In CF Headquarters Corporation v. Commissioner, 164 T.C. No. 5, filed March 4, 2025, the U.S. Tax Court addressed whether a corporation (CF Headquarters Corporation) had to include $3,107,500 in grant proceeds in its gross income for 2007 and whether it was liable for a 20% accuracy-related penalty under I.R.C. § 6662(a). The court, in Chief Judge Kerrigan’s opinion, held that the grant proceeds were includible in gross income but that the corporation was not liable for the accuracy-related penalty.

Background

Following the September 11, 2001, terrorist attacks, New York State established grant programs to aid affected businesses. CF Headquarters Corporation (the petitioner) received a cash disbursement in 2007 under one such program. The grant proceeds were intended for specific expense categories, including rent. The petitioner requested reimbursement for rent paid by its affiliates and included a report of employment form to demonstrate compliance with employment commitments. The petitioner excluded the grant proceeds from its gross income for 2007, leading the IRS to determine that the proceeds should have been included in gross income and to assess an accuracy-related penalty under I.R.C. § 6662(a) and (b)(2).

Petitioner’s Arguments

The petitioner argued that the grant proceeds were excludable as a contribution to the capital of a corporation under I.R.C. § 118, as a gift under I.R.C. § 102, or as a qualified disaster relief payment under I.R.C. § 139. The petitioner also contended that it was not liable for the accuracy-related penalty because there was substantial authority for its position.

Court’s Analysis

Gross Income Inclusion: The court stated that I.R.C. § 61(a) defines gross income broadly as "all income from whatever source derived" unless a specific Code provision excludes it. Exclusions from gross income are construed narrowly. The court disagreed with the petitioner’s reliance on Edwards v. Cuba Railroad Co., 268 U.S. 628 (1925), noting that its effect has been muted by later Supreme Court decisions. The court stated that the grant proceeds were income under I.R.C. § 61(a) unless a specific exclusion applied.

Nonshareholder Contributions to Capital: The court stated that I.R.C. § 118(a) generally excludes contributions to a corporation’s capital from gross income, including those from nonshareholders. However, this exclusion does not apply to money or property transferred in consideration for goods or services. Citing United States v. Chicago, Burlington & Quincy Railroad Co. (CB&Q), 412 U.S. 401, 411 (1973), the court stated that for a transfer to qualify as a contribution to capital, the transferor must intend it as such. The Supreme Court identified five characteristics to determine intent, including whether the contributed assets become part of the transferee’s permanent working capital.

The court also referred to Commissioner v. BrokerTec Holdings, Inc., 967 F.3d 317 (3d Cir. 2020), where the Third Circuit held that a relocation inducement must become a permanent part of the transferee’s working capital structure to be considered a contribution to capital. The Tax Court found that the grant proceeds in this case were intended to reimburse the petitioner for rent expenses and did not become a permanent part of its working capital structure.

Gifts: The court stated that I.R.C. § 102(a) excludes the value of property acquired by gift from gross income, and the determination of whether a transfer is a gift depends on the transferor’s intent. Citing Commissioner v. Duberstein, 363 U.S. 278, 285–86 (1960), the court noted that a gift must proceed from detached and disinterested generosity. The court found that Empire State’s motive was not detached generosity but the pursuit of increased employment commitments. The court also reviewed the funding legislation and legislative history, concluding that Congress did not possess the requisite donative intent.

Qualified Disaster Relief Payments: The court stated that I.R.C. § 139(a) applies only to individuals and not corporations. Since the grant proceeds were not paid to an individual, they did not qualify as disaster relief payments under I.R.C. § 139.

Accuracy-Related Penalty: The court stated that I.R.C. § 6662(a) imposes a 20% accuracy-related penalty on any portion of an underpayment of tax attributable to a substantial understatement of income tax. However, the penalty does not apply if there was substantial authority for the taxpayer’s treatment of the item. Citing Treas. Reg. § 1.6662-4(d)(3)(i), the court noted that substantial authority exists if the weight of authorities supporting the taxpayer’s position is substantial in relation to the weight of authorities supporting contrary positions. The court concluded that there was substantial authority for the petitioner’s treatment of the grant proceeds, based on Supreme Court decisions, the statutory text of I.R.C. § 118, and the regulations thereunder.

Conclusion

The Tax Court held that the grant proceeds were includible in the petitioner’s gross income for 2007 but that the petitioner was not liable for the accuracy-related penalty under I.R.C. § 6662.

Prepared with assistance from NotebookLM.