Opinion ID: 7016747
Heading Depth: 2
Heading Rank: 2

Heading: analysis

Text: 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