United States v.
Centennial Savings Bank FSB (1991)
UNITED STATES v. CENTENNIAL SAVINGS
BANK FSB (RESOLUTION
TRUST CORPORATION, RECEIVER)
No. 89-1926
SUPREME COURT OF THE UNITED STATES
499 U.S. 573; 111 S. Ct. 1512; 113
L. Ed. 2d 608; 59 U.S.L.W. 4319; 91-1 U.S. Tax Cas. (CCH)
P50,188; 67 A.F.T.R.2d (RIA) 816;
91 Cal. Daily Op. Service 2733; 91 Daily Journal DAR 4408
January 15, 1991, Argued
April 17, 1991, Decided
PRIOR HISTORY:
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE FIFTH CIRCUIT.
DISPOSITION: 887 F. 2d 595, affirmed in part, reversed
in part, and remanded.
DECISION: Financial institution held (1) to realize
tax-deductible losses on exchange of interests in mortgage loans, and (2)
not entitled to exclude depositors' early withdrawal penalties from
taxable income.
SUMMARY: In the 1981 tax year, a mutual savings and
loan institution that at the time was regulated by the Federal Home Loan
Bank Board (FHLBB) (later abolished) exchanged 90-percent participation
interests in a group of mortgage loans held by the institution for
90-percent participation interests in a group of mortgage loans held by
the Federal National Mortgage Association (FNMA), where, by exchanging
merely participation interests, each party retained its relationship with
the obligors of the exchanged loans. The loans relinquished by the
institution were secured by properties located primarily in northern
Texas, while the loans relinquished by FNMA were secured by properties
located throughout Texas. Each group of loans had a face value of
approximately $ 8.5 million and a fair market value of approximately $ 5.7
million, and although the exchange was structured to be substantially
identical for FHLBB accounting purposes, and thus did not generate losses
for FHLBB regulatory purposes, the institution claimed a deduction on its
1981 federal income tax return for the difference between the face
value--which equaled the cost basis--of the mortgage interests it
surrendered in the exchange and the market value of the mortgage interests
it received in return. Also in the 1981 tax year, the institution
collected early withdrawal penalties from depositors who prematurely
terminated their federally insured certificate of deposit (CD) accounts,
where each CD agreement had established a fixed-term, fixed-interest
account and, consistent with federal regulations, also had provided that
the depositor would be required to pay a penalty to the institution if the
depositor withdrew the principal before maturity. On its 1981 federal
income tax return, the institution treated the withdrawal penalties as
excludible from gross income, under 26 USCS 108(a)(1), as income "by
reason of the discharge ... of indebtedness." After the Internal
Revenue Service disallowed the deduction of the losses claimed with
respect to the exchange of mortgage loan interests and determined that the
institution should have declared as income in 1981 the early withdrawal
penalties collected during that year, the institution paid the resulting
deficiencies and brought a refund action in the United States District
Court for the Northern District of Texas. The District Court entered
judgment for the United States on the issue concerning the mortgage
interests, and for the institution on the issue concerning the early
withdrawal penalties (682 F Supp 1389). The United States Court of Appeals
for the Fifth Circuit reversed the District Court judgment concerning the
mortgage interests and affirmed the District Court judgment concerning the
early withdrawal penalties (887 F2d 595). The Court of Appeals held that
(1) because the two groups of mortgages, as a result of being secured by
different residential properties, were materially different for federal
income tax purposes, the exchange of mortgage interests gave rise to a
realization event allowing the institution immediately to recognize its
losses on the exchange, and (2) the early withdrawal penalties constituted
income from the discharge of indebtedness, because the penalties reduced
the size of the institution's obligation to its depositors.
On certiorari, the United States Supreme Court
affirmed in part, reversed in part, and remanded. In an opinion by
Marshall, J., joined by Rehnquist, Ch. J., and Stevens, O'Connor, Scalia,
Kennedy, and Souter, JJ., and expressing the unanimous view of the court
as to holding 2 below, it was held that (1) the institution's losses on
the exchange of mortgage interests were deductible in 1981, because the
exchange gave rise to a realization event for purposes of 1001(a) of the
Internal Revenue Code (26 USCS 1001(a))--which defines the gain or loss
from the sale or other disposition of property as the difference between
the amount realized from the disposition and the adjusted basis of the
property--since the exchanged properties, by consisting of interests in
loans made to different obligors and secured by different properties,
embodied legally distinct entitlements and thus were materially different;
and (2) the early withdrawal penalties were not excludible from income
under 26 USCS 108(a)(1), because (a) as used in 108, the term
"discharge of indebtedness" conveys forgiveness of, or release
from, an obligation to repay, (b) a depositor who prematurely closes an
account and receives an amount equal to the principal and accrued interest
minus the early withdrawal penalty receives exactly what the institution
is obligated to pay, and thus does not "discharge" the
institution from an obligation, (c) the purpose underlying 108 is to
mitigate the effect of treating the discharge of indebtedness as income so
that businesses will not be discouraged from repurchasing or liquidating
their debts at less than face value, (d) unlike a debtor who can take
advantage of 108 by planning for the effects of liquidation of an
obligation, the institution in this case had no control over whether and
when the obligations would be liquidated, and (e) tax-exemption and
tax-deferral provisions are to be construed narrowly.
Blackmun, J., joined by White, J., concurring in part
and dissenting in part in an opinion appearing in Cottage Savings
Association v Commissioner of Internal Revenue, 113 L Ed 2d, at page 605,
supra, (1) agreed with the court's opinion that the early withdrawal
penalties collected by the institution were not excludible from gross
income, under 108(a), as income by reason of the discharge of
indebtedness, but (2) expressed the view that the institution did not
realize income-tax-deductible losses from the exchange of mortgage loan
interests, because the interests released by the institution were not
materially different from those received, since (a) the mortgages were
substantially identical for FHLBB accounting purposes, and (b) the
parties' handling of the exchange and of the mortgage loans after
completion of the exchange revealed that any differences that might exist
were not material.
SYLLABUS: During the 1981 tax year, respondent
Centennial Savings Bank FSB exchanged participation interests in a set of
mortgage loans for interests in a different set of mortgage loans held by
another lender. All of the loans were secured by residential properties
and had a face value substantially higher than their fair market value. In
a separate set of transactions, Centennial collected early withdrawal
penalties from customers who prematurely terminated their certificates of
deposit (CD's). In its 1981 federal income tax return, Centennial claimed
a deduction for the difference between the face value of the mortgage
interests it surrendered and the fair market value of the mortgage
interests it received. It also treated the early withdrawal penalties it
received as "income by reason of the discharge . . . of
indebtedness" excludable from gross income under 26 U. S. C. @
108(a)(1)(C) (1982 ed.). After the Internal Revenue Service disallowed the
deduction of the losses associated with the mortgages and determined that
Centennial was required to declare the early withdrawal penalties as
income, Centennial paid the deficiencies and filed a refund action in the
District Court. The court entered a judgment for petitioner United States
on the mortgage-exchange issue and for Centennial on the early withdrawal
penalty issue. The Court of Appeals reversed the mortgage-exchange ruling,
but affirmed the early withdrawal penalty holding.
Held:
1. Centennial realized tax-deductible losses when it
exchanged mortgage interests with the other lender. Cottage Savings Assn.
v. Commissioner, ante, p. 554. Pp. 578-579.
2. The early withdrawal penalties collected by
Centennial were not excludable from income under @ 108(a)(1). A debtor
realizes income from the "discharge of indebtedness" only when
the income results from the forgiveness of, or release from, an obligation
to repay assumed by the debtor at the outset of the debtor-creditor
relationship. Here, the depositors who prematurely closed their accounts
and incurred penalties did not forgive or release any repayment obligation
on the part of Centennial, which paid exactly what it was obligated to pay
according to the terms of the agreements entered into at the time the CD's
were established. This reading best comports with @ 108's purpose, which
is to mitigate the effect of treating a discharge of indebtedness as
income so that the prospect of immediate tax liability will not discourage
businesses from taking advantage of opportunities to repurchase or
liquidate their debts at less than face value. A debtor who negotiates in
advance the circumstances in which he will liquidate the debt is in a
position to anticipate his need for cash with which to pay the resulting
income tax and can negotiate the terms of the anticipated liquidation
accordingly. Moreover, in this case, Centennial was committed to releasing
the deposits at the sole election of the depositors. Thus, unlike a debtor
considering the negotiation of an adjustment of the terms of a duty to
repay, Centennial had no discretion to take the tax effects of a
transaction into account before liquidating its obligation at less than
face value. Pp. 579-584.
COUNSEL: Acting Solicitor General Roberts argued the
cause for the United States. With him on the briefs were Assistant
Attorney General Peterson, Deputy Solicitor General Wallace, Clifford M.
Sloan, Richard Farber, and Bruce R. Ellisen.
Michael F. Duhl argued the cause for respondent. With
him on the brief were Mark L. Perlis, Frederic W. Hickman, Alfred J. T.
Byrne, Colleen B. Bombardier, and Daniel R. Richards. *
* Briefs of amici curiae urging affirmance were filed
for the Federal National Mortgage Association by Joseph Angland, Felix B.
Laughlin, David C. Garlock, Richard F. Neel, Jr., Caryl S. Bernstein,
Carolyn J.A. Swift, and Michel A. Daze; for Main Line Federal Savings Bank
et al. by Zachary P. Alexander; and for United States League of Savings
Institutions by Richard L. Bacon.
JUDGES: Marshall, J., delivered the opinion of the
Court, in which Rehnquist, C.J., and Stevens, O'Connor, Scalia, Kennedy,
and Souter, JJ., joined, in Parts I and III of which White, J., joined,
and in Part III of which Blackmun, J., joined. Blackmun, J., filed an
opinion concurring in part and dissenting in part, in which White, J.,
joined, ante, p. 568.
OPINIONBY: MARSHALL *
* JUSTICE WHITE joins Parts I and III of this opinion,
and JUSTICE BLACKMUN joins Part III.
OPINION: In this case, we consider two questions
relating to the federal income tax liability of respondent Centennial
Savings Bank FSB (Centennial). The first is whether Centennial realized
deductible losses when it exchanged its interests in one group of
residential mortgage loans for another lender's interests in a different
group of residential mortgage loans. The second is whether penalties
collected by Centennial for the premature withdrawal of federally insured
certificates of deposit (CD's) constituted "income by reason of the
discharge . . . of indebtedness" excludable from gross income under
26 U. S. C. @ 108(a)(1)(C) (1982 ed.). The Court of Appeals answered both
questions affirmatively. We agree with the Court of Appeals that
Centennial's mortgage exchange gave rise to an immediately deductible
loss, but we reverse the Court of Appeals' determination that Centennial
was entitled to exclude from its taxable income the early withdrawal
penalties collected from its depositors.
I Centennial is a mutual savings and loan institution
(S & L) formerly regulated by the Federal Home Loan Bank Board (FHLBB).
n1 At issue in this case are two sets of transactions involving Centennial
in the 1981 tax year.
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n1 While this case was pending on appeal, the FHLBB
found Centennial to be insolvent. Centennial is currently under the
receivership of the Resolution Trust Corporation.
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The first was Centennial's exchange of "90%
participation interests" in a set of mortgage loans held by
Centennial for "90% participation interests" in a different set
of mortgage loans held by the Federal National Mortgage Association
(FNMA). n2 Secured by residential properties located primarily in northern
Texas, Centennial's 420 loans had a face value of approximately $ 8.5
million and a fair market value of approximately $ 5.7 million; FNMA's 377
loans, secured by properties located throughout Texas, likewise had a face
value of approximately $ 8.5 million and a fair market value of $ 5.7
million. Centennial and FNMA structured the exchange so that the
respective mortgage packages would be deemed "substantially
identical" under the FHLBB's Memorandum R-49, dated June 27, 1980, a
regulatory directive aimed at identifying mortgage exchanges that would
not generate accounting losses for FHLBB regulatory purposes but that
would generate deductible losses for federal tax purposes. See generally
Cottage Savings Assn. v. Commissioner, ante, at 556-557. On its 1981
return, Centennial claimed a deduction for the loss of $ 2,819,218, the
difference between the face value (and cost basis) of the mortgage
interests surrendered to FNMA and the market value of the mortgage
interests received from FNMA in return.
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n2 By exchanging merely participation interests, each
party retained its relationships with the obligors of the exchanged loans.
See Cottage Savings Assn. v. Commissioner, ante, at 557-558, n. 3.
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The second set of transactions was Centennial's
collection of early withdrawal penalties from customers who prematurely
terminated their CD accounts. Each CD agreement established a fixed-term,
fixed-interest account. See App. 27-29. Consistent with federal
regulations, each agreement also provided that the depositor would be
required to pay a penalty to Centennial should the depositor withdraw the
principal before maturity. See 12 CFR @ 526.7(a) (1979); 12 CFR @ 526.7(a)
(1980); 12 CFR @ 1204.103 (1981). Thus, in the event of premature
withdrawal, the depositor was entitled under the CD agreement to the
principal and accrued interest, minus the applicable penalty. See App.
27-29.
Centennial collected $ 258,019 in early withdrawal
penalties in 1981. In its tax return for that year, Centennial treated the
penalties as income from the discharge of indebtedness. Pursuant to 26 U.
S. C. @@ 108 and 1017 (1982 ed.), Centennial excluded the $ 258,019 from
its income and reduced the basis of its depreciable property by that
amount.
On audit, the Internal Revenue Service disallowed the
deduction of the losses associated with Centennial's mortgages, and
determined that Centennial should have declared as income the early
withdrawal penalties collected that year. After paying the resulting
deficiencies, Centennial instituted this refund action in the District
Court for the Northern District of Texas, which entered judgment for the
United States on the mortgage-exchange issue, and for Centennial on the
early withdrawal penalty issue. 682 F. Supp. 1389 (1988).
The Court of Appeals for the Fifth Circuit reversed in
part and affirmed in part. 887 F. 2d 595 (1989). It reversed the District
Court's ruling that Centennial did not realize a deductible loss in the
mortgage-exchange transaction. Relying on its reasoning in another
decision handed down the same day, see San Antonio Savings Assn. v.
Commissioner, 887 F. 2d 577 (1989), the Court of Appeals concluded that
although the respective mortgage packages exchanged by Centennial and FNMA
were "substantially identical" under Memorandum R-49, the two
sets of mortgages were nonetheless "materially different" for
tax purposes because they were secured by different residential
properties. See 887 F. 2d, at 600. Consequently, the court held, the
exchange of the two sets of mortgages did give rise to a realization event
for tax purposes, allowing Centennial immediately to recognize its losses.
See ibid.
The Court of Appeals affirmed the District Court's
conclusion that Centennial was entitled to treat the early withdrawal
penalties as income from the discharge of indebtedness under @ 108. The
court reasoned that "the characterization of income as income from
the discharge of indebtedness depends purely on the spread between the
amount received by the debtor and the amount paid by him to satisfy his
obligation." Id., at 601. Under this test, the early withdrawal
penalties constituted income from the discharge of indebtedness, the court
concluded, because the penalties reduced the size of Centennial's
obligation to its depositors. See id., at 601-602. The court rejected the
United States' characterization of the penalties as merely a "medium
of payment" for Centennial's performance of its "separate
obligation" to release the deposits prior to maturity. Id., at
604-605.
The United States thereafter petitioned this Court for
a writ of certiorari. Because the Court of Appeals' dispositions of both
the mortgage-exchange issue and the early withdrawal penalty issue are in
conflict with decisions in other Circuits, and because of the importance
of both issues for the savings and loan industry, we granted the petition.
498 U.S. 808 (1990). n3
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n3 The Fifth Circuit's conclusion that an exchange of
mortgages that are "substantially identical" under Memorandum
R-49 can give rise to realizable tax losses is in conflict with a decision
of the Sixth Circuit. See Cottage Savings Assn. v. Commissioner, 890 F. 2d
848 (1989), rev'd and remanded, ante, p. 554. The Fifth Circuit's
conclusion that early withdrawal penalties constitute
discharge-from-indebtedness income under the pre-1986 version of @ 108 is
in conflict with a decision of the Seventh Circuit. See Colonial Savings
Assn. v. Commissioner, 854 F. 2d 1001 (1988), cert. denied, 489 U.S. 1090
(1989). In 1986, Congress amended @ 108, limiting its application to
situations in which the taxpayer is insolvent or in bankruptcy at the time
of the discharge of his indebtedness. See Pub. L. 99-514, @ 822(a), 100
Stat. 2373; see also Pub. L. 100-647, @ 1004(a)(1), 102 Stat. 3385 (1988)
(extending @ 108 to "qualified farm indebtedness"). We granted
certiorari nonetheless in light of the significant number of pending cases
concerning the tax status of early withdrawal penalties collected prior to
1986.
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II The question whether Centennial realized
tax-deductible losses when it exchanged mortgage interests with FNMA is
controlled by our decision in Cottage Savings Assn. v. Commissioner. In
Cottage Savings, we recognized that a property exchange gives rise to a
realization event for purposes of @ 1001(a) of the Internal Revenue Code
n4 so long as the exchanged properties are "materially
different." Ante, at 560-562. We concluded that the properties are
"different" in the sense "material" to the Code so
long as they embody legally distinct entitlements. Ante, at 564-565.
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n4 "The gain from the sale or other disposition
of property shall be the excess of the amount realized therefrom over the
adjusted basis provided in section 1011 for determining gain, and the loss
shall be the excess of the adjusted basis provided in such section for
determining loss over the amount realized." 26 U. S. C. @ 1001(a).
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That test is easily satisfied here. As in Cottage
Savings, the participation interests exchanged here were in loans made to
different obligors and secured by different properties. Thus, the
interests embodied distinct entitlements. We therefore affirm the Court of
Appeals' conclusion that Centennial was entitled to a refund of the
disallowed losses claimed on its mortgages.
III We next consider the question whether the early
withdrawal penalties collected by Centennial constituted "income by
reason of the discharge . . . of indebtedness" excludable from income
under 26 U. S. C. @ 108(a)(1) (1982 ed.). We conclude that the penalties
were not subject to exclusion under @ 108 because the depositors who paid
these penalties did not "discharge" Centennial from any
repayment obligation.
The version of @ 108 in effect for the 1981 tax year
states:
"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 --
. . . .
"(C) the indebtedness discharged is qualified
business indebtedness." 26 U. S. C. @ 108(a)(1)(1982 ed.).
"Qualified business indebtedness" includes
"indebtedness . . . incurred or assumed . . . by a corporation."
26 U. S. C. @ 108(d)(4)(A) (1982 ed.). n5 Income from the discharge of
qualified business indebtedness can be excluded from gross income under @
108 only if the taxpayer elects to reduce the basis of his depreciable
property by an amount equal to the income excluded. 26 U. S. C. @@
108(c)(1), 108(d)(4)(B), 1017 (1982 ed.). Thus, the effect of @ 108 is not
genuinely to exempt such income from taxation, but rather to defer the
payment of the tax by reducing the taxpayer's annual depreciation
deductions or by increasing the size of taxable gains upon ultimate
disposition of the reduced-basis property.
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n5 It also includes "indebtedness . . . incurred
or assumed . . . by an individual in connection with property used in his
trade or business." 26 U. S. C. @ 108(d)(4)(A) (1982 ed.).
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In characterizing early withdrawal penalties as
discharge-of-indebtedness income, Centennial, like the Court of Appeals,
focuses purely on the "spread" between the debt that Centennial
assumed upon the opening of each CD account and the amount that it
actually paid each depositor upon the closing of the account. See 887 F.
2d, at 601. When a depositor opens a CD account, Centennial notes, the
bank becomes indebted to the depositor for the principal of the deposit
plus accrued interest. By virtue of its collection of an early withdrawal
penalty, however, the bank satisfies the debt for less than that amount
should the depositor withdraw the principal before maturity. The end
result, in Centennial's view, is no different from what it would have been
had the bank and depositor (freed from the restraints of bank regulatory
law) formed no agreement on an early withdrawal penalty at the outset but
rather negotiated a forgiveness of that amount at the time of withdrawal.
We reject this analysis because it fails to make sense of @ 108's use of
the term "discharge." As used in @ 108, the term "discharge
. . . of indebtedness" conveys forgiveness of, or release from, an
obligation to repay. n6 A depositor who prematurely closes his account and
pays the early withdrawal penalty does not forgive or release any
repayment obligation on the part of the financial institution. The CD
agreement itself provides that the depositor will be entitled only to the
principal and accrued interest, less the applicable penalty, should the
depositor prematurely withdraw the principal. Through this formula, the
depositor and the bank have determined in advance precisely how much the
depositor will be entitled to receive should the depositor close the
account on any day up to the maturity date. Thus, the depositor does not
"discharge" the bank from an obligation when it accepts an
amount equal to the principal and accrued interest minus the penalty, for
this is exactly what the bank is obligated to pay under the terms of the
CD agreement.
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n6 "Discharge" can be used to signify
various means of extinguishing a legal duty. See generally Black's Law
Dictionary 463 (6th ed. 1990). Thus, a debtor might be said to
"discharge" his debt by satisfying it. But @ 108 uses
"income by reason of the discharge . . . of indebtedness" to
refer to the change in the debtor's financial condition when the debtor is
no longer legally required to satisfy his debt either in part or in full.
"Discharge" in this sense can occur only if the creditor cancels
or forgives a repayment obligation.
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Because @ 108 presupposes the "discharge" of
an obligation to repay, we disagree with Centennial and the Court of
Appeals' conclusion that the "spread" between the debt assumed
by Centennial and the amount paid by Centennial upon the closing of the
account is sufficient to trigger @ 108. The existence of such a spread is
sufficient to demonstrate that Centennial enjoyed an accession to income
equal in size to the amount of the penalty. But because this income was
not the product of the release of any obligation assumed by Centennial at
the outset of the bank-depositor relationship, it does not constitute
income "by reason of [a] discharge." In sum, to determine
whether the debtor has realized "income by reason of the discharge .
. . of indebtedness," it is necessary to look at both the end result
of the transaction and the repayment terms agreed to by the parties at the
outset of the debtor-creditor relationship. n7
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n7 Renewing the argument that it unsuccessfully
advanced in the Court of Appeals, the United States characterizes the
penalties not as income by reason of the discharge of indebtedness, but
rather as income for Centennial's performance of a "separate
obligation." This argument draws on authorities recognizing that @
108 does not apply when a creditor discharges a debtor's obligation in
exchange for services or some other form of nonmonetary consideration. See
Spartan Petroleum Co. v. United States, 437 F. Supp. 733 (SC 1977) (debt
discharged in exchange for cancellation of distributorship agreement); OKC
Corp. v. Commissioner, 82 T. C. 638, 649-650 (1984) (debt discharged in
exchange for settlement of lawsuit). In that situation, the debt is not
forgiven but is in fact satisfied in full through the debtor's performance
of a "separate obligation"; discharge of the debt is merely the
"medium of payment" for that performance, and must be treated as
ordinary income for tax purposes. See S. Rep. No. 96-1035, p. 8, n. 6
(1980) ("Debt discharge that is only a medium for some other form of
payment, such as a gift or salary, is treated as that form of payment
rather than under the debt discharge rules"). See generally 1 B.
Bittker & L. Lokken, Federal Taxation of Income, Estates and Gifts P
6.4.7, p. 6-66 (2d ed. 1989). Because we conclude that Centennial's
reliance on @ 108 fails for a more fundamental reason -- the absence of a
"discharge" for purposes of the statute -- we need not consider
whether the early withdrawal penalties were actually payments for services
unrelated to the debtor-creditor relationship.
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This common-sense reading of the statutory language
best comports with the purpose underlying @ 108. The tax-deferral
mechanism in @ 108 is designed to mitigate the effect of treating the
discharge of indebtedness as income. See 26 U. S. C. @ 61(a)(12) (1982
ed.) ("gross income . . . includes . . . income from discharge of
indebtedness"). Borrowed funds are excluded from income in the first
instance because the taxpayer's obligation to repay the funds offsets any
increase in the taxpayer's assets; if the taxpayer is thereafter released
from his obligation to repay, the taxpayer enjoys a net increase in assets
equal to the forgiven portion of the debt, and the basis for the original
exclusion thus evaporates. See United States v. Kirby Lumber Co., 284 U.S.
1, 3 (1931); Commissioner v. Jacobson, 336 U.S. 28, 38 (1949); see also
Commissioner v. Tufts, 461 U.S. 300, 307, 310-311, n. 11 (1983). But while
the cancellation of the obligation to repay increases the taxpayer's
assets, it does not necessarily generate cash with which the taxpayer can
pay the resulting income tax. Congress established the tax-deferral
mechanism in @ 108 so that the prospect of immediate tax liability would
not discourage businesses from taking advantage of opportunities to
repurchase or liquidate their debts at less than face value. See H. R.
Rep. No. 855, 76th Cong., 1st Sess., 5 (1939); S. Rep. No. 1631, 77th
Cong., 2d Sess., 77-78 (1942). See generally Wright, Realization of Income
Through Cancellations, Modifications, and Bargain Purchases of
Indebtedness: I, 49 Mich. L. Rev. 459, 477, 492 (1951). This rationale is
squarely implicated only when the debtor is seeking forgiveness or
cancellation of a pre-existing repayment obligation. A debtor who
negotiates in advance the circumstances in which he will liquidate the
debt for less than its face value is in a position to anticipate his need
for cash with which to pay the resulting income tax and can negotiate the
terms of the anticipated liquidation accordingly. Moreover, insofar as the
CD agreements at issue in this case committed Centennial to releasing the
deposits at the sole election of the depositors, Centennial abandoned any
control whatsoever over whether and when these particular debt obligations
would be liquidated. Consequently, unlike a debtor considering the
negotiation of an adjustment of the terms of his duty to repay, Centennial
had no discretion to take the tax effects of the transaction into account
before liquidating its debt obligations at less than face value. It is
true, as Centennial points out, that construing @ 108 to apply only to
debt reductions stemming from a negotiated forgiveness of a duty to repay
withholds a tax incentive to include "anticipatory discharge"
terms in the credit agreement at the outset. But we read the statutory
language as embodying a legislative choice not to extend the benefits of @
108's deferral mechanism that far. For the reasons that we have stated,
Congress could easily have concluded that only debtors seeking a release
from a pre-existing repayment obligation need or deserve the tax break
conferred by @ 108. Consistent with the rule that tax-exemption and
-deferral provisions are to be construed narrowly, Commissioner v.
Jacobson, supra, at 49; Elam v. Commissioner, 477 F. 2d 1333, 1335 (CA6
1973), we conclude that Congress did not intend to extend the benefits of
@ 108 beyond the setting in which a creditor agrees to release a debtor
from an obligation assumed at the outset of the relationship.
IV
For the foregoing reasons, the judgment of the Court
of Appeals is affirmed in part and reversed in part, and the case is
remanded for further proceedings consistent with this opinion.
It is so ordered.
For opinion of Justice Blackmun, concurring in part
and dissenting in part, see ante, p. 568.
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