                          T.C. Memo. 2001-189



                        UNITED STATES TAX COURT



           CHICAGO MERCANTILE EXCHANGE, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 8984-95, 16082-95.               Filed July 24, 2001.



     Dennis E. Frisby, for petitioner.

     Robert M. Ratchford and Dana E. Hundrieser, for respondent.



                          MEMORANDUM OPINION


     LARO, Judge:   This case was submitted to the Court without

trial under Rule 122.    Respondent determined deficiencies of

$1,706,000, $2,725,835, and $444,347 in petitioner’s Federal

income tax for 1988, 1989, and 1990, respectively.      We must

decide whether petitioner is entitled to investment tax credits

that it claims under the transition rules contained in section
                                - 2 -

204(a)(7) of the Tax Reform Act of 1986 (TRA), Pub. L. 99-514,

100 Stat. 2146.   We hold it is not.    Unless otherwise indicated,

section references are to the Internal Revenue Code in effect for

the subject years.    Rule references are to the Tax Court Rules of

Practice and Procedure.

                             Background

     All facts were stipulated and are so found.    The

stipulations of facts and the exhibits submitted therewith are

incorporated herein by this reference.    Petitioner is a

corporation organized under the Illinois General Not for Profit

Corporation Act to operate a commodity exchange in Chicago,

Illinois.   Its principal place of business is in Chicago, and it

did not own any stock in a corporation during the relevant years.

     Petitioner primarily provides and regulates a commodity

exchange where futures contracts and options on futures contracts

are traded.   Petitioner also establishes and enforces trading

rules, collects and disseminates information about its markets,

and provides the clearing mechanism for trades executed on its

commodity exchange.   Petitioner has no shareholders but is owned

by its approximately 2,700 members, approximately 1/4 of which

are corporations and the remainder of whom are individuals.    Its

member’s customers who have futures contracts and options traded

on its commodity exchange are located worldwide, and it receives

a significant portion of its income from foreign subscribers.
                               - 3 -

     In 1981, petitioner approved the construction of a new

complex/trading facility, the Chicago Mercantile Exchange Center

(CME Center), that would consist of a south tower, a north tower,

and two trading floors.   On May 11, 1981, petitioner agreed to

lease 100,000 square feet on the upper lobby level and the entire

2nd through 6th floors of the south tower.   This represented

approximately 10 percent of the total space available for lease

in the south tower when petitioner took possession of the

premises in November 1983.   Petitioner’s total leased space

increased to approximately 17 percent of the south tower space

available for lease.

     Also in 1981, petitioner became a 10-percent limited partner

in a partnership named CME Center Partnership (CCP);1 the other

partner (the general partner) was an entity that was unrelated to

petitioner.   CCP was formed to construct, own, and operate the

CME Center’s south tower and to construct and sell its trading

facility.   CCP owned indirectly the south tower, and a limited

partnership unrelated to petitioner owned indirectly the north

tower.

     In addition to its corporate headquarters in Chicago,

petitioner maintained four other offices to promote the use and

trading of financial futures contracts.   From 1979 through 1990,



     1
       Petitioner maintained that 10-percent interest until CCP
was dissolved in 1995.
                                - 4 -

petitioner maintained the first office in London, England, with a

staff of 3 to 5 employees, including one of petitioner’s vice

presidents as managing director.    From 1987 through 1990,

petitioner maintained the second office in Tokyo, Japan, with a

staff of 3 or 4 employees, including a managing director who

became a vice president of petitioner in 1988.    Petitioner

maintained the other two offices in New York, New York, and

Washington, D.C., with a staff of 2 to 5 employees and 4 to 6

employees, respectively.   The New York office also was managed by

one of petitioner’s vice presidents.

     In December 1988, petitioner formed a second limited

partnership named P-M-T Limited Partnership (PMT).    Petitioner is

a 10-percent general partner in PMT, and petitioner’s members and

clearing house members collectively own the remaining 90-percent

interest as limited partners.    PMT was formed to create and

license a global electronic system for trading futures and

options on futures contracts during the non-trading hours of

petitioner’s commodity exchange.

                            Discussion

     Before 1986, taxpayers who acquired certain machinery and

equipment for use in a trade or business were allowed an

investment tax credit against their income tax liability in an

amount equal to a percentage of the cost of the qualified

property.   Secs. 38, 46, 48.   TRA section 211, 100 Stat. 2166,
                                - 5 -

generally repealed this credit for property placed in service

after December 31, 1985.    One of the transitional rules to this

repeal is the world headquarters rule contained in TRA section

204(a).    TRA section 204(a)(7) provides:

          (7) Certain Leasehold Improvements.--The
     amendments made by section 201 shall not apply to any
     reasonable leasehold improvements, equipment and
     furnishings placed in service by a lessee or its
     affiliates if--

                 (A) the lessee or an affiliate is the
            original lessee of each building in which
            such property is to be used,

                 (B) such lessee is obligated to lease
            the building under an agreement to lease
            entered into before September 26, 1985, and
            such property is provided for such building,
            and

                 (C) such buildings are to serve as world
            headquarters of the lessee and its
            affiliates.

     For purposes of this paragraph, a corporation is an
     affiliate of another corporation if both corporations
     are members of a controlled group of corporations
     within the meaning of section 1563(a) of the Internal
     Revenue Code of 1954 without regard to section
     1563(b)(2) of such Code. Such lessee shall include a
     securities firm that meets the requirements of
     subparagraph (A), except the lessee is obligated to
     lease the building under a lease entered into on June
     18, 1986.

The requirements set forth in TRA section 204(a)(7) are

cumulative, and a taxpayer such as petitioner must prove all of

those requirements in order to receive the benefits of that

section.    Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115

(1933); Payless Cashways v. Commissioner, 114 T.C. 72, 77 (2000).
                               - 6 -

The fact that the parties submitted this case to the Court fully

stipulated does not change or otherwise lessen petitioner's

burden in this case.   Rule 122(b); Kitch v. Commissioner, 104

T.C. 1, 8 (1995), affd. 103 F.3d 104 (10th Cir. 1996).

     We focus on the text of TRA section 204(a)(7)(C); i.e., the

leased building described in section 204(a)(7) is “to serve as

world headquarters of the lessee and its affiliates.”     TRA sec.

204(a)(7)(C).   In accordance with this text, a corporate taxpayer

such as petitioner must establish that:   (1) It has affiliates

and (2) the leased building serves as its world headquarters and

the world headquarters of its affiliates.     Petitioner has not

established either of these requirements.

     As to the first requirement, petitioner argues that its

members were its affiliates.   We disagree.    For purposes of this

case, we find illuminating United States v. Kjellstrom, 100 F.3d

482 (7th Cir. 1996), affg. 916 F. Supp. 902 (W.D. Wis. 1996), a

case decided by the court to which this case is appealable.     In

Kjellstrom, a husband and wife and their four sons were the

shareholders of an S corporation named Wisco Industries, Inc.

(Wisco).   The husband was Wisco’s chief executive officer, and

the four sons worked for Wisco in various officer or other

capacities.   Wisco manufactured and sold metal stamping, and it

had its office and a separate assembly plant in Wisconsin and

another facility in Alabama.
                                - 7 -

     The taxpayers in United States v. Kjellstrom, supra, namely,

Wisco’s six shareholders, argued that Wisco qualified under TRA

section 204(a)(7).    The Court of Appeals for the Seventh Circuit

disagreed.    According to the court, Wisco had no affiliates.   The

court also found that Wisco did not have a world headquarters.

Id. at 484-485.

     We believe that the relationship of Wisco and its

shareholders is sufficiently similar to the relationship of

petitioner and its members to warrant application of United

States v. Kjellstrom, supra, to the facts herein.    Petitioner and

Wisco are both corporations, and petitioner’s members and Wisco’s

shareholders are the owners of their respective corporations.

Whereas petitioner’s owners are called members and Wisco’s owners

are called shareholders, we conclude that this difference in

nomenclature is a mere distinction without a difference.

Petitioner’s members actively participated in its business, just

as Wisco’s shareholders did in Wisco’s business, and the members

and the shareholders were the heart and soul of the respective

businesses.    Our review of the General Not For Profit Corporation

Act of the State of Illinois, in the light of the general

corporate scheme, also has uncovered no significant difference in

the rights, benefits, or obligations of a member vis-a-vis a
                               - 8 -

shareholder.   We conclude that petitioner’s members were not its

affiliates for purposes of TRA section 204(a)(7).2

     Even if petitioner’s members were its affiliates for

purposes of TRA section 204(a)(7), petitioner would have failed

the second requirement; to wit, that the leased building serve as

the world headquarters of it and each of its affiliates.

Although the CME Center arguably served as petitioner’s “world

headquarters” in the sense that petitioner had offices and

employees located throughout the world, see Payless Cashways v.

Commissioner, supra, petitioner has not established that the CME

Center also served as the world headquarters of its approximately

2,700 members.   Approximately 1/4 of those members are

corporations and the remainder are individuals.   Under the

holding of the Court of Appeals for the Seventh Circuit in United

States v. Kjellstrom, supra, a corporation does not qualify for

the world headquarters exception merely by virtue of the fact

that the corporation is owned by individuals and has more than

one office.




     2
       Nor do we believe that petitioner was an affiliate of
either CCP or PMT for purposes of sec. 204(a)(7) of the TRA, Pub.
L. 99-514, 100 Stat. 2146. Petitioner looks solely to its 10-
percent ownership interest in each partnership and concludes from
this bare fact that it and the partnerships are affiliates. We
disagree. None of the shareholders in United States v.
Kjellstrom, supra, were considered by the Court of Appeals for
the Seventh Circuit to be Wisco’s affiliate, and the interest of
at least one of those shareholders was at least 16.6 percent.
                               - 9 -

     We hold that petitioner does not meet the requirements of

TRA section 204(a)(7).   We have considered each of the parties’

arguments and have rejected those arguments not discussed herein

as without merit.   Accordingly,

                                            Decisions will be entered

                                       under Rule 155.
