Preslar v. Commissioner

BRISCOE, Before EBEL and Circuit MARTEN, Judge.1 Judges, and District Marten, sitting by designation. 1. The J. Thomas United Honorable Kansas, Judge States District District of BRISCOE, develop intended to the ranch Judge. Circuit sportsman’s by subdividing resort Revenue of Internal The Commissioner selling acres one— to two-acre lots for deci- appeals the United States homes, permitting lot cabins or vacation deficiency tax as- to redetermine the sion engage to hunt and in other outdoor owners against Layne and Preslar sessed Sue 2,340 remaining recreational activities on the underpayment of 1989 federal income taxes. goal acres. The was to sell each cabin lot for held the Preslars’ settlement The Court $16,500, face obligation a loan for less than the approximately gross with total reve- create amount of the loan did not taxable exceeding million. nues The Preslars’ $1.5 liability/disput- income because the contested joint tax return indicates lots several exception general discharge- ed debt substantially higher sold for amounts. rule of-indebtedness income rendered permitted Moncor Bank the Preslars to jurisdic- exercise write-off nontaxable. We by assigning repay their loan the installment 7482(a)(1), pursuant to 26 and tion U.S.C. purchasers sales contracts of lots to cabin and reverse remand. Moncor Bank at a There is no discount. unique repayment arrange- reference to this I. ment in the loan writ- documents. The first Preslar, Layne agent a real estate of twen- description repayment ten of this method ty-five years, negotiations in commenced May 3,1984, appears Joseph in a letter from to a 2600-acre ranch near Bank, Ferio, representative Moncor to Cloudcroft, High Nogal New Mexico. Layne arrangement Preslar. The is also dis- Ranch, Inc., owned the ranch and was a unsigned Agree- in “Dealer cussed debtor-in-possession Chapter bank- ment” Moncor Bank and the Pres- between ruptcy proceeding. Citizens State Bank of sold, lars. each cabin lot was When Carrizozo, Security Bank and Trust of Alam- assigned physically and Preslars transferred mortgages in ogordo, and Moncor Bank held Bank, the written sales contract to Moncor Bank. the ranch. Moncor which had been return, experiencing financial difficulties and In Moncor Bank credited the Pres- serious was subordinate to the other obligation whose interest equal lars’ in an amount to 95 debt banks, assisting negotia- lead in took the percent principal price, of the stated contract High Nogal tions between and Preslar. regardless payments of actual received from designed Moncor Bank’s actions were to purchaser. Moncor Bank received a se- recoup as much of its avoid foreclosure curity protect to interest each lot sold possible. loan as purchaser in the defaulted. interests event 12, 1983, talks, August July September Between 1983 and On after six months of Layne agreed Preslar to and had Sue the Preslars sold nineteen cabin lots million, the ranch for with the sale to be assigned most of the contracts to Moncor agreement financed Moncor Bank. The insolvency. prior Bank to its declared Mon- expressly the fact that Moncor referred to principal Bank had credited the Preslars’ eor financing purchase, Bank was but $200,000. approximately loan balance with president High Nogal the Preslars and applied to interest are not included Funds signed September contract on 1983. amount; thus, aggregate amount of this promisso- a million The Preslars executed $1 assigned to discounted installment contracts Bank, ry note in of Moncor secured favor Moncor Bank exceeded mortgage ranch. The Preslars were August Bank de- In Moncor was $66,- pay fourteen annual installments In- Deposit Federal clared insolvent and the percent per an- with interest twelve (FDIC) Corporation appointed surance was num, payment September with final due as receiver. The FDIC notified the $760,000 Moncor Bank used insolvency them to make and advised satisfy mortgages proceeds loan payments on their loan to the all future Security Bank and Bank and Citizens State accept further The FDIC refused to FDIC. The Preslars thus received title to Trust. assignments of sale contracts as High ranch and clear of all of No- free suspend sales of prior mortgages. and ordered the Preslars to gal’s time, however, complied filing. did the Preslars At no The Preslars cabin lots. directive, underlying liability but made no further suspension dispute their on the $1 payments on the loan. million note. against filed an action The Preslars responded that The Commissioner September of contract FDIC breach not invoke Preslars could 1985, seeking requiring the FDIC an order provision applies only to situations assignment of contracts as accept sales property agrees where the seller of to reduce parties the ac- repayment. The settled purchaser’s flowing the amount of the after the FDIC in December 1988 tion case, property In from the sale. this $350,000 agreed accept in full satisfaction argued, property seller Commissioner The Preslars the Preslars’ indebtedness. High Nogal. party responsible from another bank borrowed reducing the Preslars’ debt was not the seller and, to the after the funds were remitted (as for but was the FDIC receiver Moncor FDIC, promissory original million $1 108(e)(5) Bank), thereby rendering § inappli- “paid.” note was marked argued the cable. The Commissioner also settlement, unpaid At the time of the adjustment purchase price rule common law on the Preslars’ loan was balance 108(e)(5). § adoption of did not survive the $550,537 paid a total of The Preslars Finally, the Commissioner maintained the $200,537 ($350,000 plus cred- settlement good Preslars had not demonstrated cause contracts). assignment of sales ited untimely filing of their for the 1989 return. settlement, Therefore, a result The Tax Court ruled favor of the Pres- obligation outstanding debt was re- Preslars’ addressing purchase price lars without $449,463 ($1 $550,537). by duced million less Instead, adjustment issue. court sua $449,463 The Preslars did not include the sponte invoked the contested doc- discharge-of-indebtedness debt write-off as payment trine and held the Preslars’ unusual joint income on their 1989 tax return. Rath- arrangement with Moncor Bank caused their er, they opted to reduce in the their basis liability for the full million loan to be $1 $430,000 pursuant ranch to Internal Reve- brought question. into The court deter- 108(e)(5). 108(e)(5), § § nue Code 26 U.S.C. in- mined the true amount of the Preslars’ audited The Preslars’ 1989 tax return was firmly until debtedness was not established they deficiency and were assessed a FDIC; thus, they no dis- settled (1) discharge- had realized charge-of-indebtedness income ac- could have (2) they were of-indebtedness crued to the Preslars as a result of the eligible pur- treat not such income as Although settlement. the court held the 108(e)(5). adjustment § A chase under untimely justified, filing was not it Preslars’

penalty Internal was also assessed under deficiency of a tax ne- reasoned the absence 6651(a)(1), § Revenue 26 Code U.S.C. gated penalty assessment. The Preslars 6651(a)(1), timely § to file a re- failure appeal do not the determination that their turn. justified. untimely filing was not sought The Preslars a redetermination of Court, deficiency in United States Tax II. insisting they were free to treat their settle- of the United Decisions States purchase price ment with FDIC as “in Court are reviewed the same manner and adjustment § pursuant and/or to the same extent as decisions of the district They supported theory in common law. this jury.” courts civil actions tried without a part by claiming the refusal to honor FDIC’s 7482(a)(1). 26 We review the Tax U.S.C. repayment agreement Moncor their findings Court’s factual for clear error and infirmity relating to an Bank amounted back legal its conclusions de novo. See Schelble v. sale, thereby negating Commissioner, 1388, general prohibition against treating re- debt Cir.1997). The have the burden of adjustments. purchase price ductions as proving the determinations They argued complicated nature Commissioner’s further (cit- timely id. good of their return was cause for not are incorrect on factual issues. See Mertens, Jr., 142(a); v. 2 ing Tax R. Prae. & Proc. Welch Jacob Mertens Law Feder Ct. (1996). 111, 115, 8, Helvering, 54 S.Ct. 78 al Income Taxation 11.01 290 U.S. Loans (1933)).2 ordinarily L.Ed. 212 are taxable because the bor obligation repay rower has assumed Discharge-of-Indebtedness Income in full at some future date. See Com Tufts, missioner v. 461 U.S. 61(a) of the Internal Revenue Section (1983). S.Ct. 75 L.Ed.2d 863 Dis broadly “gross defines income” as “all Code charge-of-indebtedness principles come into source derived” ex income from whatever however, play, if assumption repay cept expressly provided otherwise. 26 61(a). proves Otherwise, phrase taxpay ment erroneous. is intended to U.S.C. wealth, clearly capture resulting all “accessions to real ers could secure income with no tax ized, taxpayers have com liability. over which

plete v. dominion.” Commissioner Glenshaw undisputed It is that the Preslars financed Co., 426, 431, 75 S.Ct. Glass U.S. of the ranch exe- (1955). enactment, L.Ed. From cuting promissory a million note favor “sweeping scope” provision of this and its similarly of Moncor Bank. It is uncontested statutory consistently predecessors has been that when the Preslars settled their lawsuit emphasized by Supreme Court. See 1988, thereby extinguish- with the FDIC in Schleier, Commissioner 515 U.S. 327- loan, ing obligations arising all from the 1983 28, 2159, (1995); 115 S.Ct. 132 L.Ed.2d 294 $550,537 paid had been on the loan Glass, 11, n. Glenshaw 348 U.S. at 429-32 & Nevertheless, principal. the Tax Court ruled 75 S.Ct. 473. underlying disputed the Preslars’ debt was

This case centers around the Commission- judicially-created fell and wúthin the “contest- discharge- of the er’s determination Preslars’ liability” exception discharge-of-indebt- ed to income after of-indebtedness settled edness income. obligation their loan with the FDIC in De- Liability/Disputed Excep- Contested Debt concept diseharge-of- cember 1988. The tion indebtedness first articulated in or, liability” The “contested as it is Co., Kirby United States v. Lumber 284 U.S. known, occasionally “disputed debt” doctrine 1, 4, (1931), 52 S.Ct. 76 L.Ed. 131 and later premise taxpayer that if a rests on the dis 61(a)(12), requires codified in 26 U.S.C. putes original good the amount of a debt in taxpayers who have incurred a financial obli- faith, subsequent dispute settlement of that gation discharged later in whole or in is cognizable is “treated as the amount of debt part, recognize to as taxable income the ex- Commissioner, purposes.” for tax Zarin v. obligation. of the in the tent reduction Two (3d Cir.1990). In other rationales have been identified for this rule: words, original the “excess of the over debt premise that This rule is based on the the determined to have due” the amount been taxpayer has increase wealth due disregarded calculating gross in be against the reduction valid claims the come. Id. The few decisions that have inter taxpayer’s In the alternative it assets. has preted generated this doctrine have consider suggested appropri- been that taxation is controversy. able ate the received consideration origins liability the doc- The contested taxpayer exchange for indebted- [his] Sobel, trine can be traced to N. Inc. v. Com- ness is not included in income when re- missioner, 40 B.T.A. 1939 WL obligation repay ceived because of the (1939), arising during a case the Great De- obligation and the cancellation of that re- case, corpora- original pression. In that a New York moves the reason for the exclu- purchased sion. tion 100 shares of a bank’s stock Restructuring taxpayer evidence with re- 2. The Internal Revenue Service "introduces credible 105-206, any ascertaining and Reform Act of Pub.L. No. spect factual issue relevant (1998) (codified Stat. 726-27 However, liability taxpayer." this 7491), popularly 26 U.S.C. known as the "Tax- July amendment did not become effective until payer Rights,” proof the burden of Bill shifts 22, 1998. to the Commissioner in certain cases where the $21,700 payment. filed a state action to collect the funds. Za- signed a note as and matured, initially liability grounds rin denied the stock was When the note the casino’s claim was unenforceable under corporation The sued bank worthless. rescission, Jersey parties insisting the loan contravened New law. The later settled for fulfill for After Zarin failed had failed to state law and bank guarantee corporation against to account for the debt write-off on his tax promise to return, thereafter, a defi- Shortly superin- Commissioner assessed loss. state million, ciency approximately because of $2.9 tendent of banks closed bank underlying against amount which Zarin’s insolvency initiated a countersuit and exceeded his settlement with the casino. corporation the amount of the note. However, The Tax a divided Court affirmed. ultimately parties settled the consolidat- The discharge-of- Third Circuit held Zarin had no paying proceedings corporation ed with the because, alia, indebtedness income inter his $10,850 superintendent in return for dis- from a con- transaction casino arose corporation charge The then debt. liability. Citing 916 F.2d at 115-16. tested $10,850 year in the of settle- took a deduction majority authority, no reasoned ment. The disallowed the de- Commissioner “[wjhen unenforceable, a debt it follows is $10,850 deficiency, duction and assessed debt, just that the amount of the and not representing the amount of the thereon, dispute.” Id. at 116. figure. The Board of over the settlement Therefore, settlement “fixed the Appeals ruling upheld reversed cogni- amount of loss and the amount of debt deduction, concluding corporation’s purposes.” zable for tax Id. ownership degree of the shares and the highly on the note were unclear. See problem with the Third Circuit’s (“There question whether the id. at 1265 holding liquidated unliquidat it treats ques- taxpayer bought property in 1929 and theory ed debts alike. The behind whole tion as to its and the amount there- requiring that the amount of a debt be dis added). of”) (emphasis The Board found the liability puted exception before the contested corporation’s obligations financial could not triggered only in can be is that the context of definitively prior be to resolution of assessed disputed Revenue debts is Internal Ser and, dispute superintendent with the since (IRS) vice of the exact unaware consideration parties’ compromised settlement claims initially exchanged in a transaction. See recognition precluded legal and of their Shaviro, Daniel The Man Lost Too Who rights, the cor- the existence and amount of Much: Zarin v. Commissioner and the Mea liability poration were not fixed until the date Consumption, surement Taxable 45 Tax Thus, release of the note did settlement. (1990). L.Rev. The mere fact that a corporation. gain to a for the not amount taxpayer challenges enforceability of a Zarin, good necessarily

In the court embraced the reason- debt faith does not mean ing reversing discharge-of-in of N. he or she is shielded from Sobel while Commis- discharge-of-indebted- upon recognition sioner’s debtedness income resolution of the liability gaming dispute. implicate To the contested ness income. The state commission doctrine, compulsive gambler identified Zarin as a and amount of the debt City unliquidated. A of lia ordered an Atlantic casino to refrain must be total denial credit, bility issuing dispute touching upon him not a from additional but is underlying ignored Za- amount of the debt.3 com casino the commission. When One million, surpassed rin’s the casino mentator has observed: debt $3.4 Although warranty. parties 3. Bittker and McMahon cor- tation or breach of The later Professors rectly professors $750. $250 that the contested settle for assert the state in their treatise The requires dispute by agree. a valid a debtor debt reduction is not taxable. We The rule creditor, exclusion, however, they misapply of the amount owed to a basis for the is not the con- hypothetical. the doctrine in their See Boris I. tested doctrine. There is no over McMahon, $1,000 Jr., upon figure J. Federal In- which the Bittker Martin (2d ¶ parties originally agreed. avoid- 4.5[3][c] come Taxation Individuals Taxable income ed.1995). buys purchase price adjustment example, ance flows from the In their an individual $1,000 “infirmity exception.” at equipment on credit but then rule or See discussion business pages pay alleged misrepresen- refuses to because of an 1331-33. taxpayer’s The ... not losses Enforceability of the debt should sought taxpayer transaction. treatment of the to assess the affect the tax Commissioner initially transac- treated the parties discharge-of-indebtedness If the in- proceeds were a loan when the loan tion as raising the contested liabili- come. Without received, declaring receipt thereby not doctrine, ty rejected the we Commissioner’s should be then the transaction debt, being gambling held “a position and consistently the loan is dis- treated when state, every slight unenforceable in has but charged income should be declared require- potential and does not meet discharge. the amount necessary justify me- ments of debt Giangiordano, Taxation-Dis- Gregory M. operation general tax chanical rules of charge Indebtedness Income-Zarin relating to cancellation of debt.” Id. at law Commissioner, 1189, 1202 Temp. L.Rev. (1991). contrary holding would A n.88 viability Hall has continued Whether debts treatment of unenforceable strain IRS questionable light Supreme Court’s and, Supreme large part, disavow holding emphasis taxpay- on a The Tufts. phrase “gross in- mandate that legal obligation pay gambling lack of er’s broadly interpreted as as the Con- come” be in Hall is difficult to reconcile with Glass, 348 permits. stitution See Glenshaw disregard of the nonrecourse nature Tuft’s & n. 75 S.Ct. 473. U.S. at 432 calculating gross a loan in income. Even by the conclusion is underscored Su This viable, however, parts if of Hall remain holding in that a nonre- preme Court’s Tufts refuge little to the Pres- opinion would offer (i.e., taxpayer per mortgage has no course unliquidated. in Hall was lars. The debt default) liability upon must be treated sonal taxpayer’s underlying obligation, there- when it is made as an enforceable loan both fore, prior could not be assessed to settle- 311-13, discharged. 461 U.S. at and when it is owner. Such a scenario ment club reasoned that 1826. The Court S.Ct. present here. as a true is treated indebtedness incurred, it must be treated debt when it is case, In this the Tax Court observed discharged, it with all as a true debt when payment arrangement between “the unusual at 309- consequences. tax Id. the attendant relating Bank Preslars] and Moncor [the from 1826. It seems evident 103 S.Ct. significant doubt on [the the Bank loan casts between the ruling that if the distinction this the total million Preslars’] of a loan and nonrecourse nature recourse principal amount of the Bank loan.” stated gross in bearing calculation of has no on Op. Accepting the Preslars’ Tax Ct. at 8. come, enforceability a debt should be million contention that their $1 course, importance. if equally minimal Of price inflated and did not reflect had been an unenforceable as a result of the debt is ranch, the Tax fair market value of the (e.g., infirmity at the time of its creation agreed to suggested the Preslars had Court liability may misrepresentation), tax fraud or arrangement only financing the terms of the through reduc be avoided to a after Moncor Bank assented favorable or an “infir under 26 tion U.S.C. involving assignment of repayment scheme mity exception.” The court held installment sales contracts. in and the court The Tax Court this case pay- to honor this when the FDIC refused Hall, in Zarin cited United States legitimate dispute arrangement, “a ment (10th Cir.1962), support in of their F.2d 238 and amount of regarding the nature arose Hall, liability holdings. In contested the Bank loan.” on [the Preslars’] gambling losses at a Las taxpayer incurred Only after the Preslars and the FDIC Id. $145,- range in an Vegas club estimated lawsuit, subsequent the court their settled of the owners of the One reasoned, was the amount in agreed forgive the debt return club finally loan established. taxpayer’s cat- a one-half interest parties two could It conceivable that prior to transfer of the interest tle. Just in which the negotiate a loan transaction $148,- cattle, had a value of which base underlying of a debt is tied to agreed amount parties mutually to assess addition, post-exe- In the Preslars’ characterization or nonexistence of some existence Indeed, dispute with the as the culmi- of their FDIC the IRS has defined cution event. dispute nation of their over the ranch loan is obligation, “an absolute “indebtedness” as not faithful to the evidence. The contingent, pay on demand or and not only terms of with the FDIC focused time, given in cash or another medi- within a repayment; upon it did not touch the amount um, Reg. Treas. fixed amount.” validity Stipula- or of the Preslars’ See debt. 1.108(b)-l(c) 1.108(b)-l(c), 26 C.F.R. ¶at 36. This tion of Facts conclusion (1998).4 repre- Contrary the Tax sought highlighted the relief from the sentations, however, there is no evidence of accepting assign- As an alternative to FDIC. agreement an here. such contracts, requested ment of the Preslars competent no The Preslars advanced “substantially the FDIC discount theory support their that their evidence to remaining amount due on their loan.” Id. repayment to the obligation loan was linked position “evidences the Preslars’ rec- Such that, although they They maintain scheme. ognition had a fixed and certain writing, acquiescence their did not state it liability at the time the FDIC took control of purchase price hinged on in the million $1 fact, their loan from Moncor Bank.” In satisfy being through their able to Layne Preslar conceded he understood he Thus, assignment of installment contracts. personally was for the full amount of liable assign refused to honor the when the FDIC the million note the event he could not $1 ments, a concomitant reduction their liabil sum, In sell a sufficient number lots. words, ity necessary. In other underlying remained Preslars’ indebtedness could enforce the ranch loan with “FDIC liquidated all times. [unsigned] Agree abiding out Dealer irrelevant, Although ultimately the Pres- Agreement ment. The loan and the Dealer evidence, Layne lars offered no other than integrated of an transaction.” were two sides self-serving testimony, Preslar’s that the fair May Appellees’ Br. at Neither the 4-5. market value of ranch differed from their Layne letter from Moncor Bank to Preslar purchase price. They million introduced unsigned Agreement, nor the 1985 Dealer expert appraisals support no at trial to however, any evincing contains statement an theory. inflation of value The refer- underlying liability link intent to appraisals ences in the record to are those Further, parties if the scheme. allegedly immediately prior conducted to the obligation inextricably desired the loan to be However, settlement with the FDIC. the al- repayment arrange intertwined with the leged appraisals were not admitted at trial. ment, that condition should have been memo 31, 1983, suggest August merely rialized in the loan document and not transcript judgment in the amount of eight set out in a letter months after the loan $495,957 unencumbering Moncor Bank’s lien protestations was formalized. The dissent’s on the ranch reflects the true value of the Layne notwithstanding, Preslar’s own self- document, however, property. This is mere- serving testimony regarding the intentions of ly judgment transcripts one of a series of parties agreement Indeed, releasing filed liens on the ranch. support to the Preslars’ inte not sufficient outstanding prior two other banks held mort- theory. grated transaction See Philhall gages totaling approximately on the ranch (6th States, Corp. v. United 215 $760,000. extrapolate The court the cannot Cir.1976) (“[T]he testimony taxpayer [a] of as property single from value of creditor’s intent, standing unsupported by Moreover, to alone and two-year-old judgment. if even facts, objective insufficient as a matter of property [is] could the Preslars demonstrate the law.”); States, F.Supp. purchase price, they Nasser v. than United was worth less (N.D.Cal.1966) (same). still could not invoke contested 61(a)(12), regulation changed regulato- § Code 4. The terms of this have not Internal Revenue 61(a)(12). adopted ry language equally applicable it was Fed. to since first See 25 (1960). Reg. Although regula- Thompson, See Boris I. Bittker and Barton H. Jr., discharge-of-indebted- Discharge specific Income Indebtedness: tion’s focus is on from of Co., Progeny Kirby corporations States v. Lumber ness of railroad and does not ex- United of (1978). plicitly apply under 66 Cal. L.Rev. to the term "indebtedness” (1980) (codified they at 26 U.S.C. proof the loan 3389-90 absence of doctrine 108(e)(5)). provides: by fraud or material The statute now tainted executed underlying misrepresentations, because If— liq- obligation remained their debt amount of (A) purchaser property of the debt of Sherman, uidated. Commissioner property Cf. of such which seller Cir.1943) (settlement follow- F.2d prop- arose out of the such duty repay full taxpayer’s to ing contest reduced, erty is misrepresenta- mortgage based on amount of (B) reduction does not occur— such contracting did not leave tions at time of (i) case, in a title 11 or in- discharge-of-indebtedness taxpayer with (ii) insolvent, purchaser when come). allegations fraud or There are no misrepresentation in this case. (C) paragraph, but for this such reduc- Finally, contend their transac- the Preslars to tion would be treated as income Bank made little economic tion with Moncor purchaser discharge from indebt- only accommodate and was done sense edness, attempts pacify bank Bank in its Moncor then such reduction shall be treated as a regulators. argument has little merit. This adjustment. purchase price highly experienced that an real It is doubtful (1988). 26 U.S.C. Layne spend agent like Preslar would estate price ranch negotiating the six months cannot treat their settle The Preslars only agree grossly to a overstated to then purchase price ment with the FDIC as a figure. is the notion Even more incredible 108(e)(5) applies only reduction. Section exposed them- that the Preslars would have agreements purchaser direct between personal liability to million of out selves (1980), re S.Rep. seller. No. 96-1035 at 16 pure for the As the Com- benevolence bank. 7017, 7031. “If printed in 1980 U.S.C.C.A.N. out, points if the Preslars had sold missioner by transferred the seller to the debt has been ninety-six they claimed all lots for as (whether party a third or not related to the negotiations they during could seller), property if trans or has been Bank, would have netted Moncor (whether by buyer party ferred to a third profit Moncor gross of more than buyer),” or not related to the fully expected Bank the Preslars to be suc- exception price reduction is not available and anticipated of lots and cessful their sales discharge-of-indebtedness rules con normal brokered profits. The deal that Preslars Id.; 2 Mertens Law Federal trol. see total economic with Moncor Bank made 11.20, 11.25. §§ The seller Income Taxation invocation of the sense. The Although High Nogal. Mon- in this case was liability doctrine the face of contested helped negotiate the terms of the cor Bank presented record was unwarranted. sale, capacity a mort it did as so Adjustment Price Purchase make much of the gage holder. The Preslars signatories to the “Sellers fact that one of the taxpayers which Another method memorializing the sale was a Statement” income discharge-of-indebtedness avoid can However, the representative. Bank Moncor classify pur their debt reductions vice-president Moncor Bank testified the adjustments. permits This rule chase signed the document at the insistence bank taxpayers reduction to reflect companies. Moncor of the title As neither property rather adjusting the basis of their FDIC, receiver, was the Bank nor its gain can recognizing an immediate than property, the loan settlement seller Although this cellation of indebtedness. negotiated with the FDIC does part law principle had been of the common reduction as permit them to invoke the debt decades, rule Congress codified the adjustment under 1980, purchase price a part Bankruptcy Tax Act of 108(e)(5).5 3389, 96-589, 2(a), § § 94 Pub.L. No. Stat. ownership argument, assessing interests in the ranch. Contrary mini- to the dissent’s High Nogal participation officials in the mal a scintilla of evidence in the record There is not pur- negotiations culminating in the Preslars' little or no relevance in chase of the ranch is of 1332 require- purchase price seek to avoid the not a

The Preslars er was considered ad- 108(e)(5) by arguing § the transac- ments of justment under common law. See Ave- Fifth (1) by: financing” a “seller tion is embraced Commissioner, Corp. Fourteenth St. v. 147 (2) exception; the common law (2d Cir.1944) (doctrine 453, F.2d 456-57 does (3) doctrine; third-party a price reduction or apply where reduction from results arms- exception in cases of infirmities re- transfer length relating solely transaction to debt it- lating back to the transaction. We self). theory in turn. address each developed prior It is clear the case law Financing Exception—Citing en Seller Dan 108(e)(5) § enactment of did not extend the Commissioner, 370, berg 73 T.C. 1979 purchase price exception reduction to debt (1979), party the Preslars contend a WL 3864 money settlements outside the financing property be treated the sale of 108(e)(5). § purposes mortgage as the seller 2 context. Mertens Law Feder- Danenberg. Dan- The Preslars misconstrue § al Income Taxation 11.25. The case law taxpayers enberg involved two insolvent at consistent, however, respect was not with tempting property previously pledged to sell purchase money mortgages involving third negotiations loan. All as collateral on bank Ave., parties. Compare 147 F.2d at Fifth subject approval by the were bank. (doctrine apply 456-57 does not to third- taxpayers agreed purchase price on a with transactions), party with Hirsch v. Commis- of their creditors and obtained the several sioner, 656, Cir.1940) 657-59 approval. bank’s The Commissioner as (doctrine apply third-party does transac- deficiency based on failure to ac sessed tions). long-term gains count for from the sale. The issue before the Tax Court centered not on The Hirsch case relied on Bowers v. Ker discharge-of-indebtedness income but Co., 170, baugh-Empire U.S. S.Ct. taxpayers required whether the were to rec 449, (1926), implicitly 70 L.Ed. 886 a decision ognize gain property pursu from the sale of repudiated subsequent years. See Glen § ant to 26 U.S.C. 1002.6 The Tax Court Glass, shaw at n. 348 U.S. 429-32 & gain recognized had to determined be be 473; Lumber, Kirby S.Ct. at U.S. taxpayers cause the were the sellers 108(e)(5) Further, intended, § S.Ct. 4. at Only property. after the sale had been con part, uniformity least to create in this summated did a “second transaction” occur jurisprudence. S.Rep. See No. 96-1035 proceeds paid in which the were to the bank (1980),reprinted 16-17 in 1980 U.S.C.C.A.N. taxpayers’ reduce and used to indebtedness. (“This provision 7031-32 is intended to The instant action involves neither insolvent disagreements eliminate between the Inter taxpayers gain nor treatment of or loss on nal Revenue Service and the debtor as to disposition property. anything, If Danen- whether, berg supports particular in a the Commissioner’s contention case to which the High Nogal and not Moncor Bank was provision applies, the debt reduction should the seller. discharge be treated as income or a true adjustment.”). If, as the Preslars ar Common Law Purchase Price Reduction gue, the common law rule remains viable Doc trine— The Preslars the com insist permits taxpayers third-party involved purchase price mon law reduction doctrine transactions to treat their debt reductions as may be invoked in cases where 26 U.S.C. adjustments purchase price than rather addi 108(e)(5) § inapplicable. The Commission 108(e)(5) gross § tions to their would responds displaced er has meaningless. agree and, be rendered any common law on We this issue event, by third-party imposing a debt reduction lend- the Commissioner’s rationale for passed High Nogal pursuant that title from to Moncor to the Tax Reform Act of Pub.L. any prior purchase. 94-455, 1901(b)(28)(B)(i), Bank at time Preslars’ No. 90 Stat. (1976). repealed 6. This section was later and its relevant provisions were inserted in 26 U.S.C. EBEL, Judge, dissenting negotiation re- Circuit seller-purchaser direct the in a 1992 revenue as articulated quirement, independent respectfully on two I dissent ruling: First, supports partic- record grounds. the — ularly clearly erroneous stan- under the a debt between a agreement to reduce An that, finding factual dard —the a third-party lender is not purchaser and a “[wjhen [the] refused to honor the FDIC purchase price paid adjustment of the true arrangement regard with to the payment the seller has property loan, legitimate dispute regard- arose Bank price from received the entire ing [the Preslars’] the nature and amount of party debt is not a to the purchaser and Op. liability the Bank loan.” Tax Ct. at 8. agreement. The debt reduction reduction triggers finding properly This factual solely debt and results relates to the Second, contested doctrine. discharge income to of indebtedness potential argument that Preslars have a

debtor. purchase-money reduc- are entitled to a debt (“I.R.C.”) tion under Internal Revenue Code 92-99, According- Rev. Rul. 1992-2 C.B. 108(e)(5), 108(e)(5), 26 U.S.C. as Moncor ly, not treat their settle- the Preslars viewed, Bank could be for all substantive pur- a common law ment with the FDIC as purposes, the seller of the Ranch. On the price reduction. chase Alternatively, if ground, I would affirm. first would, ground, I on the first we do not affirm Exception Preslars Infirmity —The least, ground remand on the second at the “infirmity they qualify the limited argue finding of fact as to whether Moncor for a general prohibition against exception” to the be considered the seller of the Bank could purchase price treating reductions as debt Ranch. seller-pur adjustments in other than direct this narrow ex chaser transactions. Under Liability I. Contested taxpayers may treat debt reductions ception, liability doctrine or the contested Under negotiated parties third disputed exception, when “there is adjustments “to the extent that a creditor and a legitimate between third-party by the lender is debt reduction concerning liability, the existence debtor clearly infirmity that relates on an based parties compromise and a between original (e.g., reached, in discharge to the sale the seller’s of indebtedness back no and un by as to the contested higher purchase price come will arise of a inducement original liability.” 2 Mer paid portion of the misrepresentation material fact or Taxation, tens, Income Federal Law fraud).” noted, As Rev. Rul. 92-99. (1996) (citing Zarin v. Commis 11.19 at 42 allegations misrep have made no (3d Sobel, Cir.1990); sioner, N. F.2d 110 “infirmity” upon or fraud. The resentation (1939)) Inc., 40 B.T.A. 1939 WL they predicate theory is the which added). Thus, contrary to the ma (emphasis terms of FDIC’s refusal to abide view, jority’s doctrine the contested plan negotiated with Moncor taxpay not limited to instances where However, dispute did not relate Bank. amount of specifically disputes er thus, sale; “infirmity original back unliq- amount was the debt and the exception” inapplicable. uidated. Sobel, Indeed, the seminal the facts of N. case, majority’s belie the contested III. There, taxpayer corporation position. the Tax Court’s vacatur We REVERSE pay note to for 100 shares issued a of tax de- determination the Commissioner’s Sobel, B.T.A. at N. stock. See bank’s filing imposition untimely ficiency due, corpo- the note became 1264. When in- the case with penalties pay, disputing and REMAND ration refused to validity of judgment in favor of the rather the to enter amount of the note but structions ground bank the note itself “on Commissioner. the Ranch had failed to million for in violation of law and made the loan guarantee [corpo- the carry promises to inflated and that the Preslars and Mon- out been corporation Id. The against correspondingly loss.” agreed ration] Bank had to a cor dispute the settled and the bank involving repayment method of inflated Appeals dis- Tax found no The Board of assignment sales contracts. of installment though even charge of indebtedness According Op. at 7-8. to the See Tax Ct. dispute the amount of corporation did Court, the FDIC refused to “[w]hen Tax original though the the debt and even regard payment arrangement with honor this (at $21,700). liquidated Id. at amount was loan, legitimate dispute Bank a arose held that the amount of the 1265. The Board regarding [the the nature and amount liability was “not actual and corporation’s liability the Bank loan.” Id. at Preslars’] on corporation’s subsequent present” until the Thus, given proper scope of the con- 8. agreement with the bank. Id. at compromise doctrine, liability I tested believe that with the FDIC would Preslars’ settlement Sobel, majori- I believe that the Given N. in- discharge not result indebtedness liability ty’s doctrine view that the contested finding if Tax is correct. come Court’s original applies only amount of when majority rejects the Tax The Court’s find- unliquidated is mistak- disputed debt is and ing, stating that no “[t]he Preslars advanced ignores enly This view the fact narrow. theory competent support their evidence to necessarily original of a debt is amount obligation that their loan was linked to the unliquidated disputed under and be scheme,” such that the FDIC’s liability good dispute “that can be faith over the scheme of inflated refusal abide circumstances in existence at traced to the give dispute repayment would rise to a re- R. creation.” William the time of the debt’s garding principal of the loan. Marsh, Jr., the inflated Jr., E. Avoid- Culp, and Richard However, arriving Ante at 1330. at this ing Debt Income Where Cancellation of conclusion, Disputed, majority significant Tax’n Liability is J. overlooks (“When Zarin, (1991); F.2d at 116 high see evidence in the record as well as the unenforceable, it follows that overturning clear error standard of debt, just liability and not amount of the finding. Tax factual See 26 Court’s U.S.C. Sobel, thereon, dispute.”); N. 7482(a)(1) (circuit cf. courts review Tax Court liability (finding corporation’s B.T.A. at 1265 “in decisions the same manner and to the “definitely fixed” until settlement of was not of the district same extent decisions courts validity dispute regarding its bona fide jury”); in civil tried without a Exxon actions note). Only upon dispute resolution of Gann, Corp. v. liability over the existence of traceable the Cir.1994) light “in (viewing the evidence origin “question does the as to of the debt ruling,” most favorable to the district court’s taxpayer’s] and the amount [the accept findings we “must the district court’s any present by “actual thereof’ become and erroneous,” is, clearly of fact unless N. practical purpose,” including taxation. [we are] unless “on the entire evidence left Sobel, Thus, at 1265. settlement of 40 B.T.A. firm with the definite and conviction that a enforceability of a debt over committed.”) (citations and mistake has been origin, the settle- traceable to its such as omitted). quotations Zarin, in N. does not result ments Sobel standard, merely the clear error I believe in a windfall. settlements es- Under Such liability, original finding. tablish the amount of we must affirm the opposed discharging any amount of the ample upon evidence which record contains liability. the Tax Court could have concluded that disputed the initial nature case, finding In this the Tax Court made a their on the Bank loan. amount of disputed fact that the Preslars Specifically, the record contains evidence FDIC both the nature and amount of (1) Ranch, during negotiations that: for the the loan from Moncor Bank. As (“Preslar”), experienced Layne Preslar majority acknowledges, the Tax Court broker, and the Bank had con- accepted contention that the real estate the Preslars’ $200,537 $350,000 plus payment settlement market value the fair eluded that million, by considerably payments previously received less than installment $1 Ranch was 40). (2) Bank) (Tr. 79)1; reas- (Stip.# the Bank nevertheless at the deal for the Ranch that the sured Preslar evidence, taken from From the above make the sales of if Preslar could would work testimony Stipula- at trial and the Preslar’s (3) (Tr. 79-80); lots, the terms at the cabin by parties,2 agreed to both the tion of Facts the Bank Ranch included the deal for the permissibly conclude that “a Tax Court could contracts of the installment sales purchasing legitimate dispute regarding the nature arose percent value under at 95 face the cabin lots liability on the and amount” of the Preslars’ (4) (Tr. 80); at the Agreement, Dealer the accept Bank loan once the FDIC refused purchase the of such percentage for standard argued the Preslars were the what (Tr. (5) 110); percent, at the was 35 contracts payment by allowing him to make terms the the Ranch 1983 at purchased Preslars assigning sales contracts. The installment agree- upon the Bank’s million based $1 allow the Tax to infer evidence would Court assignment installment accept the ment to purchase price of the Ranch was that the (6) (Tr. 82); at payment, as sales contracts inflated; the nevertheless that Preslars of cabin lots 1984 until from the first sale deal, agreed though Ranch the to the even bankruptcy in Preslar Moncor Bank’s purchase price, Bank insisted on inflated assigned all the install- lots and sold cabin they go through because wanted the deal purchas- received from ment sales contracts agreed inflated and the Bank to an method (Tr. (7) 85, 93); Bank, at when the ers to the disputed repayment; that the Preslars Bank, it the receiver of FDIC became of their nature and amount assignments of accept further refused they requested the FDIC to dis- loan when payment, contracts as these installment sales remaining if it not count the balance would (8) that, 34); in the alternative to (Stip.# accept assignments further of sales contracts assignments payment, the accepting the as payment3; dispute is tracea- as and that this wanted the FDIC to discount sub- Preslars Additionally, origins of the loan. ble remaining stantially amount due on the fact that the total amount (9) 35); Loan, during (Stip.# settle- Bank ($550,537) Ranch up paying ended for the FDIC, agreements the value ment with appraised value of the approximated the $550,000by appraised at of the Ranch was negotiations Ranch at the time of settlement (Tr. settlement, financing the Preslars’ bank ($550,000) gives further evi- with FDIC (10) 98); Preslar settled his loan with the at dentiary support to the Tax Court’s conclu- 39); $350,000 payment, (Stip.# for a FDIC disputed the nature (11) sion that the Preslars amount the Preslars ended and the total (the liability: deprived once amount of their up paying the Ranch was and "self-serving” of intent such as majority "offered than statements 1. The asserts that the Preslars Corp. disapproved of in Philhall v. United of the ranch that States, no evidence the fair market value Cir.1976) (where purchase price,” F.2d $1 million differed from their acquiring taxpayer's certain expert appraisals support was intent in at issue and “no trial discounting taxpayer's testimony theory.” property, that at 1330. I do inflation of value Ante expe- thought good as self- “I it was a investment” this is correct. Preslar was "an not believe by supported twenty-five years, serving agent” statement of intent "not real estate as rienced facts”). objective majority acknowledges, ante at 1330- during negotiations that and Preslar testified Moncor Bank for the of the Ranch majority request states that this 3.The market value [was] conclude[d]" “it the fair recognition that Preslars “evidences the Preslars' “considerably less" than Ranch at the time had a fixed and certain million, in his own estimate it was of their loan from Moncor the FDIC took control low,” 79). (Tr. "extremely This, however, ignores Bank.” Ante at 1330. possibility request could reflect that the also dollars the testimony desire to discount to real majority the Preslars’ 2. The discounts Preslar’s regarding principal the loan since the FDIC “self-serving” inflated statements inten- However, repay- accept medium of parties. would the inflated Ante at 1330. not tions demonstrates, originally agreed Bank. This to Moncor Preslar’s testi- ment the cited evidence with the Tax Court’s mony mostly undisputed regarding is consistent facts latter inference contains decision, clearly errone- cannot be said to be from circumstances of the loan transaction drawn, of intent can be rather ous. which inferences affirmance, for a with an I of the inflated medium would remand for a purchase price, upon an inflated loan based determination of the Preslars’ role in the repay- for an uninflated the Preslars settled deception perpetrated against regu- bank equal approximately to an uninflat- ment sum lators. If the Preslars were involved in price.4 ed fraud, I would allow them the benefit of the contested doctrine. evidence, Thus, “in viewed light the Tax rul- most favorable” to points majority’s Two additional dis- ing, leave me “with the definite and does not liability cussion contested doctrine firm a mistake has been com- conviction that First, majority merit comment. relies on Exxon, 1005, mitted,” I 21 F.3d at do not 300, Tufts, Commissioner v. 461 103 U.S. finding that the believe that the 1826, (1983), 75 L.Ed.2d 863 which held S.Ct. disputed the nature and amount of that cancellation of a nonrecourse loan real- clearly Accordingly, their debt is erroneous. discharge izes of indebtedness income. See result, finding. I As a I would affirm that (1983). 311-13, id. at 103 1826 The S.Ct. would affirm the district court’s conclu- also majority that “underscore^]” believes this pre- doctrine sion that the contested holding that own cancellation of an unen- dispute gener- cludes settlement of that from discharge forceable debt realizes of indebted- ating discharge of indebtedness income. income, stating that “if ness the distinction affirmance, however, should be Such sub between the recourse and nonrecourse na- ject Lurking to a caveat. beneath the Pres- bearing ture of a loan has no on calculation purchase price lars’ contention that both the gross enforceability of a debt repayment and the medium were inflated equally importance.” should be of minimal possibility is the the Preslars aided unstated, Although Ante at 1329.5 Moncor Bank in the commission of fraud. ’ way holding majori- “underscores” the Tufts explain “[t]he The Preslars that the ty’s holding if a nonrecourse loan is treated price financing nothing of Moncor bank was equivalent functional of an unenforcea- attempt pacify regu more than an to bank ble debt. lators,” because the inflated would al majority To the extent the relies on this perpetrate low Moncor bank “to a fiction that premise, disagree. I Nonrecourse loans and nonperforming (Aplee. a loan was satisfied.” equiv- unenforceable debts are not 3.) functional Br. at Because the contested ex enforceable, alents. Nonrecourse loans are doctrine, ception equitable is an unclean party may unenforceable A debts are not. part hands of the Preslars would loan, preclude taking sue to collect on a nonrecourse advantage them from of it. but Co., Hampshire cannot sue to collect on an See Hocker New Ins. 922 unenforceable (10th Cir.1991). Thus, taxpayer personal F.2d 1486 even debt. While has no lia- majority accepting (Stip. 4. The FDIC] reasons that the Preslars had a contracts.” liability” #35.) "fixed and certain when the FDIC took part control of the Bank loan in because "Preslar personally conceded he understood he was liable that, majority recognize 5. The does in the case of $1 the full amount million note in the a debt that is unenforceable "as a result of an event he could not sell sufficient number of infirmity (e.g., at the time of its creation fraud or added). (emphasis lots.” Ante at 1330 It seems misrepresentation), liability may tax be avoided reasoning to this me that is flawed. As the through purchase price reduction under 26 indicates, emphasized language Preslar's conces- ” 'infirmity exception.' U.S.C. or an personally sion that he was liable for the entire however, Unenforceability, may Ante at 1329. premised ability note million his misrepre- arise for reasons than fraud or other payments using make on the loan inflated sentation, see, Zarin, e.g., (illegal 916 F.2d at 113 assigned medium of installment sales contracts credit); Hall, extension of United States v. 307 significantly at above market value. This conces- (unenforceable Cir.1962) F.2d says nothing understanding sion about Preslar's debt); Sobel, gambling N. 40 B.T.A. at 1264 precluded of his on tire note if he was (illegal carry promises loan and failure to out Indeed, using from scheme. loss), against otherwise, guarantee borrower arise record indicates as the thrust of the after the creation of the loan but relate back to Preslars' was that "wanted the FDIC origin, substantially remaining the circumstances of its such as in this discount amount or, part, due on an in N. [the their loan” as "alternative to case Sobel. loan, gain no in the bility upon nonrecourse realizes economic settlement default of a always for the taxpayer disputed nonetheless is liable which is unenforceable for liability merely capped That loan. relating origin reasons back to underlying security interest. value origi- debt. settlement determines the Schenk, Deborah H. Michael J. Graetz & See Sobel, liability. See N. nal amount ed.1995). (3d Income Taxation Federal 1265; Zarin, F.2d B.T.A. at 116. On debt, taxpayer unenforceable Given hand, of an the other cancellation enforceable liability. make all This distinction can has no debt would realize income the extent of purposes. for tax the difference discharge. Kirby See United States v. example, held a nonre- Co., For s Lumber 284 U.S. S.Ct. Tuft mortgage, mortgage, course like a recourse (1931). L.Ed. 131 pur tax be treated as a true must Thus, contrary majority’s reasoning, prop poses, disposition so that secured I believe an unenforceable debt is not the erty buyer assumes the nonre- where equivalent functional of a nonrecourse loan mortgage in would result a realization course concept consequence, in in either or and the unpaid of by seller of the full balance the the enforceability impor of a debt is of critical mortgage, even if value of the the secured purposes liability tance for of the contested unpaid of the property is less than that bal Indeed, although doctrine. of a cancellation 311-13, 103 1826; at ance. See U.S. S.Ct. ordinarily in nonrecourse loan would result Chirelstein, Marvin A. Federal In see also discharge of indebtedness cancella (1997) (discussing come Taxation 291-92 tion of a nonrecourse loan which is unen Supreme holding, In the Tufts). so Court relating a forceable for reason back to the only that difference between “[t]he reasoned consequences. origin might the have of no tax mortgage nonrecourse] and one on which [a Marsh, Culp supra, at 292 & personally is is that the the borrower liable Cf (both . may foreclosing and recourse debts morgagee’s remedy limited nonrecourse is to securing property,” good and that this “dif “give on the rise to faith to which” does the of the ference not alter nature liability might ap the contested doctrine be obligation; only its is to shift from the effect plied). any potential loss

borrower the lender majority suggests another limitation by property.” devaluation of the caused doctrine, stating liability to the contested 311-12, Tufts, 461 U.S. 1826. at S.Ct. if could that “even the Preslars demonstrate canceled, Hence, obligation is the “[w]hen the property pur- less was worth than mortgagor responsibility is of his relieved they price, not still could invoke chase originally repay the sum received and he in the absence of contested doctrine that Id. at thus realizes value to extent.” proof the loan executed was tainted 312, 103 1826. S.Ct. misrepresentations.” material Ante fraud or reasoning, apparent it is that From Tufts’s major- It is unclear whether the at 1330-31. lack of nonrecourse distinction between require showing of or mate- ity would fraud discharge indebt- and a recourse debt for of misrepresentation in all invocations rial negate purposes does not but rather edness only in liability doctrine or the contested applicability reinforces the contested property purchased where the cases value case. doctrine in this Because Re- price. less than the stated obligation debt is an enforceable nonrecourse commentary no or gardless, ease law repay, the would cancellation that debt liability requires proof doctrine contested discharge income. result of indebtedness misrepresentation gener- or of fraud material only Although remedy upon mortgagee’s Although hand. ally or the case at acquisition property, of the secured default is Sherman, majority cites v. Commissioner remedy limited not the mort- does affect (6th Cir.1943), nowhere 135 F.2d upon gain cancellation of the mort- gagor’s imply state or case does Sixth Circuit gain That the difference between gage. majority. In- suggested limitation original amount of the debt which deed, holding reaching taxpay- that the obligated repay mortgagor contrast, discharge of indebtedness In ers did realize canceled balance. borrower income, Sherman did not discuss the contest- to deal with the Bank because he had no doctrine, (Id. ed but rather relied on the any control property, over sale of the at purchase-price 77-78). reduction doctrine. See id. at Additionally, the Bank financed the disposed deal and received and of all the assets High Nogal’s of the sale without in- Moreover, majority’s I believe the focus on (Id. 117-18.) fact, volvement. at In property the value of the received is mis- High Nogal owner of did not even know the placed. purposes For of the contested liabili- deal, doctrine, particulars ty taxpayer the value of what a dollar (Id. 118.) Thus, entering my receives consideration for amount. at into from review dispositive. Instead, record, is not itself I believe Moncor Bank taxpayer gives what is critical is what a up, have had de title to the Ranch. See facto goes taxpayer’s as that amount liabili- Hall, United States Marsh, (“The ty. Culp supra, & See Cir.1962) (stating, in deciding taxpayer disputed liability doctrine should focus on the discharge did not realize in- indebtedness created, property indebtedness not on the “[ejourts come, that apply need not mechani- received.”) ease, however, just In this it so reality cal standards which smother the of a happens that the value of what the Preslars particular transaction”)6; Danenberg v. cf. (the Ranch) actually probative received of Commissioner, 370, 382, 73 T.C. 1979 WL (their actually gave up what the Preslars (1979) (finding taxpayer to be seller Bank), indebtedness to Moncor because Mon- collateral pur- where bank controlled final agreed cor Bank from the outset to an inflat- chase but owner in respects all other ed medium of on its loan to match arranging “was active in disposition purchase price an inflated for the Ranch. assets”); Courts, such Allen v. (5th Cir.1942) (stock broker who financed II. Purchase-Money Debt Reduction purchase of seat on New Ex- York Stock 108(e)(5) § under I.R.C. seat). change deemed “in effect” seller of I potential believe the Preslars’ have a Because the Tax Court did not reach this argument their settlement with the issue, I finding would remand for a as to who purchase-money FDIC falls within the debt was the actual seller of the Ranch. 108(e)(5), exception reduction of I.R.C. sum, In I would AFFIRM the Tax Court’s thereby rendering the settlement non-tax- holding that the contested doctrine 108(e)(5) Although able. applies to precludes recognizing the Preslars from dis- agreements purchasers reduction between charge although indebtedness I sellers, provision might possibly ap- would REMAND finding for a as to whether ply to the settlement between the Preslars participated the Preslars fraud 108(e)(5) may apply and the FDIC. Section Bank, deal with Moncor as unclean hands merely because the FDIC took Moncor prevent taking advantage would them from receiver, place Bank’s as its and Moncor equitable Alternatively, doctrine. be- purposes Bank could be viewed for these might cause the Preslars be entitled to a Although the seller of the Ranch. High No- purchase-money debt reduction under I.R.C. gal had formal title to the Ranch at the time if Moncor Bank was the true Preslars, it was argua- transferred to the it is Ranch, seller of the I would ble that the REMAND for a substantive attributes of title had already passed finding as to whether the seller Moncor Bank at the time of the Ranch negotiations reasons, in fact between Moncor Bank and was Moncor Bank. For these High Nogal Preslars. The owner of respectfully did I dissent. participate negotiations the six-month (see leading up Ranch, to the sale of the 3),

ApltApp. # 2 at considered the Bank the (Tr. seller,” 118-19), “true and told Preslar majority questions Zarin, 6. The the "continued viabili- transaction.’” 916 F.2d at 116 n. 11 Hall, ty” light Tufts, 241). Moreover, (quoting of Hall in but does not 307 F.2d at Tufts ’ put “hardly I, exceptional” supra into doubt the ... holding “idea discussed Part on nonre- Tufts apply that ‘Courts need not implicate mechanical stan- course loans does not the contested reality particular dards which smother the of a doctrine.

Case Details

Case Name: Preslar v. Commissioner

Court Name: Court of Appeals for the Tenth Circuit

Date Published: Feb 16, 1999

Citation: 167 F.3d 1323

Docket Number: 97-9016

Court Abbreviation: 10th Cir.