1 All section references are to the Internal Revenue Code

in effect for the taxable year in issue, and all Rule references

are to the Tax Court Rules of Practice and Procedure. 

T.C. Memo. 2001-236

UNITED STATES TAX COURT

JOEL AND PAULA FRIEDLAND, Petitioners v. 

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14267-99. Filed September 10, 2001.

Samuel C. Ullman and Alex Rubio, for petitioners.

Sergio Garcia-Pages and Andrew M. Tiktin, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

VASQUEZ, Judge: Respondent determined a deficiency of

$165,919 in and an accuracy-related penalty of $33,184 pursuant

to section 6662(a)1 on petitioners’ 1992 Federal income tax. The

primary issue for decision is whether petitioners had a gain in
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1992 on Joel Friedland’s (Mr. Friedland) transfer of 6,842 shares

of United Bankshares, Inc., stock pledged to United National Bank

in 1991. If we conclude that petitioners did have a gain, then

we must decide whether petitioners are entitled to a deduction

equal to the amount realized on this transfer. If the Court

holds for respondent on both issues, then we must address

petitioners’ liability for the accuracy-related penalty. 

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. 

The stipulation of facts and the attached exhibits are

incorporated herein by this reference. Petitioners are husband

and wife. At the time they filed the petition, petitioners

resided in Bal Harbour, Florida. Petitioners filed a joint

income tax return for 1992 using the cash method of accounting. 

A. Mr. Friedland’s Association With United National Bank and

United Bankshares, Inc.

Starting in 1963, Mr. Friedland was a shareholder and

director of First National Bank of Hialeah (FNBH) together with

Gerald Katcher (Katcher) and Howard Scharlin (Scharlin). In

1977, shortly after FNBH was sold to an outside group, Katcher

and Scharlin purchased the stock of a nationally chartered bank

that later became United National Bank (UNB). Katcher and

Scharlin asked Mr. Friedland to join them as a shareholder and

director of UNB, and he did. In September 1981, the shareholders

of UNB transferred their shares to United Bankshares, Inc. (UBI),
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in exchange for all the stock of UBI. During 1992, UNB still

was a wholly owned subsidiary of UBI.

Scharlin and Katcher were UBI’s principal shareholders--each

owned approximately 35 percent of the total issued and

outstanding shares of UBI stock. From the creation of UBI until

January 1991, Mr. Friedland owned approximately 3 percent of the

issued and outstanding shares of UBI stock. From 1985 through

1992, Mr. Friedland sat on the board of directors of UNB and UBI

along with Katcher, Scharlin, and other individuals. 

B. UNB’s Loans to Mark Friedland’s Corporations

Centrum Corporation (CC) was a Florida corporation organized

in 1984 to develop retail shopping centers. Petitioners’ adult

son, Mark Friedland (Mark), was the majority shareholder--owning

50 percent of the outstanding stock--and president of CC.

During the mid-1980's, Mark was a successful real estate

developer, having developed a number of shopping centers for

Publix, a large grocery store chain. CC formed separate wholly

owned subsidiaries for each shopping center it developed. CC

organized Centrum Hillsboro Corporation (CHC) to take ownership

of real estate located at the intersection of Hillsboro Boulevard

and Lyons Road in Broward County, Florida (the Hillsboro

property). Mark was the president of CHC. Petitioners were not

officers, directors, shareholders, or employees of CC or CHC.

As evidenced by a promissory note dated April 19, 1985, CC
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borrowed $750,000 from UNB (the $750,000 loan). As evidenced by

a promissory note dated June 1, 1987, CHC borrowed $2.6 million

from UNB (the $2.6 million loan). CHC used the proceeds of the

$2.6 million loan to acquire the Hillsboro property. To secure

its obligations under the $2.6 million loan, CHC conveyed to UNB

a purchase money mortgage on the Hillsboro property. As a result

of a cross-default agreement, the mortgage also secured the

$750,000 loan. Mark, in his individual capacity, executed a

personal guaranty with respect to the $750,000 loan and the $2.6

million loan (together, the Centrum loans).

Although Mr. Friedland was a member of UNB’s board of

directors when UNB made the Centrum loans, he did not participate

in the decision-making process with respect to the Centrum loans. 

CHC’s application for the $2.6 million loan did not satisfy the

criteria necessary for the loan to be extended. After this was

brought to Scharlin’s attention, he called Mr. Friedland to

discuss the situation. The exact details of this conversation

are unclear; however, Mr. Friedland told Scharlin that UNB would

not lose money if it went forward with the $2.6 million loan. 

Mr. Friedland felt comfortable stating this because Mark had been

successful in the real estate business and the Hillsboro property

was a good development site. Scharlin informed Katcher of his

conversation with Mr. Friedland, and thereafter UNB approved the

$2.6 million loan. 
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2 Ultimately, in February 1995, Mark commenced a bankruptcy

proceeding.

3 Mr. Podhurst also was a member of UNB’s board of

directors. 

In February 1989, Scharlin, Katcher, and Mr. Friedland met

for lunch. The three spoke about refinancing Mark was seeking

from Chase Manhattan Bank. During the lunch, Mr. Friedland

reiterated that UNB would “not get hurt” on the Centrum loans.

During 1988 and 1989, CC and CHC consistently were unable to

service the Centrum loans. By late 1990, the Centrum loans were

nonperforming. At this time, CC and its subsidiaries were

experiencing significant financial difficulties. In addition to

the amounts owed to UNB, CC owed other creditors in excess of $60

million--the majority of which Mark had guaranteed. These loans

were in default, and, in many cases, the properties securing the

loans were deeded back to the creditors in lieu of foreclosure. 

At this time, Mark’s personal guaranty was worthless.2

Around this time, Scharlin placed a call to Mr. Friedland to

inform him that the Centrum loans “were in trouble”. Scharlin

reminded Mr. Friedland that he had stated that UNB would not lose

any money on the Centrum loans and asked Mr. Friedland to “take

care of it”. At this time, Mr. Friedland sought advice from his

attorney, Aaron Podhurst,3 regarding whether his statements

created any legal obligation to UNB on the $2.6 million loan. 

Mr. Podhurst advised Mr. Friedland that they did not. 
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4 Mr. Friedland retained the right to substitute cash in

the amount of the book value of the pledged stock as collateral

under the 1991 agreement. 

5 On Jan. 15, 1991, UNB recorded on its books the fair

market value of the 5,518 shares of UBI stock Mr. Friedland

conveyed to it pursuant to the 1991 agreement as $468,750. On

Feb. 1, 1991, UBI redeemed those shares from UNB for that amount. 

UNB released CC and Mark from liability under the $750,000 loan

and charged off $280,154--the difference between the $748,904

(continued...)

C. Mr. Friedland’s Transfers of UBI Stock to UNB

1. 1991 Agreement

Mr. Friedland executed an agreement (the 1991 agreement) UNB

presented to him dated January 3, 1991, in which Mr. Friedland

transferred 5,518 shares of his UBI stock to UNB. Mr. Friedland

also pledged and granted a security interest to UNB in his

remaining 6,857 shares of UBI stock (the pledged stock) to

secure, upon the foreclosure sale or other disposition of the

Hillsboro property by UNB, an amount equal to one-half of the

excess of the amount owed to UNB on the $2.6 million loan and the

amount realized by UNB upon disposition of the Hillsboro property

(the loan deficiency).4 The 1991 agreement further provided that

UNB had no recourse against Mr. Friedland’s assets other than the

pledged stock, Mr. Friedland had no personal obligation on the

$2.6 million loan, and Mr. Friedland’s sole future involvement

with the $2.6 million loan was his pledge of the pledged stock. 

UNB accepted the 5,518 shares of UBI stock as full payment of the

$750,000 loan5 and released Mark from his guaranty of the $2.6
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5(...continued)

then-outstanding balance on the $750,000 loan and the $468,750

redemption proceeds. 

6 The grantee actually was a subsidiary of UNB formed for

the purpose of holding real estate. 

7 UNB was not able to sell the Hillsboro property until

February 1995. 

million loan. On January 10, 1991, in order to perfect its

security interest, UNB took possession of the pledged stock. 

Shortly after execution of the 1991 agreement, Scharlin sent

Mark a special warranty deed by which CHC would convey to UNB6

the Hillsboro property in lieu of UNB's instituting foreclosure

proceedings with respect to the property. On January 22, 1991,

Mark executed the deed in his capacity as president of CHC. 

2. 1992 Agreement

UNB had difficulty selling the Hillsboro property, and it

became increasingly clear that UNB would sustain a loss on the

$2.6 million loan.7 As a result, Scharlin asked Mr. Friedland to

transfer outright to UNB the pledged stock. UNB and Mr.

Friedland thereafter entered into an agreement dated May 14, 1992

(the 1992 agreement). The 1992 agreement required Mr. Friedland

to relinquish all rights, claims, and interest in 6,842 shares of

the pledged stock. UNB agreed to release and return to Mr.

Friedland the remaining 15 shares of the pledged stock that

represented the minimal investment necessary for Mr. Friedland to 
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8 UNB management considered this amount to be the fair

market value of the stock. 

9 Respondent concedes that in calculating petitioners’ gain

pursuant to sec. 1001(a), they are entitled to a $5 per share

basis in the UBI stock. This concession is relevant, however,

only if we conclude that Mr. Friedland had an amount realized on

the transfer of this stock.

remain a member of UNB’s board of directors. UNB valued the

6,842 shares of UBI stock at $692,495.8

OPINION

Section 1001(a) provides that the gain from the sale or

other disposition of property shall be the excess of the amount

realized therefrom over the taxpayer’s adjusted basis in the

property. Section 1001(b) defines the amount realized from the

sale or other disposition of property as the sum of any money

plus the fair market value of property received. See also sec.

1.1001-1(a), Income Tax Regs. The amount realized includes the

amount of liabilities from which the transferor is discharged as

a result of the transaction. See sec. 1.1001-2(a)(1), Income Tax

Regs. 

Respondent determined that Mr. Friedland had a gain on the

transfer of the 6,842 shares of the pledged stock to UNB.9

Respondent argues Mr. Friedland had an amount realized equal to

the value of the 6,842 shares of the pledged stock he transferred

to UNB in 1992 to obtain UNB’s release of Mark, petitioners’ son,

from his guaranty and UNB’s forgiveness of the Centrum loans.
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As a preliminary matter, petitioners argue that UNB released

Mark from his guaranty of the $2.6 million loan and UNB forgave

the $750,000 in the 1991 agreement (which did not effectuate the

transfer of the 6,842 UBI shares). We agree. 

We found as a fact that UNB released Mark from his guaranty

and forgave the $750,000 loan in 1991 in exchange for Mr.

Friedland’s transfer of 5,518 shares of UBI stock to UNB. See

supra pp. 6-7. This transfer from the prior year is not in

issue, and respondent’s argument in this regard is without merit.

Petitioners also contend that Mr. Friedland did not have an

amount realized for purposes of section 1001(b) with respect to

the transfer of the 6,842 shares of the pledged stock. 

Petitioners argue that the only consideration under the 1992

agreement was the cancellation of debt owed to UNB by CHC. 

Accordingly, petitioners contend that section 1.1001-2(a)(1),

Income Tax Regs., is inapplicable because the term “amount

realized”, although it includes liabilities of the transferor

that are discharged as a result of a sale or other disposition of

property, does not include forgiveness of indebtedness of a

person or entity other than the transferor. Petitioners cite

INI, Inc. v. Commissioner, T.C. Memo. 1995-112, affd. without

published opinion 107 F.3d 27 (11th Cir. 1997), in support of

this argument.

In INI, Inc., Mr. Jones and Mr. Cates were each 50-percent
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shareholders of a corporation (Spalding) that was the sole

shareholder of another corporation (INI). Mr. Jones and Mr.

Cates had differences of opinion regarding the management and

operation of Spalding and INI, so they decided to separate. They

agreed that Mr. Cates would own 100 percent of Spalding and Mr.

Jones would own 100 percent of INI. One of the assets of

Spalding was the Spalding Building. As part of the breakup,

Spalding transferred the Spalding Building, subject to the

liability associated with the property, to INI.

The construction lender on the Spalding Building (Lender)

held a security interest in the Spalding Building. Lender also

had lent money to a company (Development) owned by Mr. Jones for

the construction of 15 townhomes.

INI defaulted on its obligation to repay the loan secured by

the Spalding Building. In lieu of foreclosure, and in

satisfaction of the construction loan, INI transferred the

Spalding Building to Lender; however, the fair market value of

the Spalding Building exceeded the balance outstanding on the

construction loan by $170,000. At this time, Development owed

Lender $170,000 related to the construction of the 15 townhomes

(the Development debt). Instead of remitting $170,000 to INI,

Lender agreed to discharge Development from the Development debt.

We held that INI, the transferor, did not have to include

the discharged Development debt in its amount realized because
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10 The Court has stated:

Where a debtor is relieved of his obligation to repay

the loan, his net worth is increased over what it would

have been if the original transaction had never

occurred. This real increase in wealth may be properly 

taxable. However, where the guarantor is relieved of

his contingent liability, either because of payment by

the debtor to the creditor or because of a release

given him by the creditor, no previously untaxed

accretion in assets thereby results in an increase in

net worth. * * *

Landreth v. Commissioner, 50 T.C. 803, 813 (1968) (citations

omitted). In the case at bar, petitioners had no untaxed

accretion in assets upon the transfer of the 6,842 shares of

pledged stock to UBI.

Development, a corporation owned by INI’s shareholder, and not

INI, was indebted to Lender, the transferee. 

The facts of this case are comparable to the salient facts

of INI, Inc. Mr. Friedland’s transfer of 6,842 shares of the

pledged stock was not in satisfaction of his own liability--CHC,

a corporation owned by petitioners’ son, and not Mr. Friedland,

was indebted to UNB, the transferee. Therefore, we hold that

petitioners did not have to include any part of the discharged

debt of CHC (i.e., the $2.6 million loan) in amount realized. 

See INI, Inc. v. Commissioner, supra; see also Landreth v.

Commissioner, 50 T.C. 803, 812-813 (1968) (holding that a

guarantor of a loan does not recognize income when the lender

discharges the debtor from the loan).10 

Accordingly, we do not sustain respondent’s determination

that Mr. Friedland had an amount realized on his transfer of the
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11 Therefore, we need not decide whether petitioners are

entitled to a deduction for this transfer or whether they are

liable for a penalty pursuant to sec. 6662.

6,842 shares of the pledged stock. Without an amount realized,

petitioners did not have a gain.11 See sec. 1001(a). 

To reflect the foregoing, 

Decision will be entered

for petitioners.