there was substantial authority for its position.

Reasoning

The court reasoned that for a transfer to be excluded under I. R. C. § 118 as a contribution to capital, it must become part of the permanent working capital of the corporation. The grant proceeds in question were used to reimburse operating expenses (rent) and were not restricted to capital expenditures. The court cited United States v. Chicago, Burlington & Quincy Railroad Co. , 412 U. S. 401 (1973), which established that government payments intended for operational costs are not contributions to capital. The court also found that the grant was not a gift under I. R. C. § 102 because it was not motivated by detached and disinterested generosity but by an expectation of economic benefits to the state, as articulated in Commissioner v. Duberstein, 363 U. S. 278 (1960). The court rejected the application of I. R. C. § 139 as it applies only to individuals. Regarding the penalty, the court found substantial authority for the petitioner’s position in the statutory text of I. R. C. § 118 as it existed in 2007, and in Supreme Court cases such as Edwards v. Cuba Railroad Co. , 268 U. S. 628 (1925), Brown Shoe Co. v. Commissioner, 339 U. S. 583 (1950), and United States v. Chicago, Burlington & Quincy Railroad Co. , 412 U. S. 401 (1973), which supported the petitioner’s good faith argument that the grants were not taxable income.

Disposition

The court entered a decision for the respondent as to the deficiency and for the petitioner as to the accuracy-related penalty.

Significance/Impact

This case clarifies the tax treatment of government grants post-disaster under I. R. C. §§ 118, 102, and 139. It distinguishes between grants intended as contributions to capital versus those intended to reimburse operational costs, reinforcing the principle that the former may be excluded from income while the latter are taxable. The decision also highlights the importance of the transferor’s intent in determining whether a payment is a gift under I. R. C. § 102. The finding on the accuracy-related penalty underscores the necessity of substantial authority in tax positions, particularly in novel circumstances such as post-disaster economic recovery. Subsequent legislative changes to I. R. C. § 118 in 2017 further delineated the tax treatment of government grants, reflecting the evolving nature of tax law in response to judicial interpretations.