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

Heading: the lamcc payments

Text: On March 1, 1980, the Raiders entered into a Memorandum of Agreement (“MOA”) with the LAMCC providing for the relocation of the Raiders to Los Ange-les beginning with the 1980 NFL season. The parties never implemented this MOA, however, because the City of Oakland (“Oakland”) filed an action in eminent domain against the Raiders, seeking to condemn for public use the Raiders’ NFL franchise, business, and physical assets. Both Oakland and the NFL obtained preliminary injunctions preventing the Raiders from relocating. As a result, the Raiders played their 1980 and 1981 home games at the Oakland Coliseum. When the NFL injunction was lifted in 1982, the Raiders resumed negotiations with the LAMCC. On July 5, 1982, these negotiations produced a new Memorandum of Agreement (the “1982 MOA”). Pursuant to the 1982 MOA, in 1984, the parties executed a promissory note (the “Note”) and a lease agreement for the LA Coliseum (the “Lease”). The 1982 MOA, the Note, and the Lease (collectively, the “LAMCC Agreement”) provided that the LAMCC would loan the Raiders $6.7 million at 10 percent interest. The Raiders were to repay the loan from 12 percent of the net receipts from the operation of luxury suites to be constructed by the Raiders at the LA Coliseum. The repayment was to begin in the third year of suite rentals. The loan was secured by the to be-constructed suites, with no recourse to the Raiders. The loan consisted of a $4 million cash payment to the Raiders in 1984 and credits totaling $2.7 million against rent due from the Raiders for the years 1982 through 1986. As to the construction of the suites, the 1982 MOA provided that the Raiders “shall construct” approximately 150 private suites. The MOA went on to state that the construction “shall commence as soon as practicable as determined by [the Raiders] in [their] reasonable discretion, having in mind pending and potential litigation involving the parties hereto, or either of them, financial considerations, and other considerations reasonably deemed important or significant to the [Raiders].” The Lease further provided that the Raiders “shall use [their] best efforts to begin and complete Suite construction as soon as possible.” The LAMCC Agreement was the result of arm’s-length bargaining between the Raiders and the LAMCC. The Raiders began playing their home games at the LA Coliseum starting with the 1982 season. Plans to construct the suites prior to the 1984 Summer Olympics were abandoned after the Los Angeles Olympic Committee voiced concerns over the timing of the construction. The Raiders worked with architects and contractors on the planning of the suites throughout 1985 and 1986. Actual construction began in early 1987, but was halted on February 18 of that year. On that date, the LAMCC demanded that suite construction stop because the Raiders had not obtained necessary performance bonds. The Raiders responded that they were willing and able to provide the required bonds, but stated that construction would cease because of the LAMCC’s failure to make certain improvements to the LA Coliseum. Due to this dispute, construction never resumed and the suites were never completed. The Raiders never made any payments on the LAMCC loan. In September 1987, the LAMCC filed a lawsuit claiming that the Raiders had breached the Lease by failing to construct the suites “as soon as practicable” and for failing to repay the $6.7 million loan. In January 1988, the Raiders answered the LAMCC’s complaint, alleging that the LAMCC had breached a commitment to modernize and reconfigure the stadium. The lawsuit was settled on September 11,1990. In a Notice of Deficiency for 1982 and FPAAs for 1983 through 1986, the Commissioner disallowed the Raiders’ rent deductions because the rent was not currently payable and was part of the loan from the LAMCC. In the alternative, if the rent deductions were allowed, the Commissioner determined that the amount of the rent credits were includable in gross income as advance payment of income. The Commissioner also determined that the $4 million advance paid in 1984 was includable in the Raiders’ 1984 gross income. The Tax Court held that the “loan” payments from the LAMCC were includable in the Raiders’ income in the years in which they were received. Milenbach, 106 T.C. at 198. It held that the obligation to construct the suites was illusory and, therefore, the LAMCC payments did not qualify as loans for tax purposes because the Raiders “controlled whether or not repayment of the $6.7 million would be triggered.” Id. at 196.
We review decisions of the Tax Court under the same standards as civil bench trials in the district court. Custom Chrome, Inc. v. Comm’r, 217 F.3d 1117, 1121 (9th Cir.2000). Therefore, conclusions of law are reviewed de novo, and questions of fact are reviewed for clear error. Id. This court owes no special deference to the Tax Court’s decisions on issues of state law. Harbor Bancorp & Subsidiaries v. Comm’r, 115 F.3d 722, 727 (9th Cir.1997). The interpretation and meaning of contract provisions are questions of law reviewed de novo. Kassbaum v. Steppenwolf Prods., Inc., 236 F.3d 487, 490 (9th Cir.2000). A loan is generally not taxable income because the receipt of the loan is offset by the obligation to repay the loan. Comm’r v. Tufts, 461 U.S. 300, 307, 103 S.Ct. 1826, 75 L.Ed.2d 863 (1983). For this rule to apply, however, the loan must be an “existing, unconditional, and legally enforceable obligation for the payment of a principal sum.” Noguchi v. Comm’r, 992 F.2d 226, 227(9th Cir.1993); see also Geftman v. Comm’r, 154 F.3d 61, 68 (3d Cir.1998) (requiring “an unconditional obligation on the part of the transferee to repay the money, and an unconditional intention on the part of the transferor to secure repayment”) (citation and internal quotation marks omitted). Whether a transaction is a loan for federal income tax purposes is ultimately a question of federal law. See Helvering v. Stuart, 317 U.S. 154, 162, 63 S.Ct. 140, 87 L.Ed. 154 (1942) (“Once rights are obtained by local law, whatever they may be .called, these rights are subject to the federal definition of taxability.”). Initially, however, state law determines the rights and obligations of the parties to a transaction. See id. at 161-62, 63 S.Ct. 140. But once an obligation is created by local law, it is subject to the federal definition of taxability. Id. Here, the dispositive question is whether the LAMCC Agreement was sufficient, under California law, to subject the Raiders to a non-illusory and enforceable obligation to repay the LAMCC advances. If the Raiders were subject to an “existing, unconditional, and legally enforceable obligation” to repay the LAMCC advances, the advances are properly treated as loans for federal income tax purposes. Noguchi, 992 F.2d at 227. Contrary to the Tax Court’s conclusion, the Raiders’ broad discretion in the timing of the construction of the suites did not make the contract illusory. Under California law, an obligation under a contract is not illusory if the. obligated party’s discretion must be exercised with reasonableness or good faith. See Storek & Storek, Inc. v. Citicorp Real Estate, Inc., 100 Cal.App.4th 44, 122 Cal.Rptr.2d 267, 281 (2002) (holding that a promise to pay only if satisfied is not illusory if the ability to claim dissatisfaction is limited by the standard of reasonableness); 24 Hour Fitness, Inc. v. Superior Court, 66 Cal.App.4th 1199, 78 Cal.Rptr.2d 533, 541 (1998) (“[W]here the contract specifies performance the fact that one party reserves the power to vary it is not fatal if the exercise of the power is subject to prescribed or implied limitations such as the duty to exercise it in good faith and in accordance with fair dealings.”) (citation and internal quotation marks omitted); Frankel v. Bd. of Dental Exam’rs, 46 Cal.App.4th 534, 54 Cal.Rptr.2d 128, 136 (1996) (holding that a contract is not illusory when the power to withdraw from the contract must be exercised in good faith). Here, the Raiders were required to exercise their discretion reasonably and nothing in the LAMCC Agreement indicates that construction of the suites was optional. Both the 1982 MOA and the Lease state that the suites “shall be” constructed and both require the Raiders to use their “reasonable” discretion in deciding the exact timing in the construction of the suites. The Lease also required the Raiders to use their “best efforts” both to construct the suites as soon as possible and to operate them in such a way as to maximize the profits to be derived from them. At no point were the Raiders free to ignore their obligation to construct the suites. They could only delay the construction for a reasonable time and were required to use their best efforts to complete the suites and begin repayment of the loan. These limitations on the Raiders’ discretion were sufficient to create a non-illusory obligation both to construct the suites and to repay the loan that would have been enforceable under California law. The fact that the obligations were later extinguished by the settlement of the 1987 lawsuit does not indicate that the obligation was illusory at the time the contract was made. Accordingly, we conclude that the Tax Court erred in holding that the LAMCC Agreement was illusory. Because the Raiders had a non-illusory, unconditional obligation to repay the LAMCC loan, the payments were properly treated as loans and were excludable from income in the year in which they were received. 1