UNITED STATES TAX COURT



THE BOARD OF TRADE OF THE CITY OF CHICAGO AND SUBSIDIARIES,
                     Petitioner v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 8202-93.                       Filed May 29, 1996.



     Petitioner (P) is a taxable membership corporation
that operates a futures exchange. When a membership on
the exchange is transferred, the transferee must pay P
a transfer fee, which, under P’s bylaws, is to be used
to “purchase, retire or redeem the indebtedness
encumbering the Board of Trade Building”, which houses
P’s trading floor and substantial office space leased
to third-party tenants. Held, the transfer fees are
nontaxable contributions to capital, rather than
taxable payments for services, because the transferees
pay the fees with an investment motive, as evidenced by
(1) the earmarking of the fees for reduction of P’s
mortgage indebtedness, (2) the resulting increase in
the members’ equity in P, and (3) the members’
opportunity to profit from their investment in P
because of the lack of restrictions on the
transferability of their membership interests.
                               - 2 -




     George B. Javaras, Barbara M. Angus, Richard E. Peterson,

and Raymond P. Wexler for petitioner.

     Joseph T. Ferrick, for respondent.



     BEGHE, Judge:   Respondent determined deficiencies in

petitioner's Federal income tax for the years 1988, 1989, and

1990 in the amounts of $108,859, $113,473, and $65,051,

respectively.

     The deficiencies arise from respondent’s inclusion in

petitioner’s gross income of membership transfer fees.    The sole

issue is whether the membership transfer fees paid to petitioner

during 1988, 1989, and 1990 are contributions to capital or

payments for services.   We hold the transfer fees to be excluded

from gross income as contributions to capital.

                         FINDINGS OF FACT

     The parties have stipulated some facts, and the stipulation

of facts and the attached exhibits are incorporated in this

opinion.   At all relevant times, petitioner maintained its

principal place of business in Chicago, Illinois.

     Petitioner, the Board of Trade of the City of Chicago

(commonly referred to as the CBOT), is a taxable membership

corporation organized in 1859 under a special act of the Illinois
                                - 3 -


legislature.    Petitioner's principal business is the operation of

a futures exchange.    Petitioner owns and manages the commercial

office building (CBOT building) that houses its exchange

facilities.    The bulk of the space in the CBOT building,

approximately 80-85 percent, is leased to third-party tenants.

     The CBOT building is the largest asset shown on petitioner's

balance sheet.    Petitioner's management believes that the current

fair market value of the CBOT building is between $350 and $400

million.   The CBOT building consists of the original landmark

building constructed in the 1930's, a new trading floor that

petitioner constructed in the early 1970's, and an adjacent 22-

story commercial building that petitioner constructed in the

early 1980's at a cost of between $110 and $120 million.

Petitioner's borrowings to finance these acquisitions are

represented by one consolidated and extended mortgage debt

secured by the CBOT building.

     During the years in issue, the mortgage debt encumbering the

CBOT building represented petitioner's single largest liability.

The amounts of the mortgage debt as of December 31, 1988, 1989,

and 1990 were $33,315,792, $30,695,564, and $27,793,779,

respectively.    Petitioner made payments of principal and interest

on the mortgage debt in the total amount of $5,914,269 in each of

the years in issue.
                               - 4 -


     Ownership of petitioner is vested in its members and is

represented by five classes of transferable memberships:    Full

memberships, associate memberships, Government Instruments Market

(GIM) memberships, Commodity Options Market (COM) memberships,

and Index, Debt and Energy Market (IDEM) memberships.

     Each class of membership carries specified voting rights,

dissolution rights, and trading privileges.   The most

comprehensive membership, a full membership, has trading

privileges on all markets on the CBOT, a full share on

liquidation, and one vote on all matters voted on by CBOT

members.   The most restricted membership, an IDEM membership, has

trading privileges only on the Index, Debt and Energy market, a

one-half percent of one share on liquidation and voting rights to

elect members of an IDEM liaison committee to the board of

directors of the CBOT.   The following chart shows the numbers of

different memberships during the years in issue and summarizes

the rights and privileges of each class:
                                          - 5 -


Class of    Numbers of memberships as           Trading      Voting    Dissol-   Transfer
Member-     of:                                 Privileges   Rights    ution     fee
ship        1/1/88 12/31/88 12/31/89 12/31/90                          Rights

FULL        1402     1402     1402      1402    All          1 vote    1 share   $1,000
                                                futures      on all
                                                contracts    matters
                                                and full     voted
                                                trading      on by
                                                privileges   the
                                                on the       owners
                                                CBOT and     of CBOT
                                                CBOE **      member-
                                                             ships

ASSOCIATE   713       722      739       748    All          1/6 of    1/6 of    $1,000
                                                futures      1 vote    1 share
                                                contracts    on all
                                                except       matters
                                                agri-        voted
                                                cultural     on by
                                                and          the
                                                associated   owners
                                                markets      of CBOT
                                                             member-
                                                             ships

GIM         1374*     1393*    1491*            Only         Voting    11% of    $350
            1493*                               Government   rights    1 share
                                                Instrument   to
                                                Market       elect a
                                                             GIM
                                                             liaison
                                                             commit-
                                                             tee

COM          *          *       *          *    Only         Voting    1/2% of   $350
                                                Commodity    rights    1 share
                                                Options      to
                                                Market       elect a
                                                             COM
                                                             liaison
                                                             commit-
                                                             tee

IDEM         *          *           *      *    Only         Voting    1/2% of   $0
                                                Index,       rights    1 share
                                                Debt and     to
                                                Energy       elect
                                                Market       an IDEM
                                                             liaison
                                                             commit-
                                                             tee

      * These numbers are the totals of the combined GIM, COM and IDEM
memberships on the dates indicated. There is no evidence in the record, other
than records of the numbers of transfers during a year of each class of
membership (see infra p. 6) of the specific numbers of each of these three
classes of membership on any of the specified dates.
                                   - 6 -


      ** The Chicago Board of Option Exchange (CBOE) is an organization
separate from the CBOT.


     The bundles of rights inherent in CBOT memberships are

divisible into two components:        the ownership or equity component

and the trading privilege component.         Although all members of a

class of membership have equal rights and privileges,

approximately 35 to 40 percent of petitioner's members do not

exercise their trading privileges.         The owner of a membership is

entitled to lease or delegate the trading privileges attributable

to the membership.     A member who leases or delegates trading

privileges retains the voting and dissolution rights attributable

to the membership.     Included in the 35 to 40 percent of members

who do not exercise their trading privileges are approximately 16

percent of petitioner's members who neither exercise their

trading privileges nor lease or delegate them to third parties.

     Petitioner's members may freely sell or transfer their

memberships pursuant to petitioner's rules and procedures

described infra pp. 10-11.       During the taxable years 1988 through

1990, 494 full memberships, 334 associate memberships, 25 GIM

memberships, 487 COM memberships, and 432 IDEM memberships were

sold or otherwise transferred.        At the time of trial, spring

1994, the fair market value of a full membership was

approximately $575,000.      When a membership is transferred, the
                               - 7 -


transferee, in accordance with petitioner’s rule 243,1 must pay a

transfer fee.

     Petitioner's rule 243 is separated into three sentences.

The first states that “No transfer of a membership may be

consummated unless the transferee pays to the Association a

transfer fee”.2   The transfer fee applies not only to sales of

memberships but also to transfers of memberships without

consideration, such as intrafamily transfers and intrafirm

transfers from the name of an owner firm’s qualified partner or

employee to another qualified individual in the firm.

Petitioner’s management regards the transfer fees as necessary

for applicants to understand and recognize that they are the

owners of the association.

     The second sentence of rule 243 states that “The amount of

[the transfer fee] is established from time to time by the Board

of Directors.”3   The amount of the transfer fee depends on the

class of membership transferred.   During the taxable years 1988

through 1990, the transfer fees set by petitioner's board of

     1
        Rule 243 is part of the bylaws of the CBOT, adopted and
amended by the owners of CBOT memberships.
     2
        In 1925, the CBOT members adopted the predecessor of rule
243, then known as rule 111. Rule 111 was amended in 1937 to
specify that the purchaser of a membership would pay the transfer
fee. Prior thereto, rule 111 specified that the seller would pay
the fee.
     3
        In 1970, rule 111 was amended to provide that the amount
of the transfer fee would be set by the board of directors.
                                - 8 -


directors were $1,000 for full and associate memberships, $350

for GIM and COM memberships, and no fee for an IDEM membership.

In the early 1970's petitioner's board of directors increased the

transfer fees for full and associate memberships from $500 to

$750.    During this same period, petitioner constructed the new

trading floor.    In 1978, petitioner's board of directors

increased the transfer fee for full and associate memberships

from $750 to $1,000, effective in 1979 when petitioner began

construction of the adjacent 22-story commercial building.

     The final sentence of rule 243 states that “The transfer fee

so collected shall be used to purchase, retire or redeem the

indebtedness encumbering the Board of Trade Building.”4      In 1988,

1989, and 1990, petitioner received transfer fees totaling

$319,800, $333,350, and $345,050, respectively.    The amount of

     4
        In 1937, petitioner and Chicago Board of Trade Safe
Deposit Co. (a corporation affiliated with petitioner, which
owned and leased the CBOT building to petitioner because at that
time petitioner was not permitted under Illinois law to own
property with a value in excess of $200,000), had an opportunity
to refinance the CBOT building at a lower interest rate and on
more favorable payment terms, provided that the outstanding
mortgage principal balance was reduced by $1,218,000. In order
to raise capital needed to reduce the mortgage principal,
petitioner made a special assessment against all members, and
rule 111 was amended to require that all transfer fees be used
for the purchase, retirement, or reduction of the mortgage
obligation. In 1947, after repeal of the property ownership
prohibition, petitioner acquired its building from Chicago Board
of Trade Safe Deposit Co., and rule 111 was amended to reflect
the ownership change of the CBOT building. As amended, rule 111
required that all transfer fees be used for the purchase,
retirement, or redemption of the indebtedness encumbering the
CBOT building.
                                 - 9 -


mortgage principal payments made by petitioner in each of the

taxable years substantially exceeded the amount of the transfer

fees collected by petitioner during those years.   For example,

the transfer fees received in 1989 and 1990, respectively, of

$333,350 and $345,050, compare with the mortgage principal

payments of $2,620,288 and $2,901,785 during those respective

years.

     For accounting purposes, each transfer fee received by

petitioner is recorded as "Restricted Capital" in one or the

other of two capital accounts.    Petitioner uses account No. 2810

(Capital-Membership Transfers) for transfer fees collected on

transfers of full and associate memberships, and account No. 2808

(Capital-Interest Transfers) for transfer fees collected on

transfers of GIM and COM memberships.    After a mortgage principal

payment is made, an equivalent amount of the transfer fees in

accounts Nos. 2808 and 2810 is considered by petitioner as

"Unrestricted Capital".   From time to time, the balances in

account Nos. 2808 and 2810 are transferred to account No. 2850

(Retained Earnings).   These accounting transfers are not made

until the amount of mortgage principal paid by petitioner exceeds

the balances in accounts Nos. 2808 and 2810.

     For financial reporting purposes, the transfer fees received

by petitioner during the year are reflected in the Statements of

Consolidated Members’ Equity as capital contributions of new
                               - 10 -


members.    Since 1937, petitioner has so treated the transfer fees

received.   The transfer fees received by petitioner in 1988 and

1989 were the only amounts reflected in the Statements of

Consolidated Member's Equity in petitioner’s financial statements

as capital contributions of new members.   The amount of capital

contributions of new members reflected on the 1990 financial

statements is the sum of the amount of transfer fees received in

1990 and the amounts received by petitioner on sales of new

participation interests to members in 1990.5   Petitioner showed,

on Schedule L of Form 1120, U.S. Corporation Income Tax Return,

all transfer fees collected during the taxable years 1988 through

1990 as contributions to capital.

     A member who wishes to sell a membership submits to

petitioner an offer to sell, which includes an offer price.

Petitioner posts all offers to sell and bids to purchase on the

bulletin board of the CBOT.    A sale is effected when there is a

match between an offer and a bid.

     Petitioner’s Member Services Department collects the

transfer fees in connection with the transfers of memberships.

     5
        Petitioner collected $345,050 in transfer fees in 1990.
The capital contributions received from new members during 1990
was $474,364; the balance of $129,314 was the proceeds of sales
of new memberships received by petitioner in 1990. The parties’
supplemental stipulation of facts states that transfer fees
received by petitioner in 1988 and 1989 were the only capital
contributions made in those years, notwithstanding that there
were increases in the number of memberships in those years, as
well as in 1990.
                              - 11 -


When a membership is transferred, petitioner:   (1) Maintains and

publishes a list of bids to purchase and offers to sell; (2)

receives and holds bid purchase money and transfer fees while

bids to purchase are pending; (3) receives and holds the

authorization of sale submitted by a prospective seller; (4)

notifies the buyer and seller whenever a bid and offer match; (5)

withholds from the tendered purchase price an amount necessary to

pay any outstanding exchange fees or fines of the seller, as well

as any trading related debts or membership financing of the

seller owed to other members or clearing firms; (6) remits

membership sale proceeds to all parties who submitted claims

against the seller for repayment of outstanding debt, that have

been "allowed" by the exchange; and (7) keeps records of all

membership transfers, including intrafirm and intrafamily

transfers, and membership exchanges.

     Within 5 business days of acquiring the membership (unless

the application was submitted and approved prior to the

acquisition), the purchaser must submit an application for

membership to petitioner.   As part of the application process,

prospective members are given a copy of petitioner’s rules and

they are tested on their knowledge of these rules.   If the new

owner of a membership fails to submit an application, is not

elected to membership, or withdraws the application, petitioner's

regulations require the new owner to sell the acquired membership
                               - 12 -


within a 30-day period.   If the membership is not sold within the

30-day period, petitioner auctions the membership and remits the

proceeds to the seller.   On all these compulsory resales of

memberships, petitioner retains the transfer fee that was paid by

the original purchaser and also collects a transfer fee from the

new purchaser on the resale.

     In addition to collecting the transfer fees, the Member

Services Department collects fees from applicants, members, and

others in the following five categories:   (I) Application fees,

(ii) delegate fees, (iii) registration fees, (iv) badge fees, and

(v) miscellaneous fees.

     Petitioner's Member Services Department collects application

fees in connection with the processing of membership

applications.   From time to time, petitioner's board of directors

reconsiders and revises the amount of the application fee.

Increases in the application fee have been related to increases

in the cost of operating the CBOT Member Services Department.

The application fee for all first time applicants for any type of

membership was $750 from January 1, 1988, through December 31,

1989, and $1,000 from January 1, 1990, through December 31, 1990.

The application fee must be paid, regardless of whether the

purchaser already owns another membership.   However, a person who

already owns a CBOT membership submits a short-form application

in connection with the acquisition of an additional membership.
                                   - 13 -


During the years in issue, the application fee for a short-form

application was $300.

     The Member Services Department collects a delegate fee

whenever a member wishes to lease the trading rights associated

with his membership.     The delegate-lessee must submit a delegate

application and pay a nonrefundable delegate fee.          Every firm

trading on the CBOT must be registered with petitioner and pay a

registration fee in connection with its registration.          All

individuals who are required to wear a badge on the trading floor

must pay the badge fee to petitioner.6          The Member Services

Department collects various miscellaneous fees, including fees

for fingerprinting, certificates, and coat room services.

     For financial reporting and tax purposes, petitioner reports

the application, delegate, registration, badge, and miscellaneous

fees as revenues included in gross income.          For 1988, 1989, and

1990, these revenues equaled $1,167,750, $1,115,021 and

$2,718,419, respectively.7        For each of the taxable years 1988

     6
        The badge fees were collected by another department of
the CBOT prior to 1990.
     7
        The amounts of these other fees and expenses of the
Member Services Department during the taxable years were:

     Type of fee         1988         1989        1990
     Application fees $720,425      $644,550    $766,825
     Delegate fees      367,800      391,800     811,200
     Registration fees   75,790       72,210      74,400
     Miscellaneous fees   3,735        6,461      83,609
     Badge fees               0            0     982,385
     Totals           1,167,750    1,115,021   2,718,419
                                                           (continued...)
                                    - 14 -


through 1990, the revenues of the Member Services Department

exceeded its expenses.

     The bulk of petitioner’s revenues is derived from

transaction fees paid for each trade executed on the exchange and

from rents for the lease of space in the CBOT building.         For the

years in issue, petitioner received the following revenues from

these sources:

    Year          Transaction Fees             Building Rents
    1988               $42,375,000               $22,558,000
    1989                41,489,000                 24,644,000
    1990                43,688,000                 24,655,000



All funds received by petitioner, including transfer fees, are

commingled in one bank account.

     During 1988 and 1989 and prior years, CBOT members had paid

quarterly dues assessed by the CBOT board of directors to help

cover operating expenses.         However, petitioner waived membership

dues for every year from 19908 through the time of trial,




     7
      (...continued)
     Expenses           719,423      807,749   1,074,709


     8
        Petitioner’s 1990 financial statement states that
membership dues were waived in each quarter of 1990. However,
the 1990 statement of consolidated income member’s dues column
reports total dues of $888,000.
                              - 15 -


primarily because of the surplus in petitioner's operating

revenues.



                              OPINION

     The issue for decision is whether petitioner must include in

gross income the transfer fees that prospective members pay in

connection with their acquisitions of memberships.   Petitioner

characterizes the transfer fees as contributions to capital and

principally relies on section 1189 for the proposition that

contributions to capital are not included in the gross income of

a corporation.   Respondent characterizes the transfer fees as

taxable payments for services that do not qualify as

contributions to capital.

     Section 118(a) states that “In the case of a corporation,

gross income does not include any contribution to the capital of

the taxpayer.”   Congress enacted section 118 to codify10 the

preexisting concept of a capital contribution by a

nonshareholder, Brown Shoe Co. v. Commissioner, 

, 591

(1950), or shareholder, 874 Park Ave. Corp. v. Commissioner, 23


     9
        Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for the years in issue.
     10
        Sec. 118 was a new provision of the 1954 Code. The
House Ways and Means Committee report described the section as
merely stating the existing law as developed through
administrative and court decisions. H. Rept. 1337, 83d Cong., 2d
Sess. A38 (1954).
                                - 16 -


B.T.A. 400 (1931); Paducah & Ill. R.R. v. Commissioner, 

(1925); G.C.M. 4015, VII-1 C.B. 120 (1928), revoked by Rev.

Rul. 77-354, 1977-2 C.B. 50.

     Respondent postulates that, under section 1.118-1, Income

Tax Regs., a payment cannot be a contribution to capital unless

it is voluntary, pro rata, and required by the corporation to

conduct its business, as described by the somewhat circumscribed

example in the regulations.11   Respondent argues that the

transfer fees are not contributions to capital because they are

not needed by petitioner to conduct its business, and are neither

voluntary nor pro rata.

     That the transfer fees are neither voluntary nor pro rata is

not dispositive of whether the fees are capital contributions.

Mandatory payments to a corporation may qualify as capital

contributions,   Concord Village, Inc. v. Commissioner, 

          Sec. 1.118-1. Contributions to the capital of
          a corporation.--

          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. Thus, if a corporation requires additional
     funds for conducting its business and obtains such
     funds through voluntary pro rata payments by its
     shareholders, the amounts so received being credited to
     its surplus account or to a special account, such
     amounts do not constitute income, although there is no
     increase in the outstanding shares of stock in the
     corporation. * * * However, the exclusion does not
     apply to any money or property transferred to the
     corporation in consideration for goods or services
     rendered * * *. [Emphasis added.]
                                - 17 -


142 (1975); Lake Petersburg Association v. Commissioner, T.C.

Memo. 1974-55, and the Supreme Court has observed that a payment

to a corporation can be a capital contribution even if some

shareholders contribute less than others or nothing at all,

Commissioner v. Fink, 

(1987); see also Sackstein v.

Commissioner, 

(1950).    These cases confirm that the

language of the regulation is merely illustrative and does not

exhaust the definition of a capital contribution.

     Nor does petitioner’s lack of need for the transfer fees in

order to conduct its business compel the conclusion that they are

not contributions to capital.    The corporation’s need is only

another element of the illustrative language of the regulation.

A payment can be a contribution to capital where it is not needed

by the corporation for the conduct of its business.    See

Cambridge Apartment Bldg. Corp. v. Commissioner, 

(1941) (holding shareholder payments in excess of operating

requirements to be contributions to capital when used to retire

bonded indebtedness).

     The correct characterization of a shareholder payment to a

corporation depends on the capacities in which the shareholder

and the corporation deal with each other in making and receiving

the payment.   Cf. sec. 1.301-1(c), Income Tax Regs. (limiting

dividend treatment to amounts paid by a corporation to a

shareholder in his capacity as such), sec. 1.311-1(e)(1), Income
                              - 18 -


Tax Regs. (applying sec. 31112 to distributions to shareholders

made by reason of the corporation-shareholder relationship and

not to transactions between a corporation and a shareholder in

his capacity as debtor, creditor, employee, or vendee, where the

fact that the distributee is a shareholder is incidental to the

transaction).   Here the characterization issue is complicated by

the fact that the payors of the transfer fees become both equity

owners of petitioner and its primary customers, and that, by

becoming members, the payors of the transfer fees become entitled

to use the trading facilities of the exchange.

     CBOT members’ use of petitioner’s trading facilities does

not prevent the transfer fees from being contributions to

capital.   A payment by a member-owner of an organization can be a

contribution to capital even where the member-owners receive

goods or services from the corporation.   See Concord Village,

Inc. v. 

(payments by members to a cooperative

housing corporation to fund a replacement reserve held to be

contributions to capital, even though members also leased

property from the corporation); Minnequa Univ. Club v.

Commissioner, T.C. Memo. 1971-305 (payments by members to an

     12
        The general nonrecognition rule of sec. 311(a), as
interpreted by this regulation, was repealed as part of the
fairly comprehensive repeal by the Tax Reform Act of 1986, Pub.L.
99-514, 100 Stat. 2085, of the statutory enactments of General
Utils. & Operating Co. v. Helvering, 

(1935). The
regulation was removed from the regulations in 1993 by T.D. 8474,
1993-1 C.B. 242.
                              - 19 -


incorporated non-stock social club to repair and improve the

club's building held to be capital contributions even though the

club's principal business was providing services to its members);

Lake Forest, Inc. v. Commissioner, T.C. Memo. 1963-39 (payments

by members to a cooperative housing corporation to meet mortgage

amortization obligations were held to be capital contributions

even though members also leased property from the corporation).

Because petitioner's members have a dual role as users of the

CBOT services and facilities and holders of equity interests in

the CBOT, we must determine whether the payments were made in

consideration of the receipt of goods or services from petitioner

or as an investment in the capital of the corporation.

     Respondent argues that the transfer fees are payments in

consideration of obtaining access to the trading facilities and

thus are ordinary income.   We disagree.   Petitioner charges its

members a separate transaction fee for each trade executed on the

exchange.   A transaction fee is paid in consideration of the use

of the trading facilities every time a trade is executed.   The

transaction fees amounted to more than $40 million in each of the

3 years in issue and are petitioner’s primary source of revenue.

We are not persuaded that the transfer fees, amounting to less

than 1 percent of the transaction fees charged for actual use of

the trading facilities, are payments in consideration of the use
                              - 20 -


of trading facilities, even though payment of the transfer fee is

a prerequisite to obtaining or retaining membership.

     Respondent also argues that the transfer fees paid to

petitioner were for services provided to its members in

consideration of and in connection with membership transfers and

are thus taxable income.   In support of this argument, respondent

asserts that, in exchange for the transfer fees, petitioner

performs the services listed supra p. 11.

     We are not persuaded that these services are provided in

consideration of the transfer fee.     An indicator of whether a

payment is for a good or service is whether the amount of the

payment is directly related to the amount and number of services

provided or merely incidental thereto.     See James Hotel Co. v.

Commissioner, 

, 142 (1962), affd. 

(10th

Cir. 1963); cf. sec. 1.311-1(e)(1), Income Tax Regs.     In the case

at hand, the amounts of petitioner's transfer fees have no

quantifiable correlation with the amounts or extent of the

functions performed or services rendered by the Member Services

Department.   The same functions are performed for the different

classes of members even though they pay different transfer fees.

In fact, 432 IDEM memberships were either sold or transferred

during the taxable years without the transferees paying any

transfer fees, and the Member Services Department performed the

same functions with respect to these transfers as it would have
                               - 21 -


performed for a full membership transferee who paid $1,000.

Petitioner, in some instances, assesses the same fees despite

substantial differences in the amounts of services.   For

instance, the transfer fee for an intrafamily transfer of a full

membership, which requires few of the services listed, is

normally $1,000, the same transfer fee payable in connection with

an outright sale of a full membership, which requires the entire

range of services.

     In contrast to the transfer fees, the application fees paid

in connection with applications for CBOT memberships are directly

related to the services performed in connection with the

applications.   Short-form applications, which obviously require

fewer services, require a lower fee than full applications.    The

application fees are based on the services rendered and, as such,

are treated as ordinary income.   On the other hand, the transfer

fees are not based on the functions performed.   Rather, the

transfer functions are performed incidentally to the paying of

the transfer fee.    The lack of correlation between the different

transfer fees and the functions performed by the Member Services

Department supports the conclusion that the transfer fees are not

payments for or in consideration of these services.

     The parties agree that the payor’s motive controls whether a

payment is a contribution to capital, whether the payor is a

nonshareholder, see United States v. Chicago, B & Q. R.R., 

, 411-413 (1973); Brown Shoe Co. v. Commissioner, 339
                                - 22 -


U.S. at 591, or a shareholder, Washington Athletic Club v. United

States, 

, 673-677 (9th Cir. 1980).   If the payor is a

shareholder, we specifically look to see whether the payor has an

investment motive in making the payment.   See, 

investment motive to be the crucial element of capital

contributions).   If an investment motive exists, then the payment

is a contribution to capital.    See Lake Petersburg Association v.

Commissioner, T.C. Memo. 1974-55 (holding that payments of

assessments to a housing cooperative were capital contributions

and not membership fees for services turned on the conclusion

that an investment motive existed); Minnequa Univ. Club v.

(an investment interest in members' payment

of assessments to a social club led to the conclusion that the

payments were contributions to capital).   The question in the

case at hand is whether the CBOT members had an investment motive

in paying the transfer fee.

     Direct proof of the motive of the payor is rarely

available.13   Whenever state of mind is relevant under the tax

laws, the most important operational question usually concerns

the weight to be attached to external factors.   Blum, “Motive,


     13
        None of petitioner’s members testified about their
motives in paying the transfer fees. However, petitioner’s
Senior Vice President of Planning and Operations, Frank Grede,
testified that petitioner’s management views the transfer fees as
necessary for applicants to understand and recognize that they
are the owners of the association.
                               - 23 -


Intent, and Purpose in Federal Income Taxation”, 34 U. Chi. Law

Rev. 485, 544 (1967); cf. Recklitis v. Commissioner, 

,

910 (1988) (the objective “badges” or indicia of fraud under sec.

6663); sec. 1.183-2(b), Income Tax Regs. (enumerating the

objective factors taken into account evidencing a profit motive).

The proper tax characterization cannot turn on the separate

intentions of multiple participants in an organization, since

each participant is apt to take a different view.    Blum, supra at

539.    Instead, motive or intent must be determined at the

institutional level, which necessarily requires an examination of

external factors.    Therefore, we look to the objective facts and

circumstances surrounding the payment to determine whether the

members must or should be deemed to have an investment motive in

paying the transfer fees.

       There is no preexisting checklist of objective factors that

can be used as a template for deciding if the payors have an

investment motive.    Therefore, we look to other shareholder/club

member capital contribution cases to isolate the objective

factors that have tended to show an investment motive.

       The transfer fees are similar to assessments paid by owners

of interests in a housing cooperative, because any assessment

paid by the cooperative owners can arguably be a charge for the

privilege of residing on the premises, just as, respondent

argues, the transfer fee should be considered merely another
                               - 24 -


charge for the privilege of trading on the CBOT.    However, we

held early on that some kinds of assessments imposed upon

cooperative housing members by the cooperative are nontaxable

contributions to capital.    We will look to these cases to find

some of the objective factors for our inquiry.14

     In 874 Park Ave. v. Commissioner, 

(1931), a

housing cooperative corporation, pursuant to the terms of the

proprietary leases, levied assessments on its tenant-shareholders

for the purpose of amortizing debt secured by mortgages on its

property.    The taxpayer used the assessments to amortize the

mortgage debt and credited the payments to its capital stock

account.    The Board of Tax Appeals held that these assessments




     14
        Respondent argues that housing cooperative cases are
inapplicable because of "the special relationship between the
shareholder-tenants and the cooperative, insofar as the tax
statutes are concerned", citing Eckstein v. United States, 

, 665, 

, 1048 (1971), which concerned
whether the payments by tenant-shareholders to be applied to the
mortgage were income to the corporation for the purpose of the
80-percent requirement of sec. 216(b). Eckstein refers to cases
cited in Lake Forest, Inc. v. Commissioner, T.C. Memo. 1963-39,
on which Eckstein relies, along with Cambridge Apartment Bldg.
Corp. v. Commissioner, 

(1941), and 874 Park Ave. v.
Commissioner, 

(1931). All this Court said in Lake
Forest is that it did not interpret United Grocers, Ltd. v.
United States, 

(9th Cir. 1962); James Hotel Co. v.
Commissioner, 

(1962), affd. 

(10th Cir.
1963); Affiliated Govt. Employees Distrib. Co., 

(1962), affd. 

(9th Cir. 1963); Federal Employees'
Distrib. Co. v. United States, 

(S.D. Cal.,
1962), judgment revd. 

(9th Cir. 1963), as requiring
a different result.
                              - 25 -


were nontaxable contributions to capital because they were

provided for in the leases and used for capital purposes.

     In Cambridge Apartment Bldg. Corp. v. Commissioner, 

(1941), the Commissioner determined deficiencies

against a cooperative housing corporation on the ground that

assessments collected from the tenant-shareholders for the

ostensible purpose of retiring bonded indebtedness were income to

the corporation.   The taxpayer used most of the funds for

operating expenses, but used any excess funds to retire its

bonds.   The Board, relying on 874 Park Ave., held that the excess

of assessments used to retire bonds were nontaxable contributions

to capital, notwithstanding the lack of an explicit agreement

between the corporation and the shareholders or any requirement

that the corporation use the excess funds to retire the bonds.

     Our most recent opinion on the housing coop capital

contribution issue, Concord Village, Inc. v. Commissioner, 

(1975), is instructive.   The taxpayer was a nonstock

not-for-profit housing corporation operated for the benefit of

its members, who had proprietary interests.   However, upon the

sale of their interests, members were required under the

taxpayer’s bylaws to forfeit to the corporation the part of the

sale price that exceeded the FHA transfer value.   We held that

the forfeitures were taxable gain to the taxpayer, but that all

proceeds of assessments accumulated in the taxpayer’s replacement
                              - 26 -


reserve were nontaxable contributions to capital.   We upheld

capital contribution treatment of the assessments on the ground

that the replacement reserve was in a separate bank account

earmarked solely for capital expenditures, and the member

received no goods or services in consideration for the payments

to the replacement reserve.   Although we were concerned that

members had no right, upon the transfer of their memberships or

at any other time, to any of the contributed amounts in the

replacement reserve, we concluded that this did not compel a

different result because it did appear that the amounts

contributed to the replacement reserve did bear some relation to

the value of the members’ equity in the taxpayer.   

     Cases that have denied capital contribution treatment, on

which respondent relies, are also instructive in determining the

characteristics of a capital contribution.

     In United Grocers, Ltd. v. United States, 

(9th

Cir. 1962), the taxpayer, a grocery-buying cooperative, charged

its members monthly dues to participate in the cooperative.     The

Court of Appeals for the Ninth Circuit concluded that the members

had no investment motive in paying the dues because memberships

were not transferable, and there was no way that members could

recover their investments in the corporation.

     In Washington Athletic Club v. United States, 

(9th Cir. 1980), the court concluded that the membership-type
                               - 27 -


fees, although earmarked for capital expenditures, could not be

treated as capital contributions because the members had no

equity interest in the club and received no legal entitlement for

the payment of the fees other than access to the club and the

right to vote for the board of directors.    The court commented

that the earmarking of the payments for capital expenditures was

relevant and pertinent, but not determinative of, a contribution

to capital.    Id at 675.

       In Affiliated Government Employees Distrib. Co. v.

Commissioner, 

(1962), affd. 

(9th Cir.

1963), we addressed whether membership fees paid to the taxpayer,

a nonstock membership corporation operating department stores for

the exclusive use of its members and their guests, were

contributions to capital.    We held that the fees were payments

for the privilege of shopping at the taxpayer’s stores and were

not contributions to capital because the members were not

entitled to share in the profits of the enterprise and had no

assurance of a share in the dissolution proceeds because the

memberships were nonassignable and terminated at death.     

       In Oakland Hills Country Club v. Commissioner, 

(1980), we denied a country club's motion for summary judgment,

holding that a "proprietary interest" is not sufficient to turn a

membership fee into a capital contribution.    However, the members
                               - 28 -


could not resell their memberships or profit from appreciation in

the value of the membership.   We found the only benefit to the

members was their right to use the club's facilities.

     In American Medical Association v. United States, 

(7th Cir. 1989), the Court of Appeals for the Seventh

Circuit, to which an appeal in this case would lie, provided

useful guidance in dealing with the member capital contribution

issue.   In holding that member dues placed in the AMA’s

“association equity” reserve account were current membership

receipts that could be allocated to circulation income in the

year received, the court rejected the taxpayer’s alternative

argument that membership fees so placed “should be likened to

capital contributions.”   

  The Court of Appeals

explained:

     The problem with this argument is that the AMA members
     received nothing in return for their “investment” in
     the AMA other than the right to receive the benefits of
     membership in the single annual period for which dues
     were assessed. In exchange for a capital contribution
     the contributor receives a future or residual claim,
     for example, for return of capital as dividends or as
     the proceeds of liquidation. A capital contribution is
     in the nature of an investment whereby the investor
     purchases a continuing interest in an enterprise.14 In
     this case there is no evidence that AMA members
     received anything more for their annual membership fee
     than an annual membership; they received no claim of
     future benefit.

     14. See, e.g., Commissioner v. Fink, 

, 97
     * * * (1987) (contributors must intend “to protect or
     increase the value of their investment in the
     corporation”); In the Matter of Larson, 

,
     117 (7th Cir. 1988)(capital contribution characterized
                             - 29 -


     by fact that investor expects to recoup her investment,
     hopefully with a profit, in the event the corporation
     is successful.

     Explaining and applying Washington Athletic Club v. United

, the Court of Appeals noted:

     Since members received no benefit through payment of
     the surcharge other than the rights attendant to an
     annual membership in the club, the members lacked an
     “investment motive” in making the payments, and
     therefore treatment of the monies received as a capital
     contribution was inappropriate. [Id.]

          The reasoning of Washington Athletic Club is
     persuasive, and directly applicable here. The AMA’s
     members received no continuing benefit from their
     payments into the association equity account; the sum
     paid as an annual membership fee entitled the member
     only to the benefits of membership in the year of
     payment. Therefore the funds placed in the association
     equity account were current “income” of the AMA * * *.
     [American Medical Association v. United 

     at 774.]

     In reconciling the cases relied upon by petitioner and

respondent, we discern three objective factors whose presence

tends to support the existence of an investment motive:   (1)   The

fee in question is earmarked for application to a capital

acquisition or expenditure; (2) the payors are the equity owners

of the corporation and there is an increase in the equity capital

of the organization by virtue of the payment; and (3) the members

have an opportunity to profit from their investment in the

corporation.
                             - 30 -


     The first factor is whether the payment is specifically

earmarked or applied to a capital acquisition or expenditure.

Webster’s Ninth New Collegiate Dictionary defines earmarking as

“to designate or set aside (funds) for a specific use or owner”.

     The repealed excise tax on club dues15 and the regulations

thereunder provide an appropriate framework for giving content to

the concept of earmarking as it should be applied in this case.16

Section 4241 imposed an excise tax on club dues and section 4243

provided an exemption from the excise tax for members’ payments

for the construction or reconstruction of capital improvements.17

The structure for imposing the club dues excise tax and allowing

the capital expenditure exemption parallels the approach under

section 118 for differentiating payments for services from

capital contributions; amounts that corporate shareholders or

association members pay for the use of corporation or association

facilities and services are ordinary income to the recipient,

     15
        Secs. 4241 and 4243, and the regulations thereunder,
were repealed by sec. 301 of the Excise Tax Reduction Act of
1965, Pub. L. 89-44, 79 Stat. 145.
     16
        The Commissioner has recognized that Federal income tax
principles can be relevant to the consideration of Federal excise
tax issues. G.C.M. 37989 (June 22, 1979); G.C.M. 36046 (Oct. 9,
1974); G.C.M. 35442 (Aug. 16, 1973).
     17
        Congress enacted sec. 4243 to provide club dues excise
tax relief from the burdensome and heavy initial cost of
construction or reconstruction of a club facility, whereas
“charges which go to the upkeep and operation of social,
athletic, or sporting clubs [were to] continue to be taxable.”
Conf. Rept. 2596, 85th Cong., 2d Sess. 4437-4438 (1958).
                                - 31 -


whereas their payments in aid of capital improvements are capital

contributions.

     The interpretive regulations under section 4243 stated that

the exemption applied to amounts paid for the retirement of

indebtedness (a mortgage loan, for example) incurred by reason of

the construction or reconstruction of any capital addition,

improvement or facility.18    Sec. 49.4243-2(b)(iii), Excise Tax

Regs.     However, the regulations did not allow the exemption

unless the funds were earmarked for capital purposes.     

Athletic Club v. United States, 

(N.D. Ga. 1967), the court held that the board’s resolution to

divert 40 percent of future assessments to qualified purposes

allowed the payments so used to qualify for the exemption.       The

court based its holding on the facts that the assessments were

based upon known existing needs, although no specific project was

stated, and the funds, although commingled with operating funds,

were held for future construction requirements.

     In Gibbons v. United States, 

(S.D. Ill.

1967), the court held that there was insufficient earmarking for

the exception to apply where the members were not told that a


     18
        For payments made before Nov. 1, 1959, the regulation
stated that “Assessments paid for the retirement of indebtedness
(a mortgage loan, for example) incurred by reason of the
construction or reconstruction of any such facility * * * are
considered to be assessments for construction or reconstruction.”
Sec. 49.4243-2(a), Excise Tax Regs.
                             - 32 -


specific portion of fees would be set aside for capital

improvements, and all income and receipts were commingled.     The

court stated that “the amount or proportion to be used for

capital improvements must be stated at the time of ‘assessment’

and earmarked for that purpose at the time of receipt.”

     In Maryland Country Club, Inc. v. United States, 75-2 USTC

par. 16,190 (D. Md. 1975), judgment revd. 

(4th Cir.

1976), the court, after examining the above- cited cases19,

concluded that there were three basic conditions of earmarking:

First, there must be a definite commitment to engage in some

capital construction; second, at the time of the initial payment,

both the club and the member must be operating under the


     19
        In addition to the above-cited cases, the court also
examined Cactus Heights Country Club v. United States, 

(D.S.D. 1967)(holding that a resolution, prior to
collection of the funds, to apply 80 percent of the funds
collected to capital improvements was sufficient to bring that 80
percent within the exception), and Pinehurst Country Club v.
United States, 248 F.Supp 690, 692-693 (D. Colo. 1965). The
court said that Pinehurst was probably at the clearly qualified
end of the scale of acceptable earmarking, stating that,
“Although earmarking was not in question in that case, the
earmarking which did occur and which was plainly acceptable
serves as a useful example in other cases.” Maryland Country
Club, Inc. v. United States, 75-2 USTC par. 16,190, at 88,952 (D.
Md. 1975), judgment revd. 

(4th Cir. 1976). In
Pinehurst the new members, in addition to paying dues, had an
option of paying an assessment for capital improvements and
construction in cash or in installments. The amounts paid as
capital contributions were accounted for separately and deposited
in a separate escrow bank account, and thereafter were
transferred directly from the escrow account to a construction
account at which time members who had paid construction
assessments were credited with the amounts not used.
                              - 33 -


assumption that the funds so collected will be used for capital

purposes; and, three, the funds must be accounted for at the time

of payment and held for that purpose and for no other purpose.

Using this test, the court held that the earmarking requirement

had not been met because the club used the amounts in the capital

accounts for operating expenses.   The court held that this use

related back to and invalidated the initial purported earmarking.

     In light of this history, we conclude that petitioner’s

procedures for the collection, accounting, and use of the

transfer fees provide sufficient assurance that the transfer fees

are dedicated to the required purpose of reducing petitioner’s

mortgage debt, in accordance with the requirements of rule 243.

As in Maryland Country Club v. United 

, petitioner’s

rule 243 illustrates petitioner’s definite commitment to engage

in a capital use with the funds; i.e., the retirement and

redemption of the CBOT building indebtedness, which was incurred

to finance capital construction projects.   Both petitioner and

its members are aware that the transfer fees are collected for a

designated purpose.   Prospective members are given a copy of, and

tested on, petitioner’s rules, including rule 243.   Finally, the

fees are accounted for separately from operating revenues.     They

are accounted for by book entries as “restricted capital”.     The

funds are held in these accounts until petitioner makes a

mortgage principal payment in an amount greater than the amounts
                               - 34 -


in the book entries.    Only then are the amounts in the book

entries reclassified as “unrestricted capital”.    The bylaw

restriction in rule 243 and the accounting ledger accounts

sufficiently restrict the amounts of the transfer fees collected

until an equal amount is paid toward the mortgage principal.20

We thus conclude that petitioner's rule 243 and its accounting

procedures sufficiently earmark the transfer fees for use in

reducing its mortgage debt, a designated capital expenditure.

     The second factor is whether the equity interest of the

members increased because of the contribution to the membership

organization.    There is no dispute that petitioner's members are

the equity owners of petitioner.    They have voting rights and

liquidation rights according to the interest held, and their

interests are freely transferable to qualified purchasers or

transferees.    Because petitioner's largest liability is the

mortgage on the CBOT building, any decrease in that liability

directly increases petitioner's members' equity.    The transfer

fees accounted for over $300,000 of the mortgage principal

     20
        The Commissioner in Maryland Country Club v. United

, argued that earmarking, under sec. 4243, required
that the taxpayer record the funds in a separate bookkeeping
account, which was to be matched by available qualified funds in
a bank account, and/or to designate funds as capital
contributions by some formal mechanism such as a bylaw. In the
case at hand, petitioner records the transfer fees in separate
bookkeeping accounts, which are always matched by available
qualified funds in its general bank account, and the transfer
fees are designated as capital contributions by petitioner’s rule
243.
                               - 35 -


payments made in each of the taxable years.   The members' equity

accounts increased each year by an amount no less than the

transfer fees collected.

     Respondent argues that the members cannot have an investment

motive because they enjoy no right to any return of the amount of

transfer fees paid in connection with that membership.    We are

not persuaded.   There is no requirement that the payments

directly increase the individual payor's equity interest on a

dollar-for-dollar basis.   Nor is there any requirement that a

member must have a right to recover from petitioner the amount of

the transfer fee paid.21   Although an individual member's

interest does not directly reflect the amount of transfer fees

paid in connection with that membership, members' equity as a

whole is increased by each transfer fee paid.   See Concord

Village, Inc. v. Commissioner, 

, 156 (1975).      We are




     21
        Respondent seems to be arguing that, in order for the
transfer fees to be capital contributions, petitioner must
maintain a capital account for each member that directly reflects
the actual amounts paid in respect of that particular membership
interest. Petitioner is a corporation, not a partnership. There
is no such requirement for corporations. A corporation is a
separate legal entity, whereas a partnership is an aggregate of
its partners. Partnership capital accounts reflect what each
partner can draw from the partnership. A corporation does not
have individual drawing accounts for each of its shareholders.
Any shareholder simply has an ownership interest in this separate
entity represented by the number of shares owned by him.
                             - 36 -


satisfied that the transfer fees enhance the equity interests of

petitioner’s members.22

     The third factor is whether the payor has an opportunity to

profit from the appreciation in his investment.   The CBOT

memberships are freely transferable, allowing the members to

realize a profit from any appreciation of their investment.23

     22
        Respondent relied heavily on Rev. Rul. 77-354, 1977-2
C.B. 50, arguing that it requires a finding here that the
transfer fees are not capital contributions. A revenue ruling is
nothing more than respondent’s litigation position, Stark v.
Commissioner, 

, 250-251 (1986); however, the revenue
ruling cited actually supports petitioner’s position in this
case. In Rev. Rul. 77-354, the Internal Revenue Service
overruled its position in G.C.M. 4015, VII-1 C.B. 120 (1928), in
holding that a securities exchange’s initiation fees were not
capital contributions. The Service based its holding on the
facts that neither new members nor existing members derived any
enhanced equity value by virtue of the payment, the funds were
not earmarked or restricted in their use to capital expenditures,
and the fees bore no relation to the capital needs of the
exchange. Here, petitioner’s members do derive an enhanced
equity value by virtue of the payment of the transfer fee, the
funds are earmarked or restricted in their use to a capital
expenditure, and the fees bear a relation to the capital needs of
the exchange, the mortgage indebtedness. In earlier rulings, the
Service had concluded that fees paid by members to membership
organizations were capital contributions where members held
substantial equity rights in the organizations and the payments
enhanced the members’ collective interest in the organization.
Rev. Rul. 72-132, 1972-1 C.B. 21 (membership certificates sold by
an unincorporated securities exchange); Rev. Rul. 74-563, 1974-2
C.B. 38 (special assessments levied by a homeowners association
to pave a community parking lot); Rev. Rul. 75-371, 1975-2 C.B.
52 (special assessments levied by a condominium to replace the
outdoor furniture surrounding the swimming pool).
     23
        The facts of the case at hand are more compelling in
justifying capital contribution treatment than many of the above
cited cases because the CBOT members suffer no restriction on
their rights to retain the entire proceeds of sale of their
                                                   (continued...)
                              - 37 -


Over 35 percent of petitioner's members do not trade on

petitioner's exchange, but instead hold their interests for

investment.   The majority of these members lease their trading

privileges to others, but approximately 16 percent of the members

neither use their trading privileges nor lease them to third

parties, apparently expecting to realize a profit on the ultimate

disposition of their memberships.

     The transfer fees are used to amortize the debt on a

revenue-raising asset, the CBOT building.   Petitioner leases 80

to 85 percent of the space in the CBOT building to third parties.

The leases generate substantial rental income to petitioner.    The

CBOT building also houses the trading floor, which generates

transaction fees, petitioner’s primary source of revenue.   It is

clear that members’ payments of assessments to finance initial

construction of those assets would have been contributions to

capital because they would have increased the members’ equity in


     23
      (...continued)
interests. Some of the members’ interests in the cases discussed
above, even those allowing capital contribution treatment, were
subject to such a restriction. Cf. Concord Village, Inc. v.
Commissioner, 

(1975); United Grocers, Ltd. v. United
States, 

(9th Cir. 1962); Washington Athletic Club v.
United States, 

(9th Cir. 1980); Affiliated
Government Employees Distrib. Co. v. Commissioner, 

(1962), affd. 

(9th Cir. 1963); Oakland Hills Country
Club v. Commissioner, 

(1980). The restriction on the
amount of profit a member can make from his transfer of an
interest attenuates the members’ financial interest in the equity
of the organization. There is no such restriction in the case at
hand.
                             - 38 -


petitioner and directly paid for capital assets used for the

production of income in petitioner’s trade or business, and there

would have been no tenable argument that the payments were in

consideration for goods or services.   The transfer fees, paid at

the time of the acquisition of a membership, reduce the principal

of the mortgage debt on the CBOT building each year.   The

periodic collection of the transfer fees is the equivalent of

installment payments for the building.   We fail to see a

significant difference where petitioner's members make their

capital contributions in “installments instead of all at once."

See Lake Forest, Inc. v. Commissioner, T.C. Memo. 1963-39; see

also sec. 49.4243-2(a), Excise Tax Regs. supra note 18, which

equate amounts paid to retire mortgage indebtedness incurred to

finance construction or reconstruction of capital improvements

with exempt payments for capital improvements.

     Petitioner's members have not paid dues since at least 1990.

The dues were eliminated because of a surplus in petitioner's

operating revenues, largely attributable to petitioner’s lease

revenues and transaction fees.   The nonpayment of dues is a form

of additional profit to the members.   See Minnequa Univ. Club v.

Commissioner, T.C. Memo 1971-305.   The transfer fees, therefore,

help finance the major sources of petitioner's revenues and

directly increase the members' profit potential from their

investment.
                              - 39 -


     We conclude that the transfer fees are primarily paid with

an investment motive.   Although there may be some attenuated and

incidental senses in which the transfer fees may be paid in

consideration for services rendered and to be rendered, we hold,

on balance, that the transfer fees paid to petitioner are paid

primarily to reduce petitioner’s mortgage debt, which was

incurred to finance capital improvements.   The transfer fees are,

therefore, nontaxable contributions to petitioner's capital and

are not includable in gross income.

     To reflect the foregoing,

                                  Decision will be entered for

                             petitioner.