Document: 499 U.S. 573 111 S.Ct. 1512 113 L.Ed.2d 608 UNITED STATES, Petitionerv.CENTENNIAL SAVINGS BANK FSB (Resolution Trust Corporation, Receiver). No. 89-1926. Argued Jan. 15, 1991. Decided April 17, Syllabus During the 1981 tax year, respondent Centennial Savings Bank exchanged participation interests in a set of mortgage loans for different held by another lender. All were secured residential properties and had face value substantially higher than their fair market value. In separate transactions, collected early withdrawal penalties from customers who prematurely terminated certificates deposit (CD's). its federal income return, claimed deduction difference between it surrendered received. It also treated received as "income reason discharge . indebtedness" excludable gross under 26 U.S.C. § 108(a)(1)(C) (1982 ed.). After Internal Revenue Service disallowed losses associated with mortgages determined that was required to declare income, paid deficiencies filed refund action District Court. The court entered judgment petitioner United States on mortgage-exchange issue penalty issue. Court Appeals reversed ruling, but affirmed holding. Held: 1. realized tax-deductible when other Cottage Assn. v. Commissioner, 554, 1503, 589. Pp. 578-579. 2. not 108(a)(1). A debtor realizes "discharge only results forgiveness of, or release from, an obligation repay assumed at outset debtor-creditor relationship. Here, depositors closed accounts incurred did forgive any repayment part Centennial, which exactly what obligated pay according terms agreements into time CD's established. This reading best comports 108's purpose, is mitigate effect treating indebtedness so prospect immediate liability will discourage businesses taking advantage opportunities repurchase liquidate debts less negotiates advance circumstances he debt position anticipate his need cash resulting can negotiate anticipated liquidation accordingly. Moreover, this case, committed releasing deposits sole election depositors. Thus, unlike considering negotiation adjustment duty repay, no discretion take effects transaction account before liquidating 579-584. 887 F.2d 595 (CA5 1989), part, remanded. MARSHALL, J., delivered opinion Court, REHNQUIST, C.J., STEVENS, O'CONNOR, SCALIA, KENNEDY, SOUTER, JJ., joined, Parts I III WHITE, Part BLACKMUN, joined. concurring dissenting post, p. ----. John G. Roberts, Jr., petitioner. Michael F. Duhl, respondent. Justice MARSHALL Court.* 1 we consider two questions relating (Centennial). first whether deductible one group lender's loans. second premature federally insured (CD's) constituted answered both affirmatively. We agree Centennial's exchange gave rise immediately loss, reverse Appeals' determination entitled exclude taxable 2 * mutual savings loan institution (S & L) formerly regulated Federal Home Loan Board (FHLBB).1 At case are sets transactions involving year. 3 "90% interests" National Mortgage Association (FNMA).2 Secured located primarily northern Texas, 420 approximately $8.5 million $5.7 million; FNMA's 377 loans, throughout likewise million. FNMA structured respective packages would be deemed "substantially identical" FHLBB's Memorandum R-49, dated June 27, 1982, regulatory directive aimed identifying exchanges generate accounting FHLBB purposes purposes. See generally 556-557, 1506, On loss $2,819,218, (and cost basis) return. 4 collection CD accounts. Each agreement established fixed-term, fixed-interest account. App. 27-29. Consistent regulations, each provided depositor should withdraw principal maturity. 12 CFR 526.7(a) (1979); (1980); 1204.103 (1981). event withdrawal, accrued interest, minus applicable penalty. 5 $258,019 1981. return indebtedness. Pursuant §§ 108 1017 ed.), excluded reduced basis depreciable property amount. 6 audit, mortgages, have declared paying deficiencies, instituted Northern issue, 682 F.Supp. 1389 (1988). 7 Fifth Circuit part. (1989). Court's ruling realize transaction. Relying reasoning decision handed down same day, see San Antonio 577 (1989), concluded although nonetheless "materially different" because they properties. F.2d, 600. Consequently, held, give realization purposes, allowing recognize losses. ibid. 8 conclusion treat 108. reasoned "the characterization depends purely spread amount him satisfy obligation." Id., 601. Under test, indebtedness, concluded, size id., 601-602. rejected States' merely "medium payment" performance "separate obligation" prior 604-605. 9 thereafter petitioned writ certiorari. Because dispositions conflict decisions Circuits, importance issues industry, granted petition. 498 808, 40, 112 17 (1990).3 II 10 question controlled our Commissioner. Savings, recognized gives 1001(a) Code4 long different." U.S., 560-562, S.Ct., 1507-1509. "different" sense "material" Code embody legally distinct entitlements. 564-565, 1510-1511. 11 That test easily satisfied here. As here made obligors embodied therefore affirm mortgages. next 108(a)(1) conclude subject exclusion these "discharge" obligation. 13 version year states: 14 "Gross does include (but subsection) includible (in whole part) taxpayer if— 15 16 "(C) discharged qualified business indebtedness." "[Q]ualified includes "indebtedness corporation." 108(d)(4)(A) ed.).5 Income if elects reduce equal excluded. 108(c)(1), 108(d)(4)(B), genuinely exempt such taxation, rather defer payment reducing taxpayer's annual depreciation deductions increasing gains upon ultimate disposition reduced-basis property. 18 characterizing discharge-of-indebtedness like Appeals, focuses "spread" opening actually closing When opens account, notes, bank becomes indebted plus interest. By virtue penalty, however, satisfies end result, view, been (freed restraints law) formed negotiated withdrawal. 19 reject analysis fails make use term "discharge." used 108, conveys repay.6 closes pays financial institution. itself provides principal. Through formula, precisely how much receive close day up maturity date. accepts interest agreement. 20 presupposes disagree sufficient trigger existence demonstrate enjoyed accession But product bank-depositor relationship, constitute "by [a] discharge." sum, determine has indebtedness," necessary look result agreed parties relationship.7 21 common-sense statutory language purpose underlying tax-deferral mechanism designed income. 61(a)(12) ed.) ("gross includ[es] [i]ncome indebtedness"). Borrowed funds instance offsets increase assets; released enjoys net assets forgiven portion debt, original thus evaporates. Kirby Lumber Co., 284 1, 3, 52 4, 76 L.Ed. 131 (1931); Commissioner Jacobson, 336 28, 38, 69 358, 363, 93 477 (1949); Tufts, 461 300, 307, 310-311, n. 11, 103 1826, 1831, 1832-33, 75 863 (1983). while cancellation increases assets, necessarily tax. Congress H.R.Rep. 855, 76th Cong., 1st Sess., (1939); S.Rep. 1631, 77th 2d 77-78 (1942). Wright, Realization Cancellations, Modifications, Bargain Purchases Indebtedness: I, 49 Mich.L.Rev. 459, 477, 492 (1951). 22 rationale squarely implicated seeking pre-existing insofar depositors, abandoned control whatsoever over particular obligations liquidated. 23 true, points out, construing apply reductions stemming withholds incentive "anticipatory discharge" credit outset. read embodying legislative choice extend benefits deferral far. For reasons stated, could debtors deserve break conferred rule tax-exemption -deferral provisions construed narrowly, supra, 49, 369; Elam 1333, 1335 (CA6 1973), intend beyond setting creditor agrees IV 24 foregoing reasons, remanded further proceedings consistent opinion. 25 ordered. Blackmun 568, 1519, WHITE joins opinion, BLACKMUN III. While pending appeal, found insolvent. currently receivership Resolution Corporation. exchanging interests, party retained relationships ---- 1506 3. Circuit's R-49 realizable Sixth Circuit. 890 848 rev'd remanded, --- ----, discharge-from-indebtedness pre-1986 Seventh Colonial 854 1001 (1988), cert. denied, 489 1090, 109 1556, 859 1986, amended limiting application situations insolvent bankruptcy Pub.L. 99-514, 822(a), 100 Stat. 2373; 100-647, 1004(a)(1), 102 3385 (1988) (extending "qualified farm certiorari light significant number cases concerning status 1986. "The gain sale shall excess therefrom adjusted section 1011 determining gain, realized." 1001(a). individual connection trade business." "Discharge" signify various means extinguishing legal duty. Black's Law Dictionary 463 (6th ed. 1990). might said satisfying it. uses refer change debtor's condition longer either full. occur cancels forgives Renewing argument unsuccessfully advanced characterizes draws authorities recognizing discharges services some form nonmonetary consideration. Spartan Petroleum Co. States, 437 733 (SC 1977) (debt distributorship agreement); OKC Corp. 82 T.C. 638, 649-650 (1984) settlement lawsuit). situation, fact full through obligation"; performance, must ordinary 96-1035, 8, (1980), U.S.Code Cong. Admin.News 1980, pp. 7017, 7023 ("Debt medium payment, gift salary, rules"). B. Bittker L. Lokken, Taxation Income, Estates Gifts ¶ 6.4.7, 6-66 (2d 1989). reliance more fundamental reason—the absence statute—we payments unrelated

Category: 11