Court Opinion

ID: 4486223
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:16.786442+00
Date Added: 2024-06-11T07:58:29.179569
License: Public Domain

Ruwe J., dissenting: Although I agree with much of the majority’s reasoning in this case, I dissent from that portion of the opinion which holds that section 108(e)(5) is inapplicable to the transaction at issue. I find no support in the language of the statute or the accompanying legislative history for the majority’s determination that the gambling chips purchased by petitioner do not constitute “property” for purposes of section 108(e)(5). Because I believe that petitioner acquired “property” from the casino on credit and subsequently negotiated a reduction of his debt to the casino, I would apply section 108(e)(5) in this case. This is a fully stipulated case. Since all of the facts were agreed to by the parties, our factual findings are controlled by the stipulation of facts. The parties stipulated that “chips are property which are not negotiable.” (Emphasis added.) In their briefs, both parties requested that the Court find this as a fact. Despite this, the majority fails to adopt this stipulated fact which is critical to the resolution of this case. It is unclear whether the majority is saying that it is not persuaded of the fact that the chips were “property” or whether the majority decides that section 108 uses the term “property” in a restricted manner. Given the majority’s failure to include in its findings of fact that chips are property, I must assume, for purposes of this dissent, that the majority decides that the stipulation fails to support a factual finding that chips are “property” and also decides that even if they are property in a generic sense, they are not “property” within the meaning of section 108. The majority agrees that the chips had value. It correctly finds that petitioner paid for the chips by giving markers to the casino, that the markers constituted petitioner’s promise to pay money to the casino (majority opinion at p. 1086), and that the chips had a value of over $3 million. (Majority opinion at p. 1096) The parties stipulated that the chips were “property.” It is beyond question that gambling chips constitute what is commonly referred to as property. See Black’s Law Dictionary, pp. 1095-1096 (5th ed. 1979). The majority attempts to support its conclusion by pointing out that petitioner’s argument that chips are property is inconsistent with other arguments contained in his briefs wherein petitioner attempts to show that he really did not get anything of value when he purchased the chips on credit. (Majority opinion at pp. 1098 and 1099.) It is exceptionally curious that petitioner’s arguments, which the majority rejects, are then used by the majority as support for its conclusion that the chips are not property. Having concluded that petitioner received chips having a value equivalent to his markers, it is impossible to describe the gambling chips as anything other than “property.” Apparently, cognizant of this dilemma, the majority finally settles on the conclusion that the gambling chips purchased by petitioner were “something other than normal commercial property.” (Majority opinion at p. 1099) I take this to be a finding of fact since the term “normal commercial property” does not appear in the relevant statutes, regulations, or legislative history. The majority’s legal conclusion seems to be that gambling chips, being other than “normal commercial property,” do not constitute “property” within the meaning of section 108(e)(5). In deciding this legal issue of first impression, the majority fails to define either the term “property” as used in section 108(e)(5) or the term “normal commercial property.” If the term “normal commercial property” has a meaning, there is no reason why gambling chips should not be included. As recently stated by the Supreme Court: it would seem that basic concepts of fairness (if there be much of that in the income tax law) demand that [gambling] be regarded as a trade or business just as any other readily accepted activity, such as being a retail store proprietor or, to come closer categorically, as being a casino operator or as being an active trader on the exchanges. [Commissioner v. Groetzinger, 480 U.S. 23, 33 (1987).] Chips are certainly “normal commercial property” in a casino’s commercial gambling business. If the term “normal commercial property” is meant to preclude the application of section 108(e)(5) to property that is unique or “one of a kind,” there is no support for such a conclusion. In any event, neither the statute nor its legislative history restricts its application to “normal commercial property.” The majority concludes on page 1096 that petitioner “received full value for what he agreed to pay, i.e., over $3 million worth of chips.”1 However, on page 1099 the majority concludes that “chips in isolation are not what petitioner purchased.” The majority reasons that the value of the chips is really derived from the fact that they give the holder of the chips the opportunity to gamble. This seems akin to saying that a taxpayer who purchases a 99-year leasehold to a vacant lot in midtown Manhattan has not acquired “property” because the value of the leasehold interest is derived from the lessee’s “opportunity” to build a large office building. That the chips derive value from the opportunity they afford is no reason why they are not property. A person who purchases chips receives, among other things, the casino’s promise to provide a gambling opportunity. In that sense, the opportunity is no different than any other valuable and assignable contract right which we would surely recognize as property. A license is nothing more than a grant of an opportunity to the licensee to do something which he would otherwise be prohibited from doing. Nevertheless, a license is considered property. Barry v. Barchi, 443 U.S. 55, 64 (1979) (State racing and wagering license); Wolfe v. United States, 798 F.2d 1241, 1245 (9th Cir. 1986) (ICC license); Aqua Bar & Lounge, Inc. v. United States, 539 F.2d 935, 937-938 (3d Cir. 1976) (liquor license). Similarly, an option, which can also be characterized as nothing more than a grant of an opportunity, constitutes property. Helvering v. San Joaquin Fruit & Investment Co., 297 U.S. 496, 498 (1936). The majority concludes that property within the meaning of section 108(e)(5) includes tangible property and “may apply to some types of intangibles.” It then states that “Abstract concepts of property are not useful” in deciding what is property within the contemplation of section 108(e)(5). (Majority opinion at p. 1100) The opinion then leaves us to wonder what kinds of intangible property might come within the contemplation of the statute or what concepts, abstract or otherwise, were relied upon in construing the meaning of the statute. The majority provides no explanation of why it believes the term “property,” as used in section 108(e)(5), should be more restrictive than the normal usage accorded that term and cites no legislative history to support such a conclusion. Section 108(e)(5) was added to the Internal Revenue Code by the Bankruptcy Tax Act of 1980, Pub. L. 96-589, 94 Stat. 3389, 3393. That section provides: (5) Purchase-money debt reduction for solvent debtor treated AS PRICE REDUCTION. — If— (A) the debt of a purchaser of property to the seller of such property which arose out of the purchase of such property is reduced, (B) such reduction does not occur— (i) in a title 11 case, or (ii) when the purchaser is insolvent, and (C) but for this paragraph, such reduction would be treated as income as to the purchaser from the discharge of indebtedness, then such reduction shall be treated as a purchase price adjustment. The term “property” as used in section 108(e)(5) is not specifically defined. However, the term “property” is generally understood to be a broad concept. As the Supreme Court noted recently: Of the aggregate rights associated with any property interest, the right of use of property is perhaps of the highest order. One court put it succinctly: “ ‘Property’ is more than just the physical thing — the land, the bricks, the mortar — it is also the sum of all the rights and powers incident to ownership of the physical thing. It is the tangible and the intangible. Property is composed of constituent elements and of these elements the right to use the physical thing to the exclusion of others is the most essential and beneficial. Without this right all other elements would be of little value.” Passailaigue v. United States, 224 F. Supp. 682, 686 (MD Ga. 1963) (emphasis in original). [Dickman v. Commissioner, 465 U.S. 330, 336 (1984). Fn. ref. omitted.] The plain language of a statute is the primary source for any interpretation. When that language is not ambiguous, it is conclusive absent a clearly expressed legislative intent to the contrary. Consumer Product Safety Commission v. G.T.E. Sylvania, Inc., 447 U.S. 102, 108 (1980). The starting point for interpreting a statutory provision is the language of the actual statute. Watt v. Alaska, 451 U.S. 259, 265 (1981); Richards v. United States, 369 U.S. 1, 9 (1962). The plain meaning of the statutory language, as enlightened by the contemporaneous legislative history, often indicates the congressional intent behind enactment of a particular statute. Edwards v. Aguillard, 482 U.S. 578, 594 (1987). In this particular instance, neither the statute nor the accompanying legislative history qualify or restrict the term “property.” No attempt has been made to specify any limits on the scope of the term. Instead, the term is used in a broad, comprehensive manner. When Congress intends to restrict the meaning of the term “property,” it certainly knows how to do so. See, for example, sec. 1031(a).2  In Dickman v. Commissioner, supra, the Supreme Court commented on the meaning of the term “property” as used in the gift tax provisions of the Internal Revenue Code. Noting that the legislative history of the Federal gift tax contained no restrictions on the term “property,” the Court concluded that Congress used that term in its broadest and most comprehensive sense. Dickman v. Commissioner, supra pp. 334-336. The Court went on to hold that even the use of money constituted property. Dickman v. Commissioner, supra p. 336. Absent any demonstrated congressional intent to limit the scope of this term, the gambling chips purchased by petitioner constitute “property” for purposes of section 108(e)(5).3  Section 108(e)(5) and the background giving rise to its enactment support its application to the facts in this case. Prior to enactment of section 108(e)(5), case law distinguished between true discharge of indebtedness situations which required recognition of income and purchase price adjustments. A purchase price adjustment occurred when a purchaser of property agreed to incur a debt to the seller but the debt was subsequently reduced because the value of the property was less than the agreed upon consideration. A mere purchase price adjustment does not result in discharge of indebtedness income. See N. Sobel, Inc. v. Commissioner, 40 B.T.A. 1263 (1939); B. Bittker & L. Lokken, Federal Taxation of Income, Estates and Gifts, pp. 6-39 - 6-40 (2d ed. 1989). Section 108(e)(5) was enacted “to eliminate disagreements between the Internal Revenue Service and the debtor as to whether, in a particular case to which the provision applies, the debt reductions should be treated as discharge income or a true price adjustment.” S. Rept. 96-1035 (1980), 1980-2 C.B. 620, 628. Section 108(e)(5) applies to transactions occurring after December 31, 1980. S. Rept. 1035, supra, 1980-2 C.B. at 622-623. Its provisions are not elective. It is obvious from the portions of petitioner’s brief, quoted in the majority opinion at pages 1098 and 1099, that one of petitioner’s arguments is that the value of what he received was less them the amount of debt incurred. Respondent argues, and the majority finds, that the chips petitioner received were worth the full value of the debt. Thus, this case presents the very controversy that the above-quoted legislative history says Congress tried to eliminate by enacting section 108(e)(5). For a reduction in the amount of a debt to be treated as a purchase price adjustment under section 108(e)(5), the following conditions must be met: (1) The debt must be that of a purchaser of property to the seller which arose out of the purchase of such property; (2) the taxpayer must be solvent and not in bankruptcy when the debt reduction occurs; and (3) except for section 108(e)(5), the debt reduction would otherwise have resulted in discharge of indebtedness income. Sec. 108(e)(5); B. Bittker & L. Lokken, supra at pp. 6-40 - 6-41; see also Sutphin v. United States, 14 Cl. Ct. 545, 549 (1988); Juister v. Commissioner, T.C. Memo. 1987-292; DiLaura v. Commissioner, T.C. Memo. 1987-291. The first condition of section 108(e)(5) has been met since petitioner was the purchaser of property in the form of gambling chips and the debt arose out of these purchases. As to the second condition of the statute, the stipulation of facts contains no specific statement regarding whether petitioner was solvent and not in bankruptcy when the debt reduction occurred. Respondent bears the burden of proof on the discharge of indebtedness issue, therefore, the absence of evidence cannot benefit respondent. However, petitioner’s opening brief stated that petitioner was solvent at the time the debt was reduced and neither respondent’s opening nor reply brief disputes this.4 In any event, had petitioner been insolvent or in bankruptcy, the discharge of indebtedness would have been excluded from income under section 108(a)(1).5  The third specific requirement of the statute, that there was discharge of indebtedness income, but for section 108(e)(5), has been met as found by the majority. In addition to the literal statutory requirements, the legislative history indicates that section 108(e)(5) was intended to apply only if the following requirements are also met: (a) The price reduction must result from an agreement between the purchaser and the seller and not, for example, from a discharge as a result of the running of the statute of limitations on enforcement of the obligation; (b) there has been no transfer of the debt by the seller to a third party; and (c) there has been no transfer of the purchased property from the purchaser to a third party. S. Rept. 1035, supra, 1980-2 C.B. at 628; B. Bittker & L. Lokken, supra at pp. 6-40 - 6-41. These requirements have also been met. The settlement agreement indicates that petitioner and Resorts mutually agreed to reduce the amount of indebtedness in order to amicably resolve their differences and terminate their litigation. In that litigation, Resorts alleged a number of counts and petitioner raised a variety of affirmative defenses. The settlement agreement was the result of direct negotiations between petitioner and Resorts.6  The second requirement set forth in the legislative history has been met. Resorts did not transfer petitioner’s debt to a third party. The third requirement has also been met. Petitioner did not transfer the property to a third party. Both parties in their briefs acknowledge that petitioner did transfer the property to Resorts in that the chips were lost to Resorts at the gambling tables. The legislative history, however, indicates that application of section 108(e)(5) is precluded only if the purchaser/taxpayer transfers the property to a “third party.” Resorts was not a third party; Resorts was the seller/creditor. Respondent’s brief makes only two arguments as to why section 108(e)(5) is inapplicable to this case. Respondent first argues that section 108 does not apply to this case because section 1.108(a)-1, Income Tax Regs., restricts its application to corporations or individuals in connection with property used in a trade or business and that section 1.108(a)-2, Income Tax Regs., requires that a taxpayer must file a consent form with his return to have his property adjusted. The problem with this argument is that there are no such requirements in section 108(e)(5) and the regulations relied upon by respondent clearly do not apply. Section 1.108(a)-1, Income Tax Regs., was promulgated in 1956, over 23 years before enactment of the provisions of section 108(e)(5). The section of the regulations that respondent relies upon specifically applies to the then-existing provisions of section 108(a) dealing with a situation completely separate from that covered in section 108(e)(5). Likewise, section 1.108(a)-2, Income Tax Regs., last amended in 1967, specifically applies to the then-existing provision of section 108(a) and not to section 108(e)(5) which was enacted 13 years later. Respondent’s arguments are without merit. Respondent’s second argument consists of only the following two sentences in his reply brief. “Furthermore, the liability in this case is based on the receipt of cash. A purchase price adjustment occurs when the dispute involves contract liability for the purchase of an asset.” I am unable to discern any basis or rationale for this argument. Respondent stipulated to, and his brief requests, a finding of fact that property in the form of chips was received in exchange for petitioner’s markers.7  The majority decides an issue of first impression by disregarding the plain language of the statute without any justification in the statute or legislative history. The result produced is ironic for both the Court and petitioner. The Court must decide the difficult factual issues that section 108(e)(5) was intended to eliminate while petitioner incurs a huge tax liability, the magnitude of which is in direct proportion to his losses.8  I would dispose of this case by assuming that there was discharge of indebtedness income. I would then apply section 108(e)(5) to treat the discharge as a purchase price adjustment. This would result in no taxable income. I respectfully dissent. Chabot, Swift, Williams, and Whalen, JJ., agree with this dissent.  The majority also notes that petitioner as a valued customer received other incidental services (lodging, meals, etc.). However, the markers were not given for these services and there is no evidence regarding the quantity or value of these incidental services.   Sec. 1031(a), prior to amendment by the Tax Reform Act of 1984, Pub. L. 98-369, 98 Stat. 595-596, provided: SEC. 1031. EXCHANGE OF PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT. (a) Nonrecognition of Gain or Loss From Exchanges Solely in Kind — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, ckoses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment. [Emphasis added.]   The majority’s statement that the chips were a substitute for cash is not completely accurate and is irrelevant for purposes of determining whether chips are property. Chips could be used for gambling purposes only; cash could not be used for that purpose but is legal tender and can be used as a universal medium of exchange. The value of the chips was dependent upon the continued operation and financial solvency of the casino, whereas cash has value apart from the solvency of the source from which it is received. Property that is used in lieu of money does not lose its status as property. Certainly precious metals or assets exchanged in sec. 1031 transactions might be said to be substitutes for cash, but they are still property other than cash for tax purposes. Biggs v. Commissioner, 632 F.2d 1171 (5th Cir. 1980), affg. 69 T.C. 905 (1978); Starker v. United States, 602 F.2d 1341, 1355 (9th Cir. 1979). We have previously held that foreign currency constitutes “property” for tax purposes. National-Standard Co. v. Commissioner, 80 T.C. 551 (1983), affd. 749 F.2d 369 (6th Cir. 1984). The majority’s observation that chips represent a credit balance reflecting an obligation of the casino does not detract from their status as property. A corporate bond represents an obligation of the corporation, but surely no one would deny that the bond is property.   Given the majority’s willingness to disregard stipulated facts, it coxdd have more easily disregarded petitioner’s statement on brief that he was solvent since statements in briefs are not evidence.   There is nothing in the stipulated facts to establish petitioner’s solvency. It could be argued that respondent has failed to prove the inapplicability of sec. 108(a)(1). Sec. 108(a)(1), prior to amendment by the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2273, provided: (a) Exclusion From Gross Income.— (1) In general. — Gross income does not include any amount which (but for this subsection) would be includible in gross income by reason of the discharge (in whole or in part) of indebtedness of the taxpayer if— (A) the discharge occurs in a title 11 case, (B) the discharge occurs when the taxpayer is insolvent, or (C) the indebtedness discharged is qualified business indebtedness.   Respondent has not argued to the contrary. Indeed, in referring to the settlement in an attempt to rebut petitioner’s argument that the debt was unenforceable, respondent’s reply brief states: “all we have is a disputed claim that was settled.”   We have recently described a seller-financed transaction as an “amalgam of two distinct transactions. First, there is a transfer of the asset from the seller to the buyer. Then, there is a ‘loan’ from the seller to the purchaser of all or a portion of the purchase price.” Finkelman v. Commissioner, T.C. Memo. 1989-72. If respondent’s “cash” argument is based on the second part of this bifurcated description of a seller-financed transaction, the result would completely nullify sec. 108(e)(5) since no transactions would ever qualify for sec. 108(e)(5) relief.   While I do not agree with Judge Tannenwald’s technical analysis of the discharge of indebtedness issue, the irony he points out is inescapable.