Opinion ID: 7016747
Heading Depth: 1
Heading Rank: 3

Heading: the city of irwindale loan

Text: The ongoing dispute between the Raiders and the LAMCC prompted the Raiders to enter into a Memorandum of Agreement (the “Irwindale MOA”) with the City of Irwindale (“Irwindale”) in August, 1987. The Irwindale MOA provided that the Raiders would construct a new stadium in Irwindale and play their home games in that stadium, starting in 1992, at the expiration of the Lease with the LAMCC. The Irwindale MOA also provided that Irwindale would loan the Raiders $115 million, to be repaid exclusively from revenue from the to-be-constructed stadium. The loan was to be secured by a deed of trust on the improvements the Raiders were obligated to build on the site provided for the proposed stadium. Under the agreement, Irwindale advanced the Raiders $10 million of the loan. The Irwindale MOA provided that, should Irwindale fail to perform its obligations under the MOA, then all of the Raiders’ obligations under the MOA would be extinguished, including the obligation to repay the advance. The Raiders would then be entitled to keep all funds advanced to them “as consideration for the execution” of the MOA. The MOA stated that Irwindale proposed to finance the project by issuing general obligation bonds. The Irwindale MOA made allowances for some obstacles to the performance of the MOA: 8.5 If any obstacle is imposed by third parties (such as litigation, legislation, or failure to cooperate) it is agreed that both parties pledge good faith cooperation to overcome such obstacle. However, these obstacles will not be construed as a tolling event for the project itself, nor will it be construed as a reason to refund any exchange of monies, nor will it be construed as a forfeiture. It is further agreed, that both parties will move forward with the project and mutually work to resolving the problem .... 8.6 Any third party obstacle will not excuse either party from proceeding with the project except to the extent ordered by court, e.g. an injunction. In September 1988, the California Legislature enacted a statute that prohibited Irwindale from using general obligation bonds to fund construction of a stadium that would be turned over to a private company, such as the Raiders. This new law made it impossible for Irwindale to finance the project in the way proposed in the Irwindale MOA. Despite this obstacle, the Raiders continued to negotiate with Irwindale through 1990 in an attempt to reach an agreement that would allow construction of a stadium in Irwindale. All alternative financing schemes were rejected, however, and, by late December 1989, one of Irwindale’s negotiators declared that the parties were back where they had started two years earlier. In early 1990, the Raiders sought further proposals from Irwindale, but none was ever produced. The Raiders were never required to repay the $10 million advance. At trial, the Commissioner argued that the Irwindale advance was not a bona fide loan and that it was taxable income in 1987, the year it was received. In the alternative, the Commissioner argued that the debt had been discharged in either 1987,1988, or 1989. The Tax Court held that the Irwindale advance was properly treated as a loan, rejecting the Commissioner’s argument that it should be treated as taxable income in the year in which it was received. Mi-lenbach, 106 T.C. at 201-02. The court also rejected the Commissioner’s contention that the Irwindale debt was discharged in 1987. Id. at 203. Instead, the court found that the debt had been discharged in 1988, and that the Raiders realized $10 million in taxable income as a result. Id. at 204. The court based this finding primarily on the passage of the law in September 1988 which made financing the stadium with general obligation bonds impossible. 3 Id. at 203-04. The court reasoned that because the 1988 legislation prohibited the use of general obligation bonds to fund the project as proposed in the MOA, negotiations that continued beyond 1988 “were not conducted under the Irwindale MOA.” Id. at 203.
The Tax Court’s determination of the timing of a discharge of indebtedness is reviewed for clear error. Friedman v. Comm’r, 216 F.3d 537, 542 (6th Cir.2000). Clear error exists only when the reviewing court is left with a “definite and firm conviction that a mistake has been committed.” Gonzalez-Caballero v. Mena, 251 F.3d 789, 792 (9th Cir.2001) (citation omitted). The discharge of a valid debt is treated as taxable income. 26 U.S.C. § 61(a)(12). A debt is discharged for tax purposes when “it becomes clear that the debt will never have to be paid.” Friedman, 216 F.3d at 546. Determining the timing of a discharge of debt requires “a practical assessment of the facts and circumstances relating to the likelihood of payment.” Id. Courts look at all of the facts concerning repayment, requiring only that the time of discharge be fixed by “some identifiable event which fixes the loss with certainty.” Id. at 547-48. Repayment of the loan need not become absolutely impossible before a debt is considered discharged. Exch. Sec. Bank v. United States, 492 F.2d 1096, 1099(5th Cir.1974). A slim possibility that a debt may still be enforced does not prevent a debt from being treated as discharged for federal tax purposes. Id. at 1099-1100. Although the test for discharge of debt requires the examination of the practical probability that a debt will be repaid, the Tax Court expressly based its holding that the Raiders debt was discharged in 1988 on its conclusion that passage of the 1988 legislation “prohibited the implementation of the Irwindale MOA.” Milenbach, 106 T.C. at 203. It concluded that, under California law, the terms of the contract required Irwindale to fund the loan with general obligation bonds or forfeit the advance. Under California law, the mutual intention of the parties at the time the contract is formed governs interpretation of the contract. Cal. Civ.Code § 1636; AIU Ins. Co. v. Superior Court, 51 Cal.3d 807, 274 Cal.Rptr. 820, 799 P.2d 1253, 1264 (1990). Such intent is to be inferred, if possible, solely from the written provisions of the contract. Cal. Civ.Code § 1639; AIU Ins. Co., 274 Cal.Rptr. 820, 799 P.2d at 1264. Forfeitures are not favored, however, and courts must strictly construe forfeiture provisions against the party on whose behalf they are invoked. Cal. Civ. Code § 1442; Deutsch v. Phillips Petroleum Co., 56 Cal.App.3d 586, 128 Cal.Rptr. 497, 501 (1976). Where there are two possible interpretations of a contract, one that leads to a forfeiture and one that avoids it, California law requires the adoption of the interpretation that avoids forfeiture, if at all possible. Ballard v. MacCallum, 15 Cal.2d 439, 101 P.2d 692, 695 (1940). Here, the terms of the MOA can, and must, be interpreted to avoid a forfeiture based on Irwindale’s inability to fund the stadium with general obligation bonds. The terms of the forfeiture provision state that the advance would be forfeited only if Irwindale was unable “to provide the full funding of the entire amount of the loan provided for in paragraph 4.7.” Although paragraph 4.7 mentions passage of a general obligation bond as a triggering date for two of the payments, it does not require that the loan actually be funded from such bonds. While it is clear that the parties assumed that Irwindale would be funding the loan with these general obligation bonds, there is no indication that either party intended to require such funding. Rather, the MOA required the forfeiture of the advance only if Irwindale was unable to come up with the full amount of the loan. Forfeiture would occur only if Irwindale was unable to provide the funds, from whatever source. The MOA did not require forfeiture if financing by general obligation bonds became impossible, as long as Irwindale could provide the funds from some other source. The passage of the 1988 legislation was simply another obstacle that the parties to the MOA had agreed to attempt to overcome. Had alternate funding become available, the Raiders would have continued to be bound by the Irwindale MOA, provided that Irwindale met all of its other obligations. Thus, the Tax Court erred in holding that the MOA ceased to bind the parties after the passage of the 1988 legislation. On remand, the Tax Court must determine whether the Irwindale debt was discharged in any of the challenged years. The court must perform a “practical assessment of the facts and circumstances relating to the likelihood of payment.” Friedman, 216 F.3d at 546. The court must determine when, as a practical matter, it became clear that Irwindale would not be able to fund the entire loan and that the stadium would not be built. It was at that point that a forfeiture resulted and the Irwindale debt was discharged. 4